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Know Your Costs

By: Kari Burnett, PAg, Regional Farm Business Management Specialist, Swift Current

April 2017

Knowing your cost of production is an important tool in farm management - whether you are producing crops or livestock products. It is an important step in your ability to set price targets for marketing, understanding how much you can afford to pay for rented land, and making informed decisions about the future of your business. Knowing your cost of production is about understanding the business from the expense side of your income statement – not to mention it will impress your banker. Bear in mind the cost of production on your farm will not be the same as your neighbour’s, so it’s important to take the time to use your numbers to calculate your cost of production, as every farm is unique, with different yields, expenses, break-evens, and cash-flow needs.

Having good records is an important place to start. Both variable costs and fixed costs should be included in the cost of production calculation. Variable costs change according to what you are producing – things like seed, fertilizer, chemical, crop insurance premiums, feed, veterinary and medicine costs, fuel and repairs. Fixed costs tend to remain the same even as production changes – things like your phone bill, accounting bill, depreciation, and property taxes.

There are many options available to simplify and speed up the process of calculating cost of production. Some are even free. Some track information on a per crop basis, and more detailed calculators can track cost of production on a field by field basis. There are spreadsheet based calculators, web based calculators, and there are also stand-alone programs to assist with the calculation. The important thing to remember is that the number calculated is only as accurate as the numerical data entered.  Therefore, it is important to take your time and make sure all costs are entered accurately, and entered in the appropriate place.  Numbers should be updated as new information becomes available.

The Saskatchewan Ministry of Agriculture publishes the Crop Planning Guide each year to assist producers in estimating their cost of production for the various crops.  The Crop Planning Guide includes each of the three soil zones in the province, as well as the specialty crops guide. A crop planner calculator is also available for download on the website, making it easy to look at different scenarios with your own numbers.

The Crop Planning Guide contains an estimate of variable and fixed expenses for an average sized farm in each of the soil zones. For 2017, the general assumptions are stated at the front of the guide. The crop prices used are estimates based on information available in early December 2016, and should be continually adjusted as spring approaches. The yields used are increased by 20 per cent above long term Saskatchewan Crop Insurance Corporation (SCIC) yields to reflect a higher level of management and higher input levels. It is important to understand that the figures used are estimated costs based on recommended production practices for that soil zone and are meant to be used as a guide. The Crop Planning Guide is most valuable when used with the worksheet supplied with the publication, or by using the calculator from the website. You can then enter your own costs, yields and commodity price estimates, as well as your overhead expenses.  Of course, some of these are unknown at this time of year, but using the best information available and updating as the season progresses will keep your target prices updated.

In addition to the published Crop Planning Guide, a number of other on-line calculators are available on the Ministry of Agriculture website. The planners are Microsoft Excel spreadsheets and may be useful tools in determining your individual cost of production. 

Some of the calculators found here that may be useful in determining your costs of production include:

Knowing your break-even yields and prices won’t guarantee a farm profit, but it does keep you on target when used in decision making and can greatly improve your chances of success.

To pick up a Crop Planning Guide, stop by or call the Swift Current regional office at (306) 778-8285 or contact the Agriculture Knowledge Centre at 1-866-457-2377. 

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