We've concentrated on managing people more effectively for greater profit in past columns. Now let's look at the cost of labor and its impact on your operation.
Growers have had success in leveraging the per-acre cost of labor to significantly improve their return on assets and return on equity.
I believe you can't manage what you can't see or visualize, so just figuring your per-acre labor cost will improve your chances of being able to do something about it.
Here's a formula to help you determine the per-acre cost of labor.
Take the total of your family living expenses for the year, including medical insurance payments and self-employment taxes. I generally don't include income taxes.
Then add all your hired labor costs and divide the total by your harvested acres. This will give you the per-acre cost of labor.
If your operation is incorporated and you're on a salary, divide your total wages by the number of acres you harvest.
If you have a livestock operation, subtract the labor cost for that operation from the total before dividing it by harvested acres. (I use data from industry recordkeeping programs or land grant universities.) This will allocate all remaining labor costs toward your crop operation. A general guideline: If your per-acre cost for labor is at or below $25/acre, you're probably very efficient. I've seen lower and higher labor costs per acre -- some as high as $70/acre.
There are many variables that need to be determined when analyzing this information. One is the per-acre cost of machinery.
You can justify a higher per-acre cost for labor and still be efficient if your machinery cost per acre is very low. Conversely, if your labor cost is low and per-acre machinery cost is high, the bottom line is the same. That's why you should look at a combination of the two.
We work with a large operation in Kentucky. Machinery costs $32/acre and labor costs $22/acre, for a total cost of $54/acre. Those are good numbers for both categories. Many times per-acre machinery costs alone are about $65-75/acre.
After you figure those costs, analyze other factors. For example, doublecropping wheat increases harvested acres.
Probably the largest factor is evaluating timeliness and quality of the work being done. For example, your total machinery and labor costs might be slightly higher, but you may gain it back and more with increased yield due to timely planting, spraying and harvest or reduced field loss.
Making sure your costs are reasonable can be the difference between making a profit or operating at a loss. But knowing what your costs are is a big step to being able to manage them.
Look Before You Leap
I'm often asked my opinion about what growers spend on labor and machinery costs.
I do have guidelines, but hesitate to share them because so many factors need to be evaluated. Costs that are obviously out of line are easy to recognize and discuss, but I've found most need further evaluation.
That's why assessing your operation by total return on assets (ROA) and return on equity (ROE) for more than one year is most effective.
To calculate ROA, take your net worth increase for the year, add your interest paid and divide by your total assets. To figure ROE, divide your net worth increase by your total equity. These numbers should give you a solid year-to-year assessment of how your operation is doing.
For example, a grower in Nebraska has achieved an average return on equity of 13.28% in the five years he's been working with us. His average return on equity for the previous five years was 2.66%.
I'm sure someone could question individual segments of this operation, but you can't argue with success.
Finally, part of my analysis generally includes an evaluation of your combined labor and machinery costs with one eye on your growth goals. Costs will normally go up as you "tool up" and make investments that will likely pay off when your acres increase. It would be better to get the additional acres and then tool up, but that's usually not how it works.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 20 states. For more risk management tips, check his Web site www.russellconsultinggroup.net or call toll-free 877-333-6135.