Discover your breakeven cost
Once you establish your breakeven cost to produce an acre or a bushel of corn and soybeans, you can do a lot with that number to improve the financial management and profitability of your farming operation.
“Farming is a high-risk business, and to succeed in today’s environment, producers need to be diligent in knowing their breakeven costs,” emphasizes Steve Johnson, Iowa State University Extension farm management specialist in central Iowa. “Without a firm understanding of the cost to produce a crop, you are merely making a ‘best guess’ and that is usually a poor business strategy.”
• Despite higher crop prices, know your production cost.
• Knowing data puts perspective back into an emotional decision.
• Economic uncertainty makes managing margins critical.
Cost of production information should be used to help producers do a better job of marketing. “It can help you understand when to sell your crop to ensure profit,” he notes. “Knowing your cost of production and breakeven can also help you determine if paying a higher cash rental rate for one farm can be justified across the entire farming operation. Or if the purchase of a new farm at today’s record-breaking prices for land can be justified.”
A vital number to know
Always knowing your breakeven, and at what price you need to sell your crop to be profitable, puts perspective back into an emotional decision. “For many farmers, capturing this data can be difficult and time-consuming,” says Johnson. “However, new tools are available to help farmers determine their breakeven and to help them establish goals.”
Programs range from straight-forward profit analysis to more advanced systems, which integrate site-specific crop planning and local cash market prices into the equation.
Johnson provides these responses to questions and gives an overview of the tools available and how they can be used:
• In today’s farming environment, what percentage of farmers have adapted recordkeeping and analysis practices to know their breakeven cost? Johnson estimates that 30% to 40% of farms in Iowa have detailed records that lead to annual calculations of the breakeven cost of production.
• What do you make of this adoption number? The number hasn’t changed significantly in recent years despite the expanded use of computer software, higher production costs and more financial risks.
• Would you say the effort has improved or declined from an individual farmer’s perspective the past few years? It has declined. With high crop prices, it’s likely less attention is being given to the need to keep good records. Profits have been readily available, so there’s less attention to detail.
• Why is it important to know the breakeven for a farm operation? It leads to the ability to manage profit margins and to make better marketing and financial risk decisions.
• Why haven’t more farmers embraced calculating their breakeven? It’s mainly lack of discipline and not budgeting time after harvest to determine their breakeven costs. That’s too bad because knowing your breakeven can lead to better decision-making.
• What steps can a farmer take to establish his or her breakeven? Keep good records and allocate expenses and income to various enterprises. Even farms, fields and crop rotations should be separated out when figuring your cost of production.
• Does a farmer’s breakeven number typically change throughout the year? Yes, the final breakeven on a crop you are growing may not be known until the crop is harvested and yields are determined. Preharvest estimates are valuable, however, for making crop marketing decisions before harvest. Most preharvest estimates of the breakeven are rough estimates of cost and yields gathered from recent years.
• What is holding back many farmers from calculating their breakeven? Large profit margins the past years have lessened the concern for risk management strategies. We suggest to farmers that they allocate time and keep detailed records so their breakeven cost can be calculated. That leads to being able to set margin goals and develop a marketing plan that includes strategies, tools and the discipline to use them.
• What programs or services are available to help a farmer know his or her costs of production? Computer software as simple as QuickBooks and the use of Excel spreadsheets or advanced computer records with enterprise allocation capabilities are the most likely ways to do it. Also available are the Iowa Farm Business Association with standardized software, consultants who make farm visits to help with the analysis, and free Excel spreadsheets called decision tools for financial analysis on the ISU Ag Decision Maker website.
• For farmers who have never calculated their breakeven, how do you suggest they get started? Choose one farm and track all costs for one year for all crops. Choose a farm that has higher fixed costs, such as a farm with a high cash rent.
• For farmers who have been calculating their breakevens, what additional advice or tips can you offer them? Use the breakevens to determine profitable crop margins; by farm, by crop and by crop rotation.
• Once a farmer has figured his or her breakeven, what can they do with that number to help improve their farming operation? Use the advanced software and decision tools available for instantaneous tracking of expenses, crop insurance coverage and market strategies such as futures/options and cash forward-contracting positions. This analysis can be done daily and compared to the current market price.
• From a lender to farmer perspective, what benefits if any could a farmer experience with their lender relationship by establishing and tracking this type of information more accurately? A farmer with a plan for locking in profit will increase the lender’s confidence in that farming operation. A lower interest rate is likely to be given to that farmer along with better repayment terms. It makes it easier for the lender to assist the farmer should they decide to rent additional land, buy or lease machinery or equipment, prepay crop expenses, or advance money to a hedging or options account.
Source: ISU Extension
This article published in the July, 2012 edition of WALLACES FARMER.
All rights reserved. Copyright Farm Progress Cos. 2012.