Consider a Budget Based on Outputs

November 2, 2015 12:00 PM
 
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Cut inputs, save money. This equation seems simple enough, but Michael Gunderson, Purdue University agricultural economist, says cutting corners on inputs can actually prove more costly if it leads to yield reductions.

“Producers often budget on cost per acre,” he says. “While this is an excellent start and certainly better than no budgeting at all, focusing only on total costs per acre might cause producers to overlook important productivity trade-offs.”

Gunderson says there are three reasons farmers should consider setting a budget based on outputs and measure their cost of production per bushel of grain.

  1. Ease of evaluating decisions
  2. Per-unit fixed costs can decline when outputs increase
  3. A trade-off exists between productivity and cost

“The most straightforward reason for calculating costs per bushel, rather than per acre,, is that the crop being produced will be priced in dollars per bushel,” Gunderson says. “Having the costs and benefits in the same units makes comparison easy.”

Budgeting this way takes the focus off cost per acre, he says. When farmers budget by dollars per acre, any additional money spent on inputs will appear to raise costs. But this analysis ignores the impact of those inputs, Gunderson says.

“A grower budgeting based on cost per acre might forego the more expensive input simply because it costs more, while someone budgeting based on cost per unit of output might note that spending additional money per acre actually reduces total cost per acre because that input yields more bushels.”

The only caveat – no budget will perfectly predict the future, Gunderson adds.

For an in-depth look at Gunderson’s advice on budgeting and pricing inputs, visit http://agribusiness.purdue.edu/blog/spend-money-to-make-money.

 

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