By: Thom Weir
‘Tis the season for making New Year resolutions. What’s on your list for 2019 resolutions? For many, improving their health is at the top of the list. Here is one more that you might want to consider. It is one that I guarantee will help the financial health of your farm – both short term and long term. I’m talking about Cost of Production calculations – the exercise of preparing a detailed cost of production calculation for each crop is invaluable for your farming operations.
Completing a Cost of Production calculation for last year’s crops is critically important. It can be completed as you prepare your books for income tax. You will have all your costs that you can then split between your various crops.
Take a specific crop – say canola and compile tall the costs related to growing it. This should include fertilizer, seed, pesticides, fuel, repairs, equipment rental or custom work used for growing canola crop and hail insurance, taxes, land payments or rental for your canola land and the cost of marketing your crop including freight. Next you can review your production; by dividing your cost per crop by the production you can determine an estimate on how much it cost to grow an acre of canola.
There are other costs that you will have to allocate to your canola crop as well. These are your fixed costs – such as electricity, payments and depreciation on equipment and building etc. These costs will have to be split across all your acres.
Finally, you have to pay yourself. Again, this will be split over all acres. I’m not an economist or an accountant — so probably have missed some categories but this will get you on the straight and narrow. Hopefully at the end of the day, you can see what each your return for each crop is. If you are really energetic, take it down to the field level! It is sometimes interesting to see how your rented land compares to the land you own.
Next task is to prepare a Cost of Production document for next year. It will give you a road map to follow for the upcoming season as well as areas where you might have to sharpen your pencil and cut costs. It will also allow you to see the impact that increasing interest rates may have on your farm.
Most state / provincial or university Agriculture Departments / Ministries have downloadable calculators or tables that can be used to prepare this planning document. These are available for various soil zones or areas of the province that you live in. If you live near a border area, look at both your area and the neighbouring area.
Once you have completed this work sheet, you will have an idea of what you can expect for returns on your crops. You may still have time to tweak your crop plans and you will also will have an idea on what you must sell your crops for to cover your costs. This is incredibly beneficial to decide on prices for pricing your crops. There are lots of new crop sales opportunities available this time of year.
The information gleaned from your Cost of Production allows you to compare crops, farms and even fields. It allows you to compare owned to rented land. Once you have results for several years, you can use them to gauge current results versus those of past years. Your Cost of Production plan allows you to track next year’s production costs to the plan. As the year progresses, you can update this calculation and adjust your inputs.
All these reasons and more will make for a financially healthier farm. Take the time now before you are busy in the field to complete your Cost of Production calculations. If you have already completed your Cost of Production calculations, you know the benefit of the exercise. If you haven’t, now is an appropriate time to make the resolution that you will do a comprehensive Cost of Production review for your farm. Your farm will be healthier because of it.
Cost of Production Resources
Tips on Cost of Production Budgeting
Cost Production Guide for Manitoba
Cost Production Guide for Saskatchewan
Cost Production Guide for Alberta
Cost Production Guide for Ontario
Cost Production Guide for North Dakota
Cost Production Guides for South Dakota
Cost Production Guide for Minnesota
Cost Production Guide for Iowa
Cost Production Guide for Nebraska
Cost Production Guide for Indiana
Finally, my family and I would like to take this opportunity to wish you and your family a safe and prosperous 2019.