There are two financial benefits in calculating your cost of production: support marketing decisions and develop accurate budgets. There also tends to be psychological benefits.
“There is a lot we can’t control in farming, but certain costs can be,” says Brian Stark with Traction Ag. “Understanding (and controlling) your costs of production is key to profitability. You can’t improve what you don’t measure.”
He says having your own financial understanding aids in making good crop marketing decisions and identifying profitable fields/crop zones; it also helps budget toward expansion.
Buoy Your Marketing
Knowing your cost of production additionally boosts your confidence in marketing. Via an online survey with 1,350 farmer respondents conducted by Bushel, over half of respondents said they were satisfied with their grain marketing results, while 42% said they were neutral, and another 5% said they were dissatisfied.
“When we dug deeper into the data, we saw a correlation between marketing satisfaction and understanding and use of cost of production data,” says Julie Christensen, product marketer for Bushel Farm. “The most satisfied farm marketers were more likely to know their cost of production and use it to set the price where they begin pricing their crop.”
According to the survey, 95% of farmers who were “very satisfied” with their marketing results also said “I have a very good understanding of my cost of production.”
“It can be overwhelming to pull together all the information to calculate actual cost of production,” Christensen says. “Fortunately, digital tools like Bushel Farm can make it a whole lot easier than it has been in the past. When armed with those insights, farmers can make the best decision for their operations, down to the field level.”
A large majority of the survey respondents said technology is important to the future, and nearly half are willing to experiment with new technology. When it comes to software use, 24% use four or more software programs for their farm business, and 44% use one to two software programs for farm business. One-fifth of respondents use no software programs at all.
Cost Calculations
Two numbers derived from your cost of production are helpful for two different applications.
Stark explains knowing your cost per acre is ideal for budgeting and can help with strategies in controlling input units.
“This is extremely important when budgeting costs for fertilizer, seed and pesticides, energy, machinery and land for the upcoming year,” he says.
Using the data differently, having your cost per bushel gives you the ability to budget and market based on output units.
“There are three good reasons to budget on outputs — ease of decision making, recognition that per unit fixed costs can decline dramatically with increases in output, and recognition in the trade-off between productivity and cost,” he says.
