With ever-increasing costs of farm inputs, it becomes more important to determine what inputs will be best to control weeds and other detriments to your crops.
Although I am not an agronomist, one method we can use to determine the best financial option when applying chemicals is the contribution margin.
REVENUES OVER EXPENSES
Simply, contribution margin is based on the excess of variable revenues over variable expenses. Variable means these revenues and expenses will increase or decrease based upon production metrics.
Fixed costs remain constant no matter how much you increase or decrease the size of your farm operation.
For example, assume you are deciding on renting an additional 300 acres. Your revenue will increase by $300,000 and the cash rent, seed, chemical, fertilizer and other variable costs will be $200,000. Your contribution margin is $100,000 and can be used to offset fixed costs such as debt service and family living costs.
CHEMICAL COSTS
So how does contribution margin apply to picking chemicals? Let’s assume you apply four different chemicals (herbicides, fungicides, insecticides, etc.). Each one will increase yields (or least prevent yields from decreasing), and the net contribution margin is as shown below.
As you can see, all the chemicals create the same net contribution margin to your bottom line. However, you spend $40 on chemical A to get the same $40 benefit from using chemical D. As long as the benefit from all four chemicals is the same, we will always pick C or D versus A and B.
To me, this type of contribution margin analysis is more important than total net income. Having a positive contribution margin will always increase your net income, while a negative contribution margin will always decrease it.
Using contribution margin analysis in any financial decision on your farm is an effective management tool. It allows you to be proactive in your analysis versus a reactive net income analysis, since that can only be determined after all events are done.
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