Estimating costs of production

If you haven't calculated your costs of production on the farm, government numbers can help get you started

Market analysts don’t always agree on price forecasts, but at every farm marketing presentation at least one analyst gives out the same piece of advice: know your cost of production.

Calculating production costs is time consuming and frustrating. As soon as you’re done, the prices change. Here are four reasons to do it anyway:

  • If you know what it costs to grow your crop, you’ll know how much money you’ve made when you sell it.
  • Knowing costs and potential profit for each crop can help you decide what to seed, when you have agronomic flexibility.
  • If you’re thinking of buying more land, knowing the rest of your current costs can help you decide if you’ll still be profitable after adding in high land costs.
  • If your costs are significantly higher than average, you can take a closer look and see why that is.

Getting started

If you haven’t done this before, the easiest way to start is to begin with someone else’s numbers, then tweak them to match your situation.

The governments of Alberta, Saskatchewan and Manitoba all provide basic data you can use as a starting point.

In Saskatchewan, Glenn Payne, Saskatchewan Agriculture’s provincial specialist, agribusiness, is responsible for developing the provincial Crop Planning Guide. “These numbers and budgets are just guides for producers to consider,” Payne says. “We strongly encourage you to use all of your own prices and costs, and tailor the results to your farm. Only you are going to know the situations you face.”

More from the Grainews website: Pre-pricing next year’s crop

The Crop Planning Guide includes not just costs, but also revenues. Tailoring these num- bers to your situation will be most important when it comes to selling prices, especially in a year like this. “We generated our price forecast early in December,” Payne says; things have changed substantially since then. When you’re forecasting your own prices, Payne says, “you really have to reevaluate and see what the marketing and commodity market forecasting experts are saying, combined with your own thoughts or forecasts, and the pricing opportunities available to you. That’s such a key component of your revenues.”

Fertilizer is another fairly substantial component of cost estimates. “And they can have fairly volatile prices. Growers really need to look at that closely as spring approaches, if they have not already locked in prices or supply.”

While the published numbers are a great starting point, over time it makes sense to use your own numbers for every cost on the list. “Throw your own numbers in there,” Payne says. “Factors change and everyone’s farm situation is unique to them.”

Finding starting numbers

Find the cost estimates that are closest to your situation.

Manitoba: The government of Manitoba has cost of production data online in a spreadsheet, or a pdf you can download. (To find these files, at www.gov.mb.ca, search for “cost of production.”). If you use the spreadsheet option, it will be simple to fine-tune the data for your own farm right in Excel.

There are separate cost estimates for eastern and western Manitoba. The eastern Manitoba numbers are intended for farmers in the area around the Red River Valley, where, as the guide says, farmers use “higher input levels to match high productivity of the soils.”

The spreadsheets include three cost categories: fixed (land, machinery and storage), variable (per acre costs such as seed, ferti- lizer, and chemicals) and labour.

Remember to look at the “assumptions” section of the files, so you’ll know which numbers are more likely to apply to you.

Staff who developed these num- bers put quite a bit of thought into each calculation. Here’s an example: The per acre figure for storage costs assumes farmers need storage for 30 bushels per acre — half aeration bins and half non-aeration bins. Annual depreciation and investment costs are estimated at $3.26 for non-aeration bins, and $3.79/bushel for aeration bins, for an average per bushel storage cost of $3.52/bushel.

Saskatchewan: For Saskatchewan numbers, at www.agriculture.gov.sk.ca, search for “crop planning guide” (or visit your local office for a hard copy). This file is a pdf. To find the Excel version of the spreadsheet, search for the “Crop Planner.” You can modify the budg- ets as much as you like or as little as you like with your own yields, prices and costs. You can also use some additional spreadsheets to compare total returns from different rotations (there are not in the hard copy or pdf version.)

Saskatchewan estimates costs for three different soil zones: brown, dark brown and black.

As with Manitoba, these numbers are based on several assumptions. Be sure to read these first — you might need to tweak some of the numbers to fit your operation. For example, pesticide costs are set at Suggested Retail Prices, with full rate application.

Alberta: The government of Alberta has created an entire computer program to help farmers calculate production costs, profit margins and break even sale prices.

At www.agric.gov.ab.ca, click on “decision making tools,” then scroll down to “CropChoice$ Computer Software.” You’ll have to download this program and install if on your own computer to see the cost data.

Once you’ve done that, the software includes provincial Crop Insurance prices and yield data, specifically for each area, as well as other cost data. The data is updated every year.

About the author

Editor

Leeann Minogue is the editor of Grainews.

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