Across the U.S., farmers are operating in survival mode, pushed to the edge by inflated production costs and low commodity prices.
With thin margins and even negative cash flow, it’s a scary time for producers, says Thomas Eatherly, farm financial business advisor at Pinion. That’s why it’s more critical than ever to know the real cost of running your farming business and accurately understand your break-even.
“When setting up budgets, most of the industry focuses on cost of production, and that’s a great place to start,” Eatherly says. “But they’re not looking at their total cost of doing business.
“At the end of the day, it comes down to the total amount of checks you wrote and the total revenue you brought in,” he says.
Here’s how Eatherly explains the difference between the cost of production and the cost of doing business:
- The cost of production (COP) covers the actual expenses incurred to grow the crop within the four corners of a field. That includes the number of trips your equipment takes across the field, seed, chemicals, fertilizer, irrigation, harvesting and so on.
- The cost of doing business (CODB) is broader. It consists of the actual expenses and the checks you wrote to operate your business within the window of time it takes to prep the land, repair equipment and plan. It also takes into account planting, harvesting and delivering the crop, and collecting the money. It further includes taxes, insurance and much more.
Calculate beyond the field
Here’s an example comparing COP and CODB, using two employees during a 40-hour work week:
During one week, Richard spent 15 hours on field preparation inside the four corners of the south farm. Labor cost was 15 hours x $14 per hour. That means your cost thus far in that field is $210 for labor. On the other hand, Joe spent the other 25 hours working on equipment, repairing grain bins and treating seed. So, that 25 hours x $14 per hour equals $350.
The COP model says your cost is $210 for labor in that field, whereas the CODB model says your cost for that work is $560 ($210 + $350) for which you actually wrote a check.
“The higher number, or the CODB model, is what you should use to calculate your break-evens,” Eatherly says.
Farming operations are high-grossing and fully operational 365 days a year, he adds. With budgets running well into millions of dollars, you must be on top of your costs.
When working on your projections and budgets, make sure you’re counting all the items on your cash balance sheets and the cash expenses on your profit and loss statements. Beyond labor, fuel, seed and feed, remember to factor in expenses such as taxes, insurance, utilities, debt service for land and equipment, and owner’s draws for cost of living. They all have to be paid from a bushel of corn or soybeans or a pound of cotton or pistachios.
“The spread between your break-even with the COP model versus the CODB model has never been as far as it is now,” Eatherly says. “Be sure to know your true costs.”
If you aren’t sure how to calculate your total costs, or want to better understand how to determine your farm’s true break-even, reach out to an expert. A second set of financial eyes will help you cut expenses, optimize your business and position you to survive.
