What is in this article?:
- Despite Record Profits, Farmers Need to be Diligent and Track Costs, Know Breakeven
- How to get started?
Farming is a high-risk business, and to succeed in today’s environment, farmers need to be diligent in knowing their breakeven costs and how they might translate to better achieving their profit goals. Despite record prices and profits the past several years, farmers should allocate time and keep detailed records. Knowing your breakeven can help with setting realistic profit goals and creating a marketing plan that includes strategies, tools and the discipline to implement.
Without a firm understanding of the cost to produce a crop, producers are making a “best guess” – and that can be a poor business strategy. This information can and should be used to help the farmer better market their crop and understand when to sell their crop to ensure profits for their operation.
In addition, knowing cost of production and breakeven can help a farmer determine if paying a higher rental rate for one farm can be justified across the entire operation. Or if the purchase of a new farm at today’s record prices, can cash flow and help avoid overextending the overall farming operation.
“I would estimate that 30-40% of farms have detailed records that lead to annual calculations,” says Steve Johnson with Iowa State University Extension. “The number hasn’t changed significantly in recent years despite expanded use of computer software, higher input costs and more financial risks. With high crop prices less attention is being placed on the need for good records.”
Knowing your breakeven – the price you need to receive for your crop in order to turn a profit – reduces the tendency to make an emotional decision. It also leads to the ability to manage profit margins and make better marketing and financial risk decisions.
Why haven’t farmers embraced calculating their breakeven? Discipline and time.
“The average cost to produce an acre of corn in Illinois rose to $800 this year. Farmers cannot afford to ignore their breakeven when the required investment per acre is significantly higher. The balance between risk and profits is also much greater. Tracking your breakeven and profitability really comes down to having the tools to make the job easier,” says Craig Mouchka, president of Growers Edge. “There are a lot of farmers who create spreadsheets, but it’s still a very labor-intensive process, because as you know, breakeven can vary throughout the duration of the growing season.”
From a lender perspective there are benefits, as well. A farmer with a plan for locking in profit will likely increase lenders’ confidence in an operation; helping secure lower interest rates and better repayment terms. This information makes it easier for that lender to assist the farmer should they decide to rent additional land, buy or lease machinery or equipment, pre-pay crop expenses or advance money to a hedging or options account.