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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
financials

Cash-flow Budgeting: About Amount and Timing

Cash-flow budgets can be difficult to create for a farm business, but they are important to lenders for two reasons. First, lenders want to know if income from a farm will be more than the expenses. Secondly, will a producer be able to pay bills on time?

While producers generally know when bills are due and production will be ready for market, input costs and production sales prices often are entered as estimates on cash-flow budgets – and these can vary greatly. As a result, many producers update cash-flow projections quarterly or even monthly.

The steps outlined below are key to helping you and your lender understand your cash flow for the year.

Cash Inflows

Inventory any production on hand, whether it is crops in storage or market livestock. If you have a recent balance sheet, these would be in current assets. Next, estimate when and for how much you might sell that production. If you’ve already contracted part of the production, enter the quantity, delivery period and price for that portion. For any remaining production, producers often pencil in the current futures price (adjusted for their local basis) for the month in which they expect to deliver production.

Next, include line items for other income, such as government payments of any kind, crop insurance indemnity, custom work, farm rent paid to you, interest, etc. Sales of capital assets, if any, would have a line of their own. Separately, add any short-term and long-term loans you have made that will be repaid. Finally, include any non-farm income that applies to your operation.

Cash outflows

Calculate your operating costs. For crops, this includes seed, fertilizer/lime, chemicals, crop insurance, drying costs, and any custom hire or machinery rental. A case can be made that an amount should be set aside for marketing—an advisory or information service, brokerage fees, etc.

If you have livestock, include any purchased crops/feed, purchased livestock, vet and health product costs and marketing expenses.

Next, enter fixed expenses, overhead, or other expenses not allocated to a specific enterprise. Examples include real estate taxes; cash rent; hired labor; machinery repairs, upkeep, fuel and lubrication; and equipment leases.

Purchases of capital assets (total for the year) warrant a line item.

Also on the debit side is financing: accounts payable, short-term notes due, long-term loan payments and any installment contract payments.

Finally, include an estimate of taxes due and family living expenses—unless family living is financed from off-farm income. If the manager doesn’t draw a salary, a “return to management” and/or a profit target should be included, as should any planned off-farm investments.

Bottom Line

The resulting calculation of income minus expenses lets you know whether your business will cash flow. Looking at the different time periods tells you whether you need to move income into specific months to cover expenses.


AgriPoint® includes an annual cash-flow budget tool that is free to customers of Frontier Farm Credit. It does not allow entries by month, but its drop-down menus help categorize income and expenses. Kansas State University offers detailed crop and livestock budgets.