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Breaking Down Your True Breakeven

As part of our commitment to dependability, FCSAmerica has specialized teams helping customers as they identify their financial challenges – and more importantly, the solutions that can return their operations to viability in today’s tough economy. Chris Nohr, a relationship officer, is part of a team supporting producers in the Huron, South Dakota, area.

One of those producers recently spoke to the value of working with his team of experts. “I look forward to calls from Chris,” the producer said.

Like many in farming, the customer prefers to be outside, working in the fields. But in today’s economy, the customer said, good financial management has become essential to long-term sustainability. The producer now spends at least part of every day managing the financial side of the family farm.

One of the benefits of this is a deeper understanding of the operation’s breakeven. This knowledge has directly impacted the producer’s marketing and shapes day-to-day decisions, both big – how to manage less productive land – and small -- how to fit that extra gallon of milk into the family’s grocery budget.

We asked Chris to share some of the work he does to help customers understand their breakevens.

What costs go into the typical breakeven?

Most only include a few of an operation’s fixed costs and a few of the variable costs. A typical breakeven might account for chemicals, feed, fertilizer, fuel and rent.

Is this enough for most operations?

This approach does give a broad overview of the “breakeven” and it does work in some operations and even in some cycles. For example, if an operation has little debt and a good handle on variable expenses, this can work OK.

But agriculture has changed a lot, even in the past 10 years. Twenty years ago, when the corn market rallied 3 cents, we would haul corn to town. Fast forward to 2017. Grain prices are unfavorable, input costs remain high and marketing is more complicated. You are cutting yourself short by using only four to six input costs to determine your breakeven.

More producers are using a marketer to help them get the best price for their grain. But good marketing – no matter who is doing it – begins with knowing your breakeven. If you want a true breakeven, you need to include many more expenses.

What costs should a producer include in a breakeven?

As an example, let’s start with fixed costs -- those expenses you have little control over: machinery and equipment depreciation and interest on related loans, health and liability insurance, rent or an appropriate value for owned land, rent, labor, to name a few.

Then you have your variable costs. You have more control over these because you can pick when and where to buy them. These include fertilizer, seed, chemicals, multi-peril crop insurance, supplies, freight, machinery repairs, meals, utilities, fees to a certified public accountant and marketer and living costs.

This list could be much longer. And at least two of them – living costs and depreciation – often are left off. This is a mistake. If your family living expenses are $100,000 a year and you farm 4,000 acres, right there you need to earn $25 an acre just to meet your family’s needs.

Some argue that depreciation isn’t a true cost to their operation. While you aren’t writing a check to depreciation at the end of year, you are when you trade in that $200,000 tractor for its depreciated value of $60,000.

I met with a producer who had every expense listed on a spreadsheet, and I mean every expense. Cell phones, meals, salary, living expenses. Naturally, his breakeven was higher than his neighbors’. He wanted to know what he was doing wrong. The answer is absolutely nothing.

Until you arrive at your true breakeven, you are not in control of your marketing – you think your breakeven for corn is $3.00 when you actually need $4.50 to breakeven. A true breakeven also allows you to better assess your expenses and start cutting where you can.

How much work is involved in getting a better handle on breakevens?

It’s important to think of it as a work in progress. The first year will be the most time consuming. In subsequent years, you update numbers and work toward greater detail and depth.

Schedule F of your tax return is a great place to start gathering numbers for your projection. Also, turn to your various advisors. Your agronomist, for example, can provide detailed projections on crop inputs, and your local vocational technical schools or colleges often have software you can use for a fee. Grain marketers will help fine tune numbers.

For some producers, time can be a major obstacle to better understanding their breakeven. But resources and experts are available to help. Call your FCSAmerica financial officer to get started.

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FCSAmerica serves farmers, ranchers, agribusinesses and rural residents in Iowa, Nebraska, South Dakota and Wyoming. For inquiries outside this geography, use the Farm Credit Association Locator  to contact your local office.