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RSS By: Chris Barron

Chris BarronHave a margins question? Through this blog, you will gain insight into improving your bottom line, as a margins expert answers questions and provides farm business advice.

 

$1,000/Ac. Production Cost for Corn!

Aug 21, 2011

 

As I've been working on 2012 crop plans with farmers, it's becoming increasingly apparent to me that we are fast approaching $1000/ac. production cost. These production estimates are showing costs north of $5.00 / bu. These numbers may seem extreme in some parts of the Corn Belt; however, in the highly productive corn growing areas these numbers will be common.
Did you ever think the cost of production for corn would reach $1,000/ac? It wasn't very long ago when we dreamed of the possibility of grossing $1,000 /ac. income! Yet at the same time our costs were in the $700-$750 /ac. range. It's interesting to me how things tend to stay fairly relative. Basically the cost of production will rapidly follow the market price opportunities. So the question is; are we willing to lock in the margin opportunity as it becomes a reality? Pricing $6.50 corn with 190/bu. yield grosses $1,235 /ac. If the cost of production is at $1,000/ac. and income is around $1,200/ac. We still have a $200/ac. margin opportunity.
The higher the input costs the more risk we assume. Dealing with higher volumes of money makes it more important than ever to manage opportunities during volatile market moves. Margins tend to stay at about the same percentages whether corn prices are at $4.00 or $7.00 as markets rally. On the other hand, market prices can drop significantly faster than inputs, which can easily reverse margins to negative numbers!
It's more important than ever to know your cost of production. It's easy to assume when we see $7.00 bu. corn prices that we should be making money. In most every case we do have great margin opportunities, but at what specific margin level do we make sales? Do we making marketing decisions based on what we think is a good price OR what is a good margin? I would argue that understanding your margin will always help you to make the best pricing decisions.
Here is the chart of some production costs I've assembled from a small number of producers projecting their margins for the 2012 corn crop. These numbers range across four states. I took the highest line item costs from each producer and put them in the high-cost category. I also took the lowest line item costs for each producer and put them in the low-cost category. I then averaged the two categories. This is not scientific by any means, but it's interesting to see how Costs, Yields, and Prices can vary.

 

Production Cost ….. Bench Mark Range
2012 Projections
Production Item
Average
 Low Range
 High Range
Land
$287.50
$200.00
$375.00
Taxes
$25.00
$20.00
$30.00
Interest
$15.00
$5.00
$25.00
Insurance
$25.00
$5.00
$45.00
Seed
$100.00
$75.00
$125.00
Fertilizer
$87.50
$50.00
$125.00
Nitrogen
$117.50
$85.00
$150.00
Herbicide
$30.00
$20.00
$40.00
Fungicide/Insecticide
$37.50
$25.00
$50.00
Custom Spray 2 pass
$15.00
$10.00
$20.00
Equipment/Fuel/ Labor
$172.50
$135.00
$210.00
Grain Hauling
$37.50
$30.00
$45.00
Drying Expense
$27.50
$0.00
$55.00
Storage
$10.00
$0.00
$20.00
Tile / Irrigation
$0.00
 
 
 Production Expense/ Ac.
$987.50
$660.00
$1,315.00
 Production Expense / Bu.
$5.20 
 $4.40
$5.72 
Price Opportunities
$6.15
$4.85
$7.45
Yield Opportunities
190
150
230
 Production Income /Ac.
$1,168.50
$727.50
$1,713.50
 
 
 
 
Margin Opportunities /Ac.
$181.00
$67.50
$398.50
ROI
18.3%
10.2%
30.3%

 

This information is interesting to review and benchmarking against others can be a valuable process. Take some time to calculate your opportunities. The best decisions always come from the best information; Your Own!
What are Your Margin Opportunities???
If you're interested in cost of production and margin management tools, feel free to send me your questions.
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