Business Matters: Get Real On Your Production Costs

 
Business Matters: Get Real On Your Production Costs

It’s no surprise to any of us in grain production that margins are extremely tight. For most of us, profitability this season seems like an almost unachievable goal. Weather challenges along with unpredictable markets present profound issues. Although we can’t control either, we can control many aspects of our business along with much of the risk. Yet we need to be certain the information we use to make decisions is accurate. We need to get real on understanding our production costs.

There seems to be an endless supply of software to track cost of production, but it’s our responsibility to create factual profit-center information. It’s not necessarily the tool but the people and processes you use. 

Find Big Savings. Most producers focus on managing the cost of land, equipment, seed, herbicides and fertilizer. They constitute approximately 85% of the total cost of production. How are you prioritizing your decision-making? 

Typically, the two areas I see with the most opportunity for savings are land and equipment. Some producers are quite efficient with their equipment and have their land costs fairly low compared to average land rents. For those who rent a large portion of their acres, lowering rental rates should be the first item of business moving forward. Most land rents range from $50 to $150 per acre higher than is realistically feasible to be profitable. 

It’s easy to say, “Lower the rent,” but it’s one of the most difficult things to accomplish. Yet it’s our responsibility to document information and communicate reality to landowners. It doesn’t happen overnight. Instead, it requires constant transparency about the challenges we face with finances and margins.

Equipment is often the second-largest line item. As a percentage of cost, machinery typically ranges between 15% and 25% of the total cost of production. With corn, for example, it’s fairly easy to have machinery costs between 80¢ and $1 per bushel. Equipment for soybeans costs up to $2 per bushel. Whatever changes are made, maximizing yield should be the first priority. 

Then consider efficiency. Are you running equipment at maximum capacity? What factors are limiting productivity? For example, if you pick up 500 more acres, you might need to increase planter rows by 12 units. Or it might be better to keep the machine running longer hours. Typically, it’s not the machinery but the lack of trained personnel that creates a bottleneck. Figure out how to use the same iron over more acres.

What constitutes the remaining 15% of the cost of production? The answer is return to management. It tends to be the most overlooked line item and is arguably the most important part of managing your business for success. It includes taxes, health care, personal items, improvement to facilities, additional payroll, family draw and profit. 

An Overlooked Priority. Always consider profit as part of the cost of doing business. Measurement of this expense is critical to make sound marketing decisions and have confidence you’re marketing above absolute production costs. In corn, return to management can easily range from 25¢ to 50¢ per bushel. For soybeans, it can range from 80¢ to $1.75 per bushel. 

The addition of return to management as a line item can significantly tighten farm budgets. An increase of 50¢ per bushel in production costs is a harsh reality. On the other hand, by managing this line item, you’ll be better equipped to make changes or improvements on underlying costs. Cutting back on perks might be necessary in the short-term, and generating off-farm income might bring in additional revenue. Custom work, shop maintenance, seed sales and jobs in town are all ways to contribute value. 

Getting real with the numbers will only help you in negotiating land rentals and purchasing terms. It will improve your ability to make the best decisions for your farm business.

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Comments

 
Spell Check

Aaron
Geneseo, IL
7/30/2015 12:58 PM
 

  It's not easy to get landlords to lower cash rent to a profitable level when there are several guys down the road that will farm the property at a loss just to get more acres in their operation. This is a continuing problem.

 
 

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