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Knowing the cost of production

Whether people raise corn, livestock or specialty crops, accurate budgets are crucial in gauging the potential profitability of farm operations.

Producers can easily put together the direct production costs with the aid of local average cost of production guides or university budgeting material. However, people still need to know the costs for their own operations.

Fixed costs must be accounted for and dollars allocated to run a farm business. Other items such as equipment, land payments, family living draws and any income taxes must be accounted for and budgeted on an annual basis. All these items need to be factored in as they become part of the "cost of production."

Knowing production costs along with an estimated selling price should give a figure on the margin for each crop. There are numerous budgeting, cost of production spreadsheets and other financial software programs available to work with personal numbers and even run a few "what if" scenarios.

Thus far in 2012, commodity prices for the new crop are positive in terms of margin and producers have had opportunities to lock in profitable prices for a portion of their crop.

As summer approaches it becomes time to update cash flows and review costs of production. Knowing the break-even costs becomes a great tool for marketing and may present the opportunity to capture pricing opportunities as the market turns favorable.

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