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:
1 Total cost
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.
2 Fixed costs
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.
3 Variable 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.
5 Cost 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.
6 Unit 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.
7 Breakeven point
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.)