|
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
 |
|
|
|
 |
|||
|
Determining Your Make-or-Break Crops for 2002 By Betsy Jensen Get a better grip on your cost of production, and you’ll already have taken a big step toward improving your profit potential in 2002. Knowing your breakeven can help you determine what to plant this spring, and where to begin making sales. Many “average” numbers are available from the extension service, private consultants and farm management programs, but the cost of production is different from one farm to the next, so in these days of dime-thin profit margins, it’s important for each farm to analyze its own operation. Ron Dvergsten says that in his 10-plus years of experience as a Farm Business Management instructor at Northland Community and Technical College (based in Thief River Falls, MN) he has yet to see a farm fit into the “average” category. Dvergsten emphasizes that expenses are the only thing we can control: With market price and yield difficult to predict, we can at least begin the growing season with an accurate estimate of total costs. One common mistake made by farmers is the failure to allocate overhead costs. “Overhead costs typically add $30 per acre to wheat production and aren’t fully realized by many farmers,” says Dvergsten. Overhead costs can include depreciation, cash labor, term loan interest, intermediate assets, dues and fees and office supplies. Duane Jaenicke, also a NCTC Farm Business Management instructor, has developed a break-even spreadsheet that uses work units to allocate overhead expenses. The work units are a simple way to allocate your overhead to the enterprises that use more resources such as machinery, labor, fuel, etc. The allocation factor is based on historical data of labor and capital intensity. Corn requires 55 work units where wheat requires 30, but alfalfa requires 60. The units don’t have a specific meaning such as hours, but are just an allocation factor. This provides a better estimate than equally spreading your overhead expenses among all your acres. Jaenicke says the most difficult costs to assign to various farm enterprises (crops or livestock) are family living (or owner withdrawals), capital replacement/improvements, and debt service requirements. A closer look at each of these areas: Family Living—Many people don’t realize how much money it takes to pay living expenses, and many of these expenses are omitted in cash flow plans. Costs that are often underestimated include health insurance, retirement plans, non-farm capital purchases, education expenses, and income taxes. These costs must be included in any good cash flow or cost of production calculation. Jaenicke refers to the expense as “return over labor and management,” and uses $12,000 per operator, plus 5% of accrual gross income as a generic calculation. However, it’s more accurate for each producer to determine family living expenses on an individual basis. Capital Replacement/Improvements—Farmers often underestimate the amount of capital needed to keep equipment up to date. Debt Service Requirements—Farmers understand their principal and interest payments, but many are unsure where to find the money to pay the principal. “Each of your enterprises should have its own obligation in order to service the debt. Make sure the cattle enterprise is paying for the new barn, and not an unrelated enterprise. You must be able to service your debt when developing a cash flow and calculating cost of production,” says Jaenicke. Your breakeven prices might hold some harsh realities for your farm. You might have to re-think your planting intentions for next year, or you might realize you have to renegotiate some land rentals. Looking at the numbers for next year, there are some potentially profitable crops, and there are others that need a major price rally before the numbers start to look attractive. It’s only when you begin to pencil out the numbers for your farm that you can begin to make the difficult decisions. Crop Enterprise Budgeting There are different ways of crop enterprise budgeting: Following is an example of a corn enterprise budget from Rod Sharp and Dennis Kaan, Colorado State University. The format is attractive since it is easy to follow, and includes 10 different breakeven scenarios; five based on yield and five on price.
Enterprise Budget for Corn Production (1 Acre) |
|||