As commodity prices are falling, it’s a good time to review your cost-of-production figures. You can do this on a whole-farm basis, but it’s even more beneficial to do it on individual fields or groups of fields.
Recently, I created a spreadsheet that allows me to take my home farms and rented farms and break out my cost of production on each.
The soil types and productivity of each of these groups of farms is different, so that’s why I’ve separated them into two different groups.
Thus, try to organize your farms into two or three groups so you can evaluate each of them separately.
If you have great disparity in yields, soil fertility and rental rates, you may want to break them down to the field level to really know what your cost of production and profit potential is on each farm.
You can then take numbers from your total production, and your overall farm cashflow, and appropriate them to the correct group of fields by crop.
Developing a Spreadsheet.
My spreadsheet is set up in the rows with a production area, four expense areas, an income area and a profit-and-loss area. My columns are a group of columns for each group of fields for each crop type.
In each of these groups I have a column for total cost, cost/acre and cost/bushel so I can see the total cost, per-acre cost and per-bushel cost and income for each group of fields.
In my first rows of the spreadsheet, I calculate my total production and divvy it out to each group of fields by the yield potential of each. Then I move into the expense categories. The first group of expense rows is the variable costs.
In the variable-expense box, my rows of data include: chemicals, fertilizer and lime, seed, auto and truck, freight, fuel, farm insurance, crop insurance, hired labor, repairs and utilities.
Then these are subtotaled so I can see my cost of production per bushel on the variable costs.
In the next box of rows I have rent and property taxes so I can see my cost of production per acre and per bushels for the land-use costs. You can also put a value on your owned land here if you want to force a return per acre on your own land.
In the next box of rows, I have machinery costs, which include planting, spraying and harvesting so I can see my cost of production, per acre and bushel, for machinery.
In my box of rows I have returns to my labor and management. This way I can put in a figure that I want to be paid for the labor and management that I provide.
The next box of rows includes the market value of the crops and then a line showing the profit/loss on a total, per-acre and per-bushel basis.
We also have an area on the spreadsheet that totals up everything so we can compare our total production to our inventory, and we can compare our total costs to what our farm cashflows are showing us.
Using the Spreadsheet.
Divvying up these costs really makes us think about where our resources are going, and going through this process will truly reveal to you where you’re making and losing money.
Breaking the spreadsheet into boxed categories lets us see how my variable costs are related to my fixed-land costs, and what part of the value per bushel these costs are.
We can all continue to produce a crop covering our variable and rented-land costs — as well as our land principal and interest costs — but we won’t last long if we don’t continue to cover our machinery use and replacement costs, and our personal labor and management costs.
The spreadsheet will give you each of these costs on a total, per-acre and a per-bushel cost so you begin to understand which groups of fields are making the money for you and which fields may be less profitable.
This will also help you to understand if you’re paying too much for land rent on some groups of fields and give you data to go back to your landlord to ask for an adjustment.
You won’t have to share your own personal spreadsheet with the landlord, but the spreadsheet serves as a tool to show how some different scenarios with different budget numbers affect your profitability.
The Bottom Line.
Once you’ve run this spreadsheet, you’ll know what your cost of production is and what your marketing price will need to be, based on the yield you entered, to make a reasonable profit.
You can also raise and lower the yield estimates to see how much impact yield variability has on your cost of production. This will help you to understand how much crop-price volatility you can withstand.
Having all this information will then help you to know when to pull the trigger on a price to at least cover your variable and land costs.
You may also want to market in a profit at a certain price level. Then, if you like to speculate on the rest of your bushels, you can do it after you have covered your costs and a basic profit.
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