market-notes-john-berry

My favorite time to be an Extension educator is when the rush of the planting, growing and harvesting season is but a memory. During the short months that follow this busiest of times, I believe we are better able to reflect on past opportunities and challenges as we prepare for the upcoming round.

As field crop yields have now been determined, we are in the best shape to identify our true costs of production. We know all the input costs for the recent harvest and we know our bushels harvested. It is simple math to add all our costs and then divide by the total yield. That gives us cost per bushel. Of course, many of us break our farming operations into smaller pieces which complicate the process, but the idea remains sound. Now is the time to take account of our profitability as we consider bills yet to be paid, taxes owed, and what the plans are for spending money in 2017.

If you have participated in any of the grain marketing discussion groups you are well aware one topic I feel is critically important is individual farm cost of production. Some managers prefer to use averages found most anywhere instead of building their own. While the strategy of using someone else’s numbers may be better than nothing, it does not provide much of a picture on the financial health of a specific business.

The reason I prefer we know our own actual costs per bushel is that when we look at market prices we have a gauge of how profitable an offer really is. I had a farmer tell me once that they didn’t need to know their cost of production because all they wanted was the highest price available. I had to agree that this was probably the desire of most farmers. Unfortunately, we never know the highest price until it is history. Many times we pass up a profitable price waiting for a better one that may, or may not, appear.

I am happy to provide averages for those interested although these numbers may only be good for arguing over. My 2016 cost of production calculations for corn, soybeans and wheat are:

• 180 bushel/acre corn cost $4.10 per bushel

• 55 bushel/acre soybeans cost $9.45 per bushel

• 80 bushel/acre wheat cost $5.90 per bushel

Of course, my numbers are artificial calculations only, and more significantly, include a return to farm management as I believe the farm business is responsible for covering all costs. If the manager takes no income from the farm the costs will be lower. If we take no income from the farm our family living expenses will be coming from somewhere else. My costs include $48/acre for the management team.

Not much different than the 2014 and 2015 marketing seasons — the 2016 marketing opportunities have been few that would generate breakeven or better yet profitable prices. As I prepare my talking points for farmer consultations and meetings this winter the topic of preserving working capital will be a primary message again this year. One job for the manager is to generate profits. If our costs are above our income we must either get better prices or reduce our costs. Neither of these options is easy.

As I explore the concepts and practices around maintaining working capital, the conversations will likely include the following topics: restructuring debt, opportunities to save on cost of production, getting creative with enterprise diversification, managing machinery expenses, utilizing available safety nets and income tax management. Also, asking questions like: How Long Can We Afford to Lose Money on Rented Ground? Is it Time to Retire? and What About the Next Generation?

I look forward to the upcoming educational season as I firmly believe the opportunities for production agriculture are only limited by our imagination. However, the challenges are great. Farming is the riskiest business I know of. Who else but a farmer would be willing to have their income determined by an uncontrollable mix of weather, government policy, fickle consumers and global competitors? The future may be bright if we are constantly learning, staying flexible, accepting of change and supporting each other.

Editor’s note: John Berry is a Penn State Extension ag marketing educator.

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