Knowing Your Costs
“Being profitable has a lot to do with how much you can hold on to!” A producer’s success is dependent on the ability to manage risk and adapt to change. Knowing your cost of production is key to being able to identify opportunities to make appropriate changes, reduce costs and improve profit margins.
Calculating your cost of production is an exercise that needs to be completed regularly as costs change from year to year. Your cost of production calculation needs to include all costs including land rent, equipment costs, costs of credit, taxes, storage, etc., not just the costs associated with chemical, seed, fertilizer, fuel and labour. It can be difficult to attribute overhead costs to specific crops, therefore it may be appropriate in some cases to divide these costs by the total acres and attribute to each crop accordingly. The more granular you get with calculating your cost of production per crop, the more accurate your cost of production calculation will be.
Managing overhead costs and debt payments have become increasingly difficult due in part to increased land rent and the increased costs of investing in land, storage and equipment. Reviewing the details of your leased land agreements as well as your credit portfolio structure, arrangements and terms will give you the valuable information you need to identify options and opportunities to reduce costs in these areas.
We are in a trend where production costs have gone up and commodity returns have moved downward. Having a firm grasp on your farm’s cost of production is vital to being prepared for the unexpected and creating a marketing strategy that is designed to take advantage of favorable marketing opportunities, increase profitability and meet financial obligations.
With farming comes significant and diverse risks, not all of which are within managements ability to control. Management does however have a significant amount of control over costs and this is an area where efficiencies can be gained. If you know your Cost of Production you can easily figure out what, yield and price combination, you’ll need to achieve your target profit.
Denise Filipchuck, consultant associate at Backswath Management Inc. is a specialist in financial management and a certified member of the Canadian Association of Farm Advisors (CAFA). Since earning a Certificate in Agriculture Studies, she has been working with both agriculture and non-agriculture clients. A farmer at heart, Denise was raised on a grain, oilseed and hog farm outside of Swan River, MB.