ARE YOU PROFITABLE?

When you ask most producers in agriculture today what their break even or cost of production is, most would not be able to give you an answer to either of those questions. This is a dangerous position to be in because a producer doesn't know at what price their operation becomes profitable. You can see how this puts an operation at risk because one is not able to make accurate financial decisions when it comes time to sell products or make purchases for your operation. Today we are going to take a look at the cost of production, break even price, making a budget, and making an expense and income report.

Cost of Production

According to Merriam-Webster the definition for Cost of Production is, “The combined total of raw material and direct labor costs and burden incurred in production”(1). So let’s break this down. When talking about the raw materials, these are things like rent, seed, fertilizer, tillage, chemical, fuel, etc. Direct labor is the time you or others put into your operation or the wages you pay those working on your farm. Lastly, burdens incurred is a fancy way of saying any debt that you have taken on to begin or keep your operation running. The hard thing with this number is every year it will change. A good way to get an estimate is by looking at last year's expenses and adding them all together. This will give you a starting point in which you will be able to predict this year's cost of production.

Break Even Price

Now let's move on to break even price. According to Merriam-Webster the definition for Break Even Price is, “The point at which what one earns matches what one spends”(2). This means the price you receive for selling your products is equal to the amount you pay to produce your products, in other words your cost of production. To put this in a math equation it would look like this:

Break Even Price: Earning - Cost of Production = $0

When making decisions on when to sell a product on the market, we are shooting for prices that are above this number because that is when we will be profitable. I know this isn’t always the case from year to year, but we should always be looking for ways to decrease this number, because the lower the break even price the greater our profit will be. If you are a producer that directs markets or sells your products to the consumer you will want to pick a price that is above the break even number to ensure you are profitable. Direct marketing may take a little more work finding consumers who would be interested in buying your product, but can be a way to ensure you are profitable every year.

Making a Budget

Most farmers and producers cringe when they hear the word budget, and very few actually have one. Budgets do take time to create, but once a person has established a habit of looking ahead they can be very helpful in creating a little padding for breakdowns, tackling debt, or saving for down payment on land, equipment or other farm goals. This may all sound fine and dandy, but this won't do you any good unless you actually make a budget. Your budget doesn't have to be super complex. It can be as simple as going through your operation and looking at all the items you spend money on and writing it down with a prediction of the amount you will spend on it this upcoming year. Remember this is just an estimate. Then after you have made a list, categorize each item and total up the expenses under that category. This will help you see which categories you spend the most money on and brainstorm ways to cut expenses. Finally, add all the category totals together and this equals your total cost of production.

Next, move on to your income and go through the same process you just went through with your expenses. Make sure you are realistic with your numbers from years past. It is very easy to mess with the numbers to make them look good or in your favor. Note that some producers separate each enterprise to compare which produces profit consistently over the years. After all of your income is estimated, subtract your total expenses from your total income. This number will show if your farm is profitable. There you go, you just created a budget.

Expense and Income Report

Expense and income reports are very simple ways to track your spending and income for a given period of time and literally take a minute to fill out. When filling out either of these reports, simply write down and track every time you make a purchase or sell a product. This will help you keep records over the years to give you a better estimate when you are creating your budget.

Doing these tasks can take some time and will not be the same from year to year. But, over time you will be able to see patterns and get more accurate with your estimates because you will be able to look back over the years and see where your operation is leaking. I am always amazed when I make a budget and then look back at my expense and income reports after the year and find out how much I spend on certain items. Even for my personal budget, I sometimes look back over the month and find that I spend almost the same amount on groceries as I did on eating out. I know this isn’t the same as a farm operation, but these are the kin

d of things you want to look for. Where are you spending your money and is it the best use of that resource?

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1.https://www.merriam-webster.com/dictionary/production%20cost

2.https://www.merriam-webster.com/dictionary/break-even%20point