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Knowing Your Cost Of Production Can Lead To Sound Management Decisions

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 scenario of “Joe Farmer” helps illustrate the power of knowing your cost of production. Producers who understand their costs will be in a better position heading into 2018 – and will be well prepared for discussions with their Frontier Farm Credit financial officer and crop insurance agent.

Meet Joe Farmer

Joe is an 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
Insurance Premium $12.50 $9.00 OTHER COSTS / REVENUE
Miscellaneous $5.00 $5.00 Annual Machinery Payments $75,000
Fuel / Repairs $20.00 $20.00 Machinery Payment per Acre $75
Custom Farming Charges $0.00 $0.00 Annual Family Living Expense $80,000
Drying $0.00 $0.00 Family Living Expense per Acre $80
Storage $8.00 $4.00 Off Farm Income / Other $30,000
Transportation $5.00 $3.00 Off Farm Income per Acre $30
Labor $0.00 $0.00 Combined Cost Impact per Acre $125
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

Apply Marketing Tools to Capture Profits

Corn and soybeans futures reached two-year highs in recent weeks as part of a broader surge in commodity prices. July 2016 corn futures, for example, climbed to $4.07 and currently are at $3.96. Soybean futures are bouncing between $10.60 and $10.90. Not accounting for basis, this is well ahead USDA’s cash price forecasts of $3.60 for corn and $8.85 for beans for the 2015/16 crop year.

Market rallies in today’s low-price environment are critical windows of opportunity for producers positioned to take advantage of them. While many will speculate on the how long and how high a rally will last, good marketers understand that locking in a profit requires applying some tried-and-true rules to their marketing:

  • Know your breakevens. The closer to the penny, the better. Otherwise, you are throwing darts at an unknown target.
  • Identify your desired profit per acre or profit per bushel to establish your profit target. This takes away the emotion that often enters marketing decisions.
  • Remember that marketing isn’t a one-time decision. By selling your crop in increments — up to your crop insurance guarantee – you reduce some of the emotion of marketing.

Price changes offer good opportunities to review your farm’s profit potential. Once the crop is in the ground, update costs as well. We offer Manage Profits to help you understand and identify market opportunities. Manage Profits, which is free to customers through AgriPoint®, has all of the basic components to manage risk in production agriculture.

This easy-to-use tool allows you to manage crop and livestock production, track marketing progress, crop insurance, generate profitability reports and stress test the business with what-if scenarios. The what-if analyses involve plugging several variables into an operation’s current plan to see how one or multiple changes, including futures prices, affect profitability.

To learn more about Manage Profits, log into or enroll in AgriPoint. Click on Manage Profits. There, you will find an informational video to get you started. Click on “Help” in the upper left hand corner for a user guide with step-by-step instructions. Contact your local Frontier Farm Credit office for further assistance.