Knowing your cost of production has always been important.
But in today’s agricultural environment, it is imperative to your
viability and financial success. Your cost of production is the
foundation to a good marketing plan and to buying the right
level of crop insurance coverage.
It also helps you determine where you might need to make
adjustments to reduce costs and identify opportunities to grow
your business.
The hypothetical case of “Joe Farmer” illustrates the power
of knowing your cost of production.
Meet Joe Farmer
Joe is an Iowa farmer with 1,000 acres evenly split between
soybeans and corn. He owns 250 of the acres, with an annual
land payment of $100,000. Rent on the remaining land averages
$300 an acre. His actual production history is 190 bu/acre for
corn and 55 for beans.
Joe farms full time while his wife works off the farm earning
$30,000 a year and benefits. They spend $80,000 a year on
family living expenses. Their next largest cost is an annual farm
machinery payment of $75,000.
The cost-of-production worksheet, located at the bottom of this article, gives Joe a better
understanding of his operation. (All numbers are hypothetical and do not reflect the actual range of expenses and diversity of production found from one operation to the next.)
Focus on Costs You Can Control
Based on Joe’s current situation, the operation’s break-even
costs per bushel are $4.03 for corn and $10.20 for soybeans.
These are, of course, higher than current market prices. So
what’s Joe to do?
One option is to work on reducing variable costs – and the good
news is that fertilizer and other variable costs have inched down
in price.
However, fixed costs are the main factors that separate high-,
medium- and low-cost operators. The big three fixed expenses
include land – cash rent and/or principal and interest payments
on owned acres – machinery and equipment and family living.
By lowering these costs, you can improve your operation’s
overall cost structure.
Adjusting fixed costs is a smart strategy that will benefit every
producer. For some, it will help them survive the low prices. For
others, it will position them to take advantage of opportunities.
If your fixed costs are high, work with your lender to identify
strategies that will make you more competitive. The pace of
adjustment is critical.
Joe addressed his fixed costs by re-amortizing his land loan to
reduce the annual payment to $70,000, renegotiating cash rent to
an average of $280 an acre and trimming $10,000 from family living.
| Variable Costs | Corn | Soybeans |
| Land Costs |
|
| Seed | $110.00 | $35.00 |
| Land Payment per Acre | $400 |
| Fertilizer | $100.00 | $0.00 |
| Tax Payment per Acre | $20 |
| Lime | $0.00 | $0.00 |
| Average Cash Rent per Acre | $300 |
| Herbicide | $35.00 | $20.00 |
| Average Land Cost per Acre | $330 |
| Insecticide | $15.00 | $10.00 |
|
|
|
| Irrigation Costs | $0.00 | $0.00 |
| Other Costs / Revenue |
| Insurance Premium | $12.50 | $9.00 |
| Annual Machinery Payments | $75,000 |
| Miscellaneous | $5.00 | $5.00 |
| Machinery Payment per Acre | $75 |
| Fuel / Repairs | $20.00 | $20.00 |
| Annual Family Living Expense | $80,000 |
| Custom Farming Charges | $0.00 | $0.00 |
| Family Living Expense per Acre | $80 |
| Drying | $0.00 | $0.00 |
| Off Farm Income / Other | $30,000 |
| Storage | $8.00 | $4.00 |
| Off Farm Income per Acre | $30 |
| Transportation | $5.00 | $3.00 |
| Combined Cost Impact per Acre | $125 |
| Labor | $0.00 | $0.00 |
|
|
|
| TOTAL | $310.50 | $106.00 |
|
|
|
Improving Profitability
Joe’s understanding of his cost of production allowed him to
make adjustments that improve his chances at profitability. Here
is a before-and-after comparison of Joe’s cost of production.
Talk with your financial officer to discuss options for addressing
fixed and variable costs in your operation.
Before
| Corn | Soybeans |
| After
| Corn | Soybeans |
| Cost of Production per Acre | $765.50 | $561.00 |
| Cost of Production per Acre | $715.50 | $511.00 |
| Breakeven per Bushel | $4.03 | $10.20 |
| Breakeven per Bushel | $3.77 | $9.29 |
