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Roy Smith: Here we go again
January is a logical time to be making marketing plans for the coming year if you have not already done so. As I start seeing commentary about how to write a marketing plan, I observe that again this year many of the recommendations begin with an appeal to start by figuring your cost of production. I will never argue that every farmer needs to make a budget. Knowing cost of production is an excellent management tool. However, break even prices are not good triggers for making sales.
I discovered this principle early in my farming career. In the fall of 1972 soybean prices reached the level of $3.00 per bushel. That was in the top range of soybean prices up until that time. By the end of harvest the price was $4.00. Few soybeans remained in farmer ownership. By spring the price had more than doubled. Those who sold for $3 or $4 missed a golden profit opportunity.
Not long after that in the spring of 1974 corn prices for fall delivery held over three dollars per bushel. This also was far over my projected cost per bushel. I gladly forward contracted part of my crop at that level. Unfortunately the worst drought in 38 years cut my yield from the anticipated 100 bushels per acre to less than 40 bushels. The cost per bushel increased proportionally. My early sales were far below actual cost.
The drawbacks to using cost of production to trigger sales are numerous. Break even prices are moving targets until yields are known. I only have to look at my crop insurance yields from 2009 and 2010 to observe this phenomenon. My average corn yield in 2009 was 196. Last year it was 127. That difference obviously makes a tremendous difference in per bushel cost.
Calculating variable cost per acre is pretty straight forward. For my figuring I use invoices of inputs already purchased. Determining the numbers to use for machinery cost and land cost are much less definite. My main power source is a 1982 4440 tractor. I paid $24,000 for it in 1983. Today that machine would probably bring $30,000 if I sold it. The value of my planter, truck and harvesting equipment has also appreciated. Does that mean I have a positive machinery cost? Probably not, but it leaves me wondering what a realistic cost really is.
Land cost is another issue where costs vary widely depending on per acre value, rental rates and arrangements, property taxes, interest and other factors. The land in my small farming operation was bought in 1975 for $700 per acre and has been paid off for 20 years. My only direct land cost is the property tax and a small cost for liability insurance. To be realistic I should consider opportunity cost on the value of the property. However, it will still probably be less than a neighbors’ cash rent that is over $200 per acre or the person who might have paid $5000 per acre for a recently purchased farm.
Finally, there are as many ways of calculating costs as there are farmers. Crop budgets are included in the “Winning the Game” workshops going on this winter. The estimated cost per bushel for soybeans on my non irrigated farm is $8.76. University of Nebraska calculations on a similar farm show a break even of $5.13. We would have different price targets in our plan for making new crop soybean sales. You need to do your own estimations based on your individual farming business!
Go ahead and figure your estimated cost per bushel. Use it as a management tool and for cash flow planning. For triggering sales of the crop not yet planted look at seasonal patterns, technical indicators, basis levels or some other mechanism that is more predictable than cost per bushel.