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For famers who have never calculated their breakeven, Johnson suggests choosing a farm with a higher fixed cost – one that is cash rented – and track all the annual costs for all crops.
“Computer software as simple as Quick Books or advanced farm computer records with enterprise allocation capabilities are good options to help a farmer get started,” says Johnson. “In addition, your state’s Farm Business Association has standardized software and consultants who make farm visits. Plus, there are free computer spreadsheets for financial analysis from land-grant universities and other companies.”
Mouchka advises breaking input costs into categories to identify cost of goods sold.
What is the cost of land? How much is needed to cover cost of living expenses? What is the salary for hired help? What about vacation and college savings, and a rainy day fund? Some of these costs are not as flexible as others because you need to purchase fertilizer, but a vacation can be postponed.
Each farm may have different costs, so breaking that out not only affects the individual farm cost, but has an impact on the whole farming operation. You may discover that one farm may actually produce a loss for the overall farming operation.
“It can be pretty labor-intensive, but that’s where software programs designed to help farmers through the process come into play,” says Mouchka. “Growers Edge – along with other companies – is continually working to develop tools and solutions to simplify the process; from the quick input of numbers to running the calculations and analysis. Farmers don’t have to do quite so much of the work themselves.”
“For a farmer who has been calculating his breakeven, it’s important to use the data to determine profitable crop margins; by farm, by crop and by crop rotation,” says Johnson.
Without a lot of work on the part of the farmer, software programs can determine the breakeven number and then translate into your profit. That in turn can help you determine if the farming operation can support the purchase of land, a higher rental rate, equipment and an increase in salary or extra contributions to a college savings fund.
Johnson recommends using advanced software and decision tools for instantaneous tracking of expenses, crop insurance coverage and market strategies such as futures/options and cash forward contracting positions. This analysis can be done daily and based on the most current prices.
“Once you have that number you can set a goal,” says Mouchka. “Then you can track your process based on the number of bushels sold to date and determine what price you will need on the remaining bushels to reach the breakeven and achieve the desired profit goal. Some programs and services will even identify the best local grain bids in the area and feed that information into the system, providing a real-time snapshot of where you stand day-to-day.”
It all leads to the ability to manage profit margins and make better marketing and financial decisions for your farming operation in good times and not so good times.