Preparing a cost of production worksheet for the farm is one of the most rewarding New Year’s resolutions that producers can make.
Grain farmers, with whom I am most acquainted, will find this information invaluable when making decisions.
Templates are available that can prepare a cost of production worksheet for each crop and each field. An analysis of the entire enterprise can be prepared once these worksheets have been assembled.
Let’s not discuss the preparation of a worksheet. Instead, let’s talk about how a well-prepared cost of production analysis can be used to make a farm more profitable:
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- Preparing input purchases: Farmers who have prepared the worksheets with a limited budget in mind will now have a template to follow when making purchases. For example, it becomes a lot easier for farmers to make fertilizer purchasing decisions if they have budgeted $50 per acre for fertilizer and are able to pre-buy their requirements for $45 per acre. As well, a well-prepared worksheet will be well received when requesting an operating loan or line of credit from a lending institution.
- Planning the season: Cost of production worksheets are also good roadmaps to follow as farmers move through the growing season. They now have a budget that they can use to guide them when making in-season purchases. The worksheet should not be a static document. Farmers should enter the actual costs as they move through the season and compare them to their predicted costs. This allows them to see if they are ahead or behind in their predictions. The expected return on the commodity they are growing should also be updated as prices move. This will result in a clearer picture of their net return.
- Selling the product: Farmers have often said to me over the years: “But I need $10 per bushel for my canola.” However, they usually don’t really know what they need for their canola. It’s just that they think $10 sounds like a nice number. Let’s say farmers have prepared a cost of production worksheet that indicates their total production costs and cost of living requirements total $9.25 per bu. The worksheet gives them the confidence to sell if they have an opportunity to lock in production at this level. Yes, they may not produce what they have predicted, but this number should be conservatively based on long-term production. As well, they have insurance options. The cost of production worksheet gives signals at prices that will provide a return for the farm rather than an “I need” price.
- Looking back: Farmers should also prepare a cost of production worksheet for last year’s production. If they are ahead of the curve and have already done so, then now is the time to finalize the numbers. Farmers can add in the production they have already sold and the prices they have sold for to calculate what they really need for the remaining grain on hand to cover their costs and make a profit.
