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The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

What's Your Contribution Margin?

Oct 08, 2010

The University of Purdue and other universities do a good job of providing estimated crop costs and return guides for each major crop grown in their area.  I decided to take their 2010 Crop Cost and Return Guide and update with three ranges of prices for the five different crop rotations shown.  I am using a low, average and high price for these crops based solely on an educated guess by me as to what prices might be over the next twelve months.  Based on 2008, almost all of these numbers were hit, so I think we stand a good chance of hitting most of these numbers on at least the average and hopefully the high side.

The table is as follows: 

 

              DC Beans
    Cont Rot Rot   DC  With
    Corn Corn Beans Wheat Beans Wheat
               
  Yield 180 191 59 84 35  
               
Low Price               4.50               4.50               9.00               6.00               9.00  
Average Price               6.00               6.00             12.00               7.00             12.00  
High Price               7.50               7.50             15.00               8.00             15.00  
               
Low Revenues             810              860             531             504             315             819
Average Revenues          1,080           1,146             708              588              420           1,008
High Revenues           1,350           1,433              885              672              525           1,197
               
  Variable costs              380              367              206              172              170              342
               
Low Contrib. Margin              430              493              325              332              145              477
Average Contrib. Margin              700              779              502              416              250              666
High Contrib. Margin              970           1,066              679              500              355              855

 

As you can see, in most cases, corn will generate the highest amount of contribution margin to the farm operation, however, this is based upon input costs using 2010 numbers.  I believe that costs for 2011 for fertilizer and fuel will most likely be higher than 2010, therefore, you will need to update with the pricing levels that you expect for these input costs.  Also, double cropping wheat with beans is very competitive with corn and since most of the winter wheat has already been planted in a lot areas, these acres will not be available for corn.

This is a fairly easy spreadsheet to work up.  You just need to determine your total variable farm costs by crop and then plug in your yield and estimated pricing.  Every farmer should prepare and update these spreadsheets before making any planting decisions.

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