Calculate Cost of Production

Calculate Cost of Production

Make sure your farm is on track for profit in 2012.

You can expect crop production costs to increase for 2012 while grain prices slip. And managing margins will be the key challenge for many farmers.

That's one of several key messages Steve Johnson was delivering this winter at meetings around Iowa. The Iowa State University Extension farm management specialist is telling farmers to "know your costs and estimate your own 2012 margins. Separate owned land from rented land when making these calculations."

Another tip: consider using revenue protection crop insurance coverage and the new trend adjusted yield endorsement to increase your actual production history (APH) on your farms.

Preharvest marketing strategies might include delivery of a large portion of these guaranteed crop insurance bushels. Another advantage of this strategy is that on March 1, the projected prices for revenue protection products are known. Consider selling bushels for harvest or later delivery when December corn futures and November soybean futures are at or above these projected price levels."

U.S. farmers are expected to increase planted acres for both corn and soybean acres in 2012. While USDA will not release their forecast until late February, the expectation is that over 6.5 million acres that were not planted or were flooded in 2011 are expected to be planted.

Corn acres are expected to increase to 94 million acres with increased corn-on-corn rotation. Soybean planted acres are expected to approach 77 million acres, as many farms benefit from drier winter conditions and more soybeans are double cropped behind winter wheat.

Calculate your cost of production by crop and by farm. Use family living plus actual cash wages for labor cost. Use actual depreciation rather than tax depreciation for machinery costs. Calculate by unit of production as well as by acre: compare farm by farm.

Go to www.farmdoc.illinois.edu/fasttools/index.asp to download the Grain farm budget and projection tool. This program calculates per-acre budgets for different crops and a whole farm budget and includes breakevens. Projected financial statements and return sensitivities are available. The effects of farm level crop insurance and hedging can be analyzed.

Keep an eye on debt to equity ratios, says Bushnell, Ill., financial consultant Darrell Dunteman. According to Illinois FBFM (Farm Business Farm Management) records for grain farms, the top fourth of operations have 11% debt-to-equity ratio, while the average have 28%.

Bidding cash rent

How should you bid on cash rent? First, work up your budget. Just because your cash rent breakeven is $503 per acre doesn't mean you bid that amount, adds Dunteman. Take out $68 per acre margin to account for price variability, yields and input prices. It means you could tolerate a price drop and still make money.

"Cash rents are like the price of gas - they go up rapidly but go down slowly," he says.

 

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