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Costly inputs require max production
In the “Marketing in a New Era” workshops this year, I go into detail about the five steps I see as necessary when a farmer is putting together marketing plans for the coming year. The first of these steps is to implement a crop insurance program. While crop insurance is not directly a marketing function, the guarantee of revenue is an important tool in being able to deal with the crop production risk.
The second step is to estimate the cost of production. I do not believe in using the cost of production as a way to trigger sales. The market does not care what it costs you to grow a bushel of soybeans! However, knowing the break even price is a necessary factor in making good management decisions. If you consistently sell at a price that does not pay all expenses, your business has a poor long term outlook.
In calculating break even prices for the 2012 crops, I was shocked at some of the costs that I discovered. Variable costs are pretty straight forward. At the top of the list is the cost of nitrogen fertilizer for corn. My pre-pay cost of this is $96.25 per acre. My parents did not pay much more than that for the farm I live on! In contrast, seed and some of the chemicals went up very little. When calculating variable costs, per acre expenses are pretty straight forward. In my case, those items for soybean production totaled $192 per acre. For corn the sub total was $3.20.
The picture for machinery and land cost is not nearly as clear cut. My main power source on the farm is a 4440 John Deere that I bought in 1983. Since it is now worth more than I paid for it, does that make the cost per acre positive? That would not be realistic. Shortly after I retired in 2004, I bought a six row corn head which has been used to harvest my crop. I traded it last fall for a new one of the same make and model. The one I just purchased cost roughly double what I paid in 2004. Clearly, the machinery cost must be much higher even though much of my machinery is 20 or 30 years old. I settled on a cost of $120 per acre plus custom application of fertilizer and chemicals. That is probably too low for most farmers with relatively late model machinery in good condition.
A similar dilemma shows up in allowing for land cost. I made the last payment on my farm in 1990. Does that mean the only land cost is the $28 per acre in property tax? That is not realistic either. The easiest way to arrive at a land cost is to use the going rate for cash rent. Being out of the rental market for several years, the only rental rates that I hear are the coffee shop numbers. The highest rent I can confirm for 2012 is $205 per acre. When this number became public early last fall, the common knowledge was that it was way too high. My calculations show that at today’s crop prices, rent that high can be justified. That instance was for a poor quality farm in eastern Nebraska, not Illinois or Indiana.
Using the above data, my total per acre cost of production for corn comes out to $642 for corn and $510 for soybeans. The corn cost is $4.59 using APH yields. The soybean break even is $10.01. For those of us here in the non irrigated part of Nebraska, the big variable that changes per bushel cost is the yield. With normal weather we have consistently had yields better than APH in the last five years. With today’s forward contract bids we can show a profit. We certainly do not get rich unless yields are better than average. With today’s costs the pressure is on to get the most production possible from the expensive inputs!