Cost of Production in Farming
Farm Business Management Update, August 2002
By Bill Whittle
Knowing your cost of production (COP) is a key component to successful farming. What does it cost you (not your neighbor or your industry average) to produce a widget? Farmers do not produce widgets, but they must know what it costs to produce their product, whether it is a 100 pounds of milk, 100 pounds of lamb, one bushel of corn, one quart of strawberries, or a dozen ears of sweet corn. Farming is a business and for those who say that it is a lifestyle, the reply is, "Yes, it is a lifestyle business." Only hobby farmers need not worry about the cost of production.
The following questions may help clarify the need to know your COP:
Once you understand the need to know your COP, the question becomes how do you determine it? COP is typically calculated using cash or variable expenses, i.e. those expenses that are paid yearly to produce the crop. Total COP uses both variable expenses and fixed expenses such as land costs. One can stay in business for a while covering only variable COP; however, at some point the farm must be able to make the payments associated with fixed costs.
Records are the lynchpin that allows for calculating COP. Whether from the shoebox or computer, compile all expenses related to a particular enterprise such as the dairy. At this time of year, it is also reasonable to use Schedule F information minus Depreciation. However, most farms in the Valley have multiple enterprises and expenses are often blended. An example is the dairy farmer who is also raising sweet corn. These multiple enterprise farms can only determine the true COP if management is willing to allocate expenses such as labor and fertilizer among the different enterprises. Otherwise, an enterprise may look profitable when it may be a money loser. Once enterprise expenses are identified, calculate COP by dividing your sold (or fed) production, such as pounds of milk, dozens of ears of sweet corn, or bushels of corn, into your total cash expenses for the enterprise. This value is what it cost your farm to produce one unit.
COP information provides management the factual information platform necessary to make sound business decisions. If your COP is high compared to what you can sell the product for, you need to make decisions about how you conduct your business. A high COP may mean that you have allowed inefficiencies or debt to increase beyond normal levels or that your higher costs are related to producing a product that has more value. You may need to reduce expenses, market wisely, or change the product you produce.
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