Most farms could benefit from putting more time and effort into analyzing costs, particularly fixed costs.
Marketing and agronomics both receive a lot of attention. Figuring out ways to grow more bushels and sell them for a better price is at the essence of being a farmer.
Figuring out ways to spend less isn’t as much fun.
Just look at how many marketing and agronomic presentations you can attend over the winter, and compare that to the number of meetings devoted to cost analysis.
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Most market analysts say that knowing your cost of production should be the starting point for a marketing plan, but the concept can be a tough sell.
“Why should I work out my cost of production?” a farmer asked at a recent conference.
“I try to keep costs as low as possible, and I sell as high as I can.”
When producers do work out their cost of production, it’s typically a gross margin calculation. Various cropping options at various yield and price scenarios are compared, but only production costs are considered.
Gross return minus production costs, including seed, fertilizer and crop protection products, provides a contribution margin. This is how much you have to cover your fixed costs and provide a profit.
Fixed costs receive the least analysis.
Bob Tosh, a business adviser at MNP, recently told a session during Agri-Visions in Lloydminster that the biggest change he has seen over the past seven years is the increase in fixed costs. Where $100 an acre used to be typical, now the number is often around $190 an acre.
Tosh says it isn’t unusual to see equipment and labour costs of $140 an acre. Professional fees are often $10 an acre, especially if a producer is using an agronomic service. Land costs, including cash rents, interest on debt and building depreciation, can add another $40 an acre.
Some producers will argue that equipment depreciation isn’t a real cost. It’s true that you can live off your depreciation during a few lean years, but it eventually catches up to you.
Farmers should analyze their fixed costs because they vary dramatically from one farm to the next and they’re one part of the income statement over which you can exercise a lot of control.
It isn’t unusual to see fixed costs vary by more than $100 an acre from one farm to the next. In fact, there’s usually a lot more variation in fixed costs than in production costs.
Farms carrying more debt will tend to have higher fixed costs. So will farms with a lot of rented land.
Another big variance occurs because of equipment.
Add up the current market value of your equipment and divide by your seeded acres. While some producers manage to get their work done with less than $200 an acre in equipment, others are more than $500 an acre.
There can be legitimate reasons for some of this variance, including labour availability and crop mix, but in some cases farms have simply acquired more shiny new paint than they really need.
Producers on coffee row don’t tend to compare their fixed cost numbers or their machinery investment per acre. However, a good accountant with lots of farmer customers should be able to tell you how your fixed costs rate.
The best defence when margins tighten is to be a low cost producer, and that means keeping fixed costs as low as possible.
