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Knowing your cost of production

Your Farm Business

June 8, 2012
From Wayne Schoper and Rich Baumann - South Central College

Do you know what it costs to produce the crops or livestock raised on your farm?

Whether you raise corn, livestock or specialty crops, accurate budgets are crucial in gauging the potential profitability of your operation. 2012 is proving to be another challenging year for marketing crops and livestock as prices go up one day and plunge the next. There has been talk that the period from 2006 and ending sometime in the near future will likely be viewed as "the golden age" for crop farm incomes. Profitable production will still be there but you will need to know such critical information as the cost of production for commodities produced on your farm with your particular set of input costs.

As a farmer, you can put together some general direct (cash) production costs with the aid of local average cost of production guides or university budgeting material, but you still need to know the costs for your own operation. Remember fixed costs must be accounted for and dollars allocated to run your farm business. Other items such as equipment, land payments, family living draws and any income taxes must be accounted for and budgeted on an annual basis. All these item need to be factored in as they become part of your "cost of production''! For example, too many times we overlook things like general farm insurance, machinery repairs and interest payments or we do not assign a value for our labor when considering what it costs us to produce a bushel of corn.

Knowing your production costs along with an estimated selling price should give you a figure on your margin for each crop. There are numerous budgeting, cost of production spreadsheets and other financial software programs available to work with your own numbers and even run a few "what if '' scenarios. Working with your banker or farm business management instructor is important to look at different scenarios with a variety of different outcomes.

Thus far in 2012, commodity prices for the new crop are positive in terms of margin and producers have had opportunities to lock in profitable prices for a portion of their crop. We know that costs of production for both corn and soybeans are at or near all-time highs. Of course much of this is dependent on what kind of yields we get come harvest time. However, too many farmers have depended on market rallies that may or may not occur. Each farm is different with different costs for land rent, interest, depreciation and overall crop inputs.

As we move into summer it becomes an excellent time to update cash flows and review your own cost of production. Knowing your break even costs becomes a great tool for marketing and may give you the opportunity to capture pricing opportunities as the market turns favorable. Just doing nothing and waiting until next fall or winter to price grain or livestock is a very risky proposition.

In summary, knowing your cost of production and selling at a profit is important to make sound business decisions during the course of the year. Develop a marketing plan that takes into account cost of production figures for your farm. Spend some time analyzing your farm records to avoid costly mistakes.



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