SERIES DE CUOTAS, REMUNERACIONES, COMISIONES Y GASTOS

6.5.1 Definition of break-even yield and break-even price

The break-even point analysis in this study is divided into break-even yield and price. Break-even yield and break-even price are classified by each ratoon and region, which is presented in this section.

The break-even analysis is a useful tool to study the relationship between fixed costs, variable costs and returns. A break-even point defines when an investment will generate a positive return and can be determined graphically or with simple calculation the break-even yield analysis computes the volume of production at a given price necessary to cover all costs.

Break-even price analysis computes the price necessary at a given level of production to cover all costs. To explain how break-even analysis works, it is necessary to define the cost items.

The main advantage of break-even analysis is that it points out the relationship between cost, production volume and returns. It can be extended to show how changes in fixed cost - variable cost relationships, in commodity prices, or in revenues, will affect profit levels and break-even points. Limitations of break-even analysis include:

• It is best suited to the analysis of one product at a time;

• It may be difficult to classify a cost as all variable or all fixed; and

• There may be a tendency to continue to use a break-even analysis after the cost and income functions have changed.

Break-even analysis is most useful when used with partial budgeting or capital budgeting techniques. The major benefit to using break-even analysis is that it indicates the lowest amount of business activity necessary to prevent losses (BIZ 2002).

Break-even yield

The Break-Even Yield allows one to know the minimum yield for the farm to be profitable. The formula for computing the break-even yield is:

price Output cost Total yield even Break− =

This is the yield necessary to cover all costs at a given output price (Markus 2006). For example, total costs (fixed costs + variable costs) = $ 157.50 /hectare, output price = $ 80/ton. Therefore, Break-Even Yield is =157.5/80 = 1.97 tons/ha (FAO 2006).

In this study, the calculation of total cost is as follows (Table 6.2):

Total cost = Cash cost (variable cost+ fixed cost) +

Non cash cost (depreciation+ opportunity cost) Break-even price

The analysis of break-even price in section 6.5.4 applies the formula as follows:

Break-even price is the output price needed to just cover all costs at a given output level, and can be found from the equation (Markus 2006).

yield Expected cost Total price even Break− =

For example, the break-even price would be $157.5 divided by 2.5 tons is equal to $63. Notice that the break-even price is the same as the cost of production (FAO 2006).

6.5.2 Break-even yield and break-even price of sugarcane production

This section is the analysis of break-even yield and break-even price of sugarcane production. The calculation of break-even yield is done by dividing total costs by the average sugarcane price. To calculate the break-even price, total costs are divided by the average sugarcane yield (Table 6.7).

Table 6.7 Break-even yield and break-even price of sugarcane production classified by ratoons and regions

Region

Unit Ratoon North Northeast Central Average

(Baht/rai) 1st 5,314 5,112 5,719 5,382 (Baht/rai) 2nd 3,326 3,148 3,447 3,307 Average total cost

(Baht/rai) 3rd 2,535 - 3,570 3,053 (Baht/ton) 1st 495 (Baht/ton) 2nd 501.8 Average price* (Baht/ton) 3rd 499.8 (Tons/rai) 1st 11.5 (Tons/rai) 2nd 10.8 Average yield* (Tons/rai) 3rd 11.3 (Tons/rai) 1st 10.7 10.3 11.6 10.9 (Tons/rai) 2nd 6.6 6.3 6.9 6.6 (Tons/rai) 3rd 5.1 0.0 7.1 6.1 Average break-even yield (TC/price) Average 7.5 8.3 8.5 (Baht/ton) 1st 463.2 445.6 498.5 469.1 (Baht/ton) 2nd 308.1 291.6 319.3 306.3 (Baht/ton) 3rd 223.6 0 315.0 269.3 Average break-even price (TC/yield) Average 331.6 368.6 377.6

Source: Own survey (2004).

Note: * The calculation of break-even yield and price use the average value of price and yield in all farms in order to make the equivalent of the calculation. Thus, the price and yield in each region are not show in the table in order to avoid the confusion. See appendix table 6.9.

From table 6.7, the average break-even yield for the first ratoon of sugarcane production is 10.9 Tons/rai, which is calculated from average total costs of 5,382 Baht/rai divided by the average price of 495 Baht/ton. Break-even yield means that the sugarcane farmer must receive this yield to cover the costs related to sugarcane production. Generally, the lowest break-even yield is related to the highest competitiveness. The average break-even yield for the third ratoon of sugarcane production is 6.1 Tons/rai. This means that sugarcane farmers would reach the break-even point for covering all costs if they produce at least 6.1 Tons/rai. According to break-even yields by region, sugarcane farmers in the North have lower break-even yields than farmers in the other regions (7.5 Tons/rai). Thus, sugarcane farmers in the North have the high of competitiveness in sugarcane production.

Considering the break-even price analysis, the break-even price is the price a producer must receive minimum for a product in order to cover the entire costs associated with the production of the product (Hofstrand 2005). The average break-even prices of the different ratoons are different. Sugarcane in the third ratoon has an average break-even price of 269.3 Baht/ton (5.4 Euro/ton), while sugarcane in the first ratoon has an average break-even price of 469.1 Baht/ton. Therefore, the continuing production until the third ratoon is a good choice because sugarcane farmers start making profit from a sugarcane price of minimum 269.3 Baht/ton. Comparing break-even prices by region, there is no big difference. The break-even prices range from 331.6 to 377.6 Baht/ton.