Know Your Breakeven This Growing Season

Finance First

Tighter margins this year require good risk management strategies.

Published on: July 29, 2013

As you continue to make marketing decisions this year, you'll want to keep an eye on your breakeven price. Our ag finance department has watched average breakevens trend upward for the past three years straight – a total 44% rise for corn and 26% increase for soybeans!

A few different pieces have bumped breakevens up. Overall, farmers are paying more for cash rent. There's also more expense from depreciation as you have invested profits into updated or additional equipment.

Debt payments have risen from recent land purchases. And farmers have taken advantage of low interest rates over the past few years, using more financing to make purchases.

Higher breakevens mean tighter profit margins for most farmers. They also mean it's more important to have a proactive marketing plan and risk management strategies in place.

Tighter margins this year require good risk management strategies.
Tighter margins this year require good risk management strategies.

To figure your breakeven, take your cost of production divided by your yield. The result tells you the exact price you need to cover your production costs. Your breakeven should also include your costs across the board – not just your direct inputs for the crop. If you only look at inputs, you'll get an artificially low number.

Our ag finance specialists calculate all your costs into your breakeven – family living expenses, energy costs, the fuel you put in your trucks. They build in replacement costs for your equipment line because you'll probably want to buy a new piece of machinery someday. Your main source of revenue is selling your grain, so you need to know that it can cover all of your costs.

Many farmers have reinvested profits into their businesses. This is good – but can impact your short-term cash flow.

Depending on what happens with yields and prices over the next few years, it could become tough to keep funding these investments. You'll want to be deliberate about watching your operation's finances carefully.

As you're doing your strategic planning, get the help of an expert who can run various scenarios on your financials based on different commodity prices and yields. Find out what has the most impact on your breakevens. Have a backup plan for what you would do if you ever got into a negative cash flow situation.

Knowing your breakeven – and using it to make risk management decisions – shows what it's going to take to "make it" this year. Do you know your numbers?