Golf icon Arnold Palmer once said, "Golf is deceptively simple and endlessly complicated.” You hit a little white ball toward a hole and when the ball falls in the hole, you stop. Simple.
But hitting that ball with a stick and making it go where you want is complicated. That's how Roger Schlitter of Roger's Farm Financial, a consulting firm based in Mason City, Iowa, sees the challenge of figuring cost of production.
Producers traditionally look at cost of production only as inputs and hired labor. Living expenses, equipment expenses and principal payments aren't factored in.
"Simply put, your cost of production is every dime it takes to run your business,” Schlitter says. "That's whether you're growing crops or livestock.”
Schlitter says that, at least in his part of north-central Iowa, yields don't change much from year to year. If you know that, estimating your cost of production can be a fairly simple task.
Yet many farmers don't like dealing with these numbers—it isn't the enjoyable part of farming.
"If you have enough money, you can shoot from the hip, but I don't know a lot of farmers who have that luxury,” Schlitter says. As producers deal with huge dollars per acre and high cash rents, it can come down to pay it or lose it.
"You need to know every dime you spent last year … payments, interest, whatever. Don't worry about classifications. Divide the total by number of bushels sold, and that's your cost per bushel. Your accountant can do that in a couple of minutes,” Schlitter says.
Producers can use cost of production figures available from most land-grant universities as a guide, but they need to know the costs for their own operation. It's an exercise well worth the time invested.
"If you have $50,000 in interest payment spread over 1,000 acres and you're running the same equipment fleet as your neighbor, who is running 10,000 acres with the same interest payments, guess whose cost of production is going to be cheaper,” Schlitter says.
Do a Little Better.
Texas AgriLife Extension economist Danny Klinefelter says using these numbers can help you become a better manager. Along with the estimated selling price for your production, you can figure your margin for the year. Then you can maximize margins.
"A lot farmers are good at one thing, and that's where they focus,” Klinefelter says. They may be good marketers, for example, but they don't like looking at cost control.
"If you try to be a little better in marketing, production and cost control, the cumulative effect is always much better than concentrating on one area,” he says.
Figure Your Costs
A new Web-based calculator is available on AgWeb to help you figure your cost of production. You can enter your costs and anticipated yield into the calculator to figure your costs on a per-acre and per-bushel basis. A calculator based on Danny Klinefelter's premise that a little improvement in all areas leads to better results than more improvement in one area is also available to help you see where you should concentrate your efforts to maximize your profits.
Top Producer, January 2010