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Know your costs

Business owners need to know where they make their money.

Determining where the profit centers are means knowing revenue and expenses, plus those overhead expenses that must be paid whether production occurs or not. Most farmers talk about costs per acre, revenue per acre, and maybe margin per acre. But to see where your risk and margin occurs, take a look at your unit cost and unit margin — your cost and profit per bushel.

In the past, people talked about reducing costs per bushel by producing more bushels. It makes sense, as producing more with less accumulated cost is more efficient. It can be even better if you produce the same amount with fewer inputs due to lower risk. Then you throw in a bad year like 2010 or 2011, and it makes the numbers scary.

Per-acre revenue and costs are easy to budget with, measure, and compare with other producers. But cost and revenue per unit (bushel) shows your efficiency.

You can calculate this measure either after harvest or by using budgeted yield estimates. Take the costs and revenues per acre, then divide by the yield.

Another good thing to calculate is your overhead cost. What would your farm cost if you did not put in a crop or spend money on inputs? This includes payments on land, equipment, labour, taxes and living expenses — first broken down per acre and then by bushel. This shows you what your actual costs look like based on actual yields.

Because prices are reported to us in dollars per bushel, we need to know our costs per bushel.

Using the numbers

Once we know our fixed and variable costs, we can pull the trigger on prices that will make us money. Making margin on variable cost is nice, but are we actually making enough money to pay for the power and equipment and put food on the table?

These measures also allow us to look at the bigger picture. If it’s difficult to pencil in a profit for a crop, why are we growing it? If it is just a rotational crop, is there a better replacement?

One of the things I’ve learned is, just because someone else isn’t growing something, doesn’t mean I can’t. Or if someone tried it and didn’t work for them, it may for me. Small-acre experiments or learning from someone who’s successfully growing a crop may open up new opportunities to make money.

There are two ways to decrease costs per bushel. The first is to reduce costs per acre while getting the same yield. This might mean no longer putting extra inputs into the ground that are unmerited (like over-fertilization), getting rid of a payment, or reducing inputs with low rates of return. The other option is to increase bushels per acre. Once again, there are two ways of doing this. Use the same dollars per acre, just reallocate them into different management zones, or increase inputs and have the return higher than the additional costs. Either way, there is a change in management.

With a change in management, one expects a change in results. Doing things differently should give different results. As they say, insanity is doing the same thing and expecting different results.

In agriculture, doing the same thing will be influenced by weather, which can give different results. To make the most of management opportunities, one needs to know the risk-reward and cost-benefit scenarios. Adding extra nitrogen during a drought is probably a high-risk, low-reward management decision.

Keeping budgets in line while bumping up yields looks great on paper, but it’s challenging to do. It takes discipline and time to make sure each field gets an optimal fertilizer blend, go to a longer rotation, or to set longer-term goals to ensure long-term sustainability. It also means getting things done at the right time to get the maximum dollar benefit.

Hit the jackpot

To hit the jackpot, you need to decrease inputs and increase yields. This may be due to rotational benefits, improved timing through equipment, technology or labour changes, or a change in weather patterns. On our farm, we changed our rotation to increase our pulse acres, changed our canola system to LibertyLink and changed our cereal from winter wheat to winter triticale. Alfalfa and sainfoin is included on some of the acres, along with corn that is grazed. The next move is to include cover crop blends into all of the acres to cycle nutrients through the profile, potentially gain some grazing opportunities and create more biodiversity on our farm. Just changing our winter cereal from winter wheat to winter triticale cut our costs by $40 per acre while keeping our revenue similar, down about $10 per acre. Net gain.

Actual numbers will vary from farm to farm and will depend on what stage you’re at in your farming career. Knowing your break-even and, better yet, knowing where you’re making money, makes negotiating finances easier. On every farm there are money sources and money pits. With good growing conditions, higher management will result in higher yields and lower costs per bushel of grain produced. †

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