Why cost analysis matters now

Why cost analysis matters now

When times get tough, the tough crunch numbers (part two of two)

For South Dakota farmer Scott Anderson, who learned the art of cost analysis during his years on Wall Street before returning to the family farm in 2010, things haven't been so bad. In fact, the last year has been profitable for Anderson, who locked in corn and soybean prices that were above his projected breakeven costs on his family's 8,000-acre operation.

Related: How 10 farmers plan to protect 2016 profit margins

He calculates another profitable year for himself in 2016, thanks to having breakeven projections that help him in marketing.

South Dakota farmer Scott Anderson, with his father, Kevin, learned the art of cost analysis during his years on Wall Street before returning to the family farm in 2010. Photo by Lon Tonneson

"It helped me identify my production costs so that I know that if it costs me $3.50 to produce corn, and the market's offering me $4 right now, I better do some marketing," he says. "You don't go out of business selling for a profit."

His secret weapon to cost analysis is an online program, "Cash Cow Farmer," that he developed and now sells to other farmers that can be viewed on a smartphone or tablet in the field. The program breaks down costs on a field-by-field basis and figures profitability on each field with current futures prices and local basis factored in.

Anderson's intensive cost analysis program led him to make major adjustments that reined in cost and lowered his breakeven cost-of-production to a more profitable level.

The first big move involved dropping wheat out of the farm's crop rotation.

"We used to farm corn, soybeans and wheat in rotation, and every year, wheat would be losing money versus what we could make with corn," he explains. "We're no longer farming any wheat because you can't afford to lose money right now."

Anderson's straight-forward, numbers-based approach also led him to do the unthinkable — letting go of 600 acres of rented land the family had farmed for 25 years.

"The numbers never lie," Anderson says. "If you can get the numbers, then you just look at what they tell you. It really takes the emotion out of management."

Likewise, Kansas farmer Douglas Melia's thorough cost tracking also led him to make big changes in management. He discovered he could lower his fixed costs by adding more head of cattle to his stocker operation.

Spreading fixed costs
"We're definitely looking at feeding year around so that we can spread fixed costs over more animals," Melia says. "You have the pay loader, your feed truck, your facilities. Those fixed costs are there whether the pens are full or empty, so if we can move more animals through the facility, you're utilizing the equipment that otherwise just sits around for six months out of the year."

Finding the time to input every data point into the computer — and doing it timely and correctly — is the hardest challenge, Melia says, adding that even he wishes he could commit more time to cost analysis.

Nonetheless, that's no reason to not do it, Melia maintains. Vigilant cost analysis still is the most important job on the farm that helps keep costs in check and his eyes open for marketing opportunities.

Anderson agrees: "You don't want to be chasing the market," he warns. "You want to be ahead of the market, so when opportunities present themselves, you can execute and be comfortable about it."

Part one: Cost analysis crucial to farm profitability

Ehmke writes from Healy, Kan.

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