Knowing per-bushel, per-acre and per-field costs help farmers meet price uncertainty head-on
Most farmers don’t go into business so they can stare at spreadsheets on computer screens. Yet few—if any—tasks on the farm are as important as having an accurate read on your cost of production—more specifically, on a per-acre, per-bushel and even a per-field and whole-farm basis. Crunching numbers is necessary to squeeze out every cent of profitability.
This is hardly a new topic, but less than 5% of commercial farmers know their cost of production on a farm basis, and fewer still know on an enterprise basis, estimates Danny Klinefelter, ag economist at Texas A&M University. As we enter a new era of tighter margins with less room for error, those farmers most likely to survive and thrive will be those with a firm grip on their cost of production, he says. Such knowledge enables producers to calculate what-if scenarios and shock-test their balance sheets. "It’s not only ‘what-if’ but ‘what do I do if,’ " Klinefelter says.
"I have grown to dislike accounting," admits Dick Wittman, a crop, livestock and timber farmer in Culdesac, Idaho. Such a statement is a bit of a surprise from Wittman, who teaches managerial accounting workshops. "What I hate more than accounting is working without good financial information," he says, which is why he invests so much time crunching numbers and beta testing accounting software.
Wittman says it’s impossible to make sound financial decisions without understanding costs on a micro level, such as whether to lease equipment, purchase equipment—either on your own or share equipment with other farmers—or go the custom farming route. "How can you market without knowing your cost of production?"
Overestimation of costs can be a problem, too.
Failure to follow good accounting procedures for unusual revenue and expense transactions can result in grossly overstating production costs, Wittman says, which can equally lead to poor marketing decisions. For farmers whose variable costs are high in relation to fixed costs, one of the best ways to boost returns given the present outlook is through improving cost efficiency. "The only way you can do that is to know what contributes to your cost structure," Wittman adds.
Experts are mixed on how precise farmers need to be on financial numbers and their calculation. For example, the most accurate calculation of production costs requires tracking not only the price and quantity of inputs but the costs of each piece of equipment per task and per field, how much fuel is used, even how much labor costs per task.
For many producers, that’s probably too complicated and time consuming, says Mike Duffy, ag economist at Iowa State University. Most farmers have an accurate read on seed, fertilizer and crop chemical costs. Where it gets sticky is calculating costs such as grain drying and machinery.
While less precise and perhaps less ideal, an easier way is to keep track of total equipment costs and allocate it by crop after the fact, Duffy says. Combined with other costs, this will get farmers close to knowing production costs.
Grain farmers have enjoyed a five-year run of good prices, so much so that some producers have become a bit cavalier about monitoring production costs. No longer can producers afford to estimate costs; they need to know them inside and out, he says.
For example, one farmer can rent land for $300 per acre and lose money, while another can show a profit. "The risk of not knowing your costs is that you can end up paying too much," Duffy says.
Where to turn for help.
For producers who are in the beginning stages of determining costs, Duffy recommends using spreadsheets available through land-grant universities, such as the sample on page 26. In addition, farmers can compare their costs to those developed by farm management associations and other benchmarking services.
Even so, some farm management association data are not actual but allocated, says Gary Schnitkey, University of Illinois ag economist. For example, University of Illinois farm management data uses real numbers supplied by farmers on variable costs such as fertilizer, seed, drying and storage, but allocated—or estimated—costs for power, machinery, land and labor. Allocated costs are determined by average costs over time and might differ farmer to farmer.