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Knowing Your Breakeven: Is It A Thing Of The Past?
Source: Growers Edge news release
Steve Johnson, Iowa State University Extension,
and Craig Mounchka, Growers Edge
June 12, 2012 — Farming is a high-risk business, and to succeed in today’s environment, producers need to be diligent in knowing their breakeven costs and how they might translate to better achieving their profit goals.
Despite record prices and profits the past several years, farmers should allocate time and keep detailed records. Knowing your breakeven can help with setting realistic profit goals and creating a marketing plan that includes strategies, tools and the discipline to implement.
Without a firm understanding of the cost to produce a crop, producers are making a “best guess” — and that can be a poor business strategy. This information can and should be used to help the farmer better market their crop and understand when to sell their crop to ensure profits for their operation.
In addition, knowing their cost of production and breakeven can help a producer determine if paying a higher rental rate for one farm can be justified across the entire operation. Or if the purchase of a new farm at today’s record prices, can cash flow and help avoid overextending the overall farming operation.
“I would estimate that 30% to 40% of farms have detailed records that lead to annual calculations,” says Steve Johnson with Iowa State University Extension. “The number hasn’t changed significantly in recent years despite expanded use of computer software, higher input costs and more financial risks. With high crop prices less attention is being placed on the need for good records.”
Knowing your breakeven — the price you need to receive for your crop in order to turn a profit — reduces the tendency to make an emotional decision. It also leads to the ability to manage profit margins and make better marketing and financial risk decisions.
Why haven’t farmers embraced calculating their breakeven? Discipline and time.
“The average cost to produce an acre of corn in Illinois rose to $800 this year. Farmers cannot afford to ignore their breakeven when the required investment per acre is significantly higher. The balance between risk and profits is also much greater. Tracking your breakeven and profitability really comes down to having the tools to make the job easier,” says Craig Mouchka, president of Growers Edge.
“There are a lot of farmers that create spreadsheets, but it’s still a very labor-intensive process, because as you know, their breakeven can vary throughout the duration of the growing season.”
From a lender perspective there are benefits as well. A farmer with a plan for locking in profit will likely increase lenders’ confidence in an operation; helping secure lower interest rates and better repayment terms. This information makes it easier for that lender to assist the farmer should they decide to rent additional land, buy or lease machinery or equipment, pre-pay crop expenses or advance money to a hedging or options account.
How to get started?
For famers who have never calculated their breakeven, Johnson suggests choosing a farm with a higher fixed cost — one that is cash rented — and track all the annual costs for all crops.
“Computer software as simple as Quick Books or advanced farm computer records with enterprise allocation capabilities are good options to help a farmer get started,” says Johnson. “In addition, your state’s Farm Business Association has standardized software and consultants that make farm visits. Plus, there are free computer spreadsheets for financial analysis from land-grant universities and other companies.”
Mouchka advises breaking input costs into categories to identify cost of goods sold.
What is the cost of land? How much is needed to cover cost of living expenses? What is the salary for hired help? What about vacation and college savings, and a rainy day fund? Some of these costs are not as flexible as others because you need to purchase fertilizer, but a vacation can be postponed.
Each farm may have different costs, so breaking that out not only affects the individual farm cost, but has an impact on the whole farming operation. You may discover that one farm may actually produce a loss for the overall farming operation.
“It can be pretty labor-intensive, but that’s where software programs designed to help farmers through the process come into play,” says Mouchka. “Growers Edge — along with other companies — is continually working to develop tools and solutions to simplify the process; from the quick input of numbers to running the calculations and analysis. Farmers don’t have to do quite so much of the work themselves.”
“For a farmer who has been calculating their breakeven, it’s important to use the data to determine profitable crop margins; by farm, by crop and by crop rotation,” says Johnson.
Without a lot of work on the part of the farmer, software programs can determine the breakeven number and then translate into your profit. That in turn can help you determine if the farming operation can support the purchase of land, a higher rental rate, equipment, and an increase in salary or extra contributions to a college savings fund.
Johnson recommends using advanced software and decision tools for instantaneous tracking of expenses, crop insurance coverage and market strategies such as futures/options and cash forward contracting positions. This analysis can be done daily and based on the most current prices.
“Once you have that number you can set a goal,” says Mouchka. “Then you can track your process based on the number of bushels sold to date and determine what price you will need on the remaining bushels to reach the breakeven and achieve the desired profit goal. The Growers Edge programs and services will even identify the best local grain bids in the area and feed that information into the system, providing a real-time snapshot of where you stand day-to-day.”
It all leads to the ability to manage profit margins and make better marketing and financial decisions for your farming operation in good times and not so good times.