Farmers need to know production costs in order to price their farm products for profit. Commonsense, right?
The truth is most farmers estimate what it costs to raise an animal for market or produce a peck of apples. As a result, they underprice their products and undermine their profits.
The following seven numbers will help clarify your costs and set your farm on the path to profitability:
Total cost = fixed costs + variable costs
Your farm’s financial records are the best source of cost data, but new farmers that lack records can use land-grant university extension service enterprise budgets to estimate production costs.
Farm budgets are available on the Ohio State University Farm Office website at farmoffice.osu.edu, search Farm Management Tools.
Specialty crop budgets from the University of Kentucky Center for Crop Diversification are online at www.uky.edu/ccd, search tools.
Fixed costs contribute to total cost. These costs stay the same regardless of production level. Salaried employees, rent, insurance, utilities, licenses and advertising are fixed costs.
Variable costs are the other part of total costs. These costs fluctuate with the level of production. Custom hire and seasonal help, seed, fertilizer, pesticides, distribution and feed are variable costs.
Estimate the number of units your farm will produce in a season. New farmers that lack yield records can utilize crop estimates from the USDA National Agricultural Statistics Services Statistics.
Visit www.nass.usda.gov and search by subject. The USDA measures most yields by hundredweight; CWT is equal to 100 pounds.
The University of Kentucky Center for Crop Diversification website provides yield estimates for fruit and vegetable production. Visit www.uky.edu/ccd and search production.
University extension service farm budgets are another good source of yield estimates.
5Cost per unit
Cost per unit = fixed costs + variable costs / quantity
Cost per unit is what it costs to produce one unit of product. It informs farmers of the amount of money required to cover all costs associated with the production of one unit.
6Unit variable cost
Unit variable cost = variable costs / quantity
As the name implies, unit variable cost only considers variable costs associated with production; not fixed costs.
Unit variable cost is the amount of money it takes to make a single unit at a level of production. Farmers can use the unit variable cost to analyze the profit potential of different markets, various production levels and alternative production methods.
Breakeven point = fixed costs / price – unit variable cost
The breakeven point informs farmers how many units they need to sell at a price to pay costs associated with production. The breakeven analysis allows farmers to explore the relationship between revenue and costs.
Next Week: 5 price research resources for farmers.
(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)
More Farming 101 columns:
- How to keep your livestock cool
- How to create an irrigation schedule
- How to choose the right irrigation system
- Things to consider when burning agricultural waste
- What can you burn on the farm?
- 9 tips for better pasture management
- 7 safety tips for driving farm equipment on the road
- 5 things to know about farmland leases
- No-till planter in-field checklist
- How to prep a no-till planter part 2
- How to prep a no-till planter
- 7 considerations for gardening with high tunnels
- 9 basic considerations for backyard poultry
- 9 ways to grow your farm business
- 10 questions to ask before expanding the farm
- How to select quality replacement heifers
- Stay safe working with electricity on the farm
- How to create a job safety analysis
- Tips for a successful lambing season
- Do you have a vision for your farm?
- Cattle handling for beginners
- Should I buy a new or used tractor?
- How to inspect a used tractor before purchase
- How to buy the right tractor for your farm
- 5 tips for a better farm marketing plan
- How to seek help with retirement planning
- How to set goals for retirement
- A farmer’s guide to saving for retirement
- A farmer’s guide to planning for retirement
- 5 steps to get NRCS assistance
- How can conservation easements help you?
- How to fund conservation plans
- What is a conservation plan?
- How can NRCS help you?
- More airborne hazards on the farm
- 5 airborne hazards to beware of on the farm
- 5 things to know about Wagyu beef
- Pennsylvania utility vehicle laws
- Ohio utility vehicle laws
- Farm chemical safety checklist
- When should a farm become a business entity?
- Harvest prep: Check your yield monitors
- How to tag livestock properly
- 6 tips for decision making on a family farm
- 8 tips to prepare your farm for agritourism
- How to plan for farm emergencies
- 7 keys to success on the farm
- 7 tips for healthy fair animals
- 5 tips to ensure livestock health before the fair
- 6 tips to keep your livestock parasite free
- 6 tips for vaccinating your livestock
- 5 tips to prevent dairy cow foot problems
- 6 common foot problems found in dairy cows
- Recognize, prevent heat stress in dairy cattle
- How to monitor your dairy herd
- How to start your own dairy farm
- 5 tips for sun safety in the field
- Employing youth for the summer
- What to do if a hay fire occurs
- How to prevent hay fires
- How to extend the life of your fence
- 10 safety tips for installing electric fences
- How to chose the right fence for your farm
- How to create a fencing plan
- 7 steps for easy sprayer calibration
- Prepare for planting season, Part 2: Calibration
- Prepare for planting season, Part 1: The Basics
- 7 tips to improve security on your farm
- 5 tips to protect your farmland
- 3 measures to deal with severe farm debt
- How to buy time to catch up on farm debt
- 6 tips to manage income on the farm
- 5 tips to recognize and deal with farm stress
- How to prepare a livestock birthing kit
- 5 tips for marketing your farm
- How to develop farm mission, vision statements
- 5 tips for setting farm goals
- 2 types of livestock insurance policies
- 6 things you need to know about WFRP plans
- 3 basics of crop insurance
- How does liability insurance work on the farm?
- Why do I need farm insurance?
- How to understand and use Ohio’s CAUV
- How to utilize the Pa. Clean and Green Act
- 9 tips for filing farm taxes
- 8 reasons record keeping for taxes is essential
- 5 tips for post-harvest storage
- 7 tips for family meetings on the farm
- 4 tips for balancing your farm and family
- 4 tips for communicating on the family farm
- 4 tips for firing an employee
- 6 tips for keeping good farm help
- 4 tips for recruiting farm labor
- 5 general farm labor laws
- 4 tips for employing minors
- 4 tips for PTO safety
- 5 things young farmers should know about finances
- The farm balance sheet
- 5 items for your farm’s cash flow statement
- Personal and business records: Keep them separate
- What to include in your farm business plan
- How to approach a lender: Tips for getting a farm loan
- How to use microloans to get your farm started
- Saving for the future: 6 tips for young farmers
- How to create a farm safety kit
- 5 tips for child safety on the farm
- 4 tips for transporting livestock
- 5 ways to better understand tractor stability
- 6 farm equipment hacks
STAY INFORMED. SIGN UP!
Up-to-date agriculture news in your inbox!