Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

Decisive Marketing

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
March 23, 2001

Crop Costs and Sales Goals

On Thursday (3-22-01), new crop (November) soybean futures set a new contract low at $4.42 1/2 and December corn approached contract lows ($2.29 1/4) by closing at $2.31 1/2. Assuming harvest time basis will be similar to the past three years, this translates into Central MO cash bids of about $4.00 for soybeans and $1.95 corn. How do these new crop prices affect your production and marketing plans?

New crop marketing plans begin with knowing your cost of production. Land Grant Universities, USDA and many private firms provide crop budgets to estimate average cropping costs. While the operating costs (seed, fertilizer, chemicals, fuel, etc.) are often similar, internal business costs and fixed overhead costs often create huge differences in total cost of production between different producers. "The average belongs to no one!" one college professor used to say. It is essential to know your own costs and whether they are economic costs or cash flow outlays! A business may sacrifice some of the economic costs during a period of low returns, but generating enough sales to meet cash outlays may determine whether the business survives the year.

Consider an example using two different State University corn budgets (Missouri and Illinois). Both project very similar operating costs per acre (seed, fertilizer, chemicals, machinery, insurance and interest). In both budgets, inputs to produce 135 bushels of corn per acre amount to about $180 per acre. If your first goal is to recover these operating costs, it appears you might only need $1.34 per bushel ($180/135 bpa). However, if you 50/50 crop-share rent this farm, you only receive 67.5 bushels of corn. You would have fewer input costs, but much or all of the machinery cost would remain. This might lower your operating costs to $115 per acre. But you would now need $1.70 ($115/67.5 bpa) just to cover operating costs.

Interest, labor, fixed machinery costs, land costs and business overhead costs may also need to be recovered. Some of these represent economic costs (depreciation, maybe operator labor, interest on equity, etc.). Others may represent actual cash outlays (loan interest payments, hired labor, land rent, taxes, etc.). While not economic costs, loan principal payments or capital expenditures may also have to be covered by gross sales. Fixed and overhead costs can easily be $150 to $200, or more, per acre --adding an additional dollar or more per bushel in cost that must be recovered. Adding these costs to the above operating costs may push total production costs above $2.50 per bushel.

What is your production or marketing plan? Cut costs, recover costs through marketing or both? It is difficult to cut operating costs without reducing production, leaving you with less to market. Managing overhead costs, especially those that involve cash payments, may offer better cost control opportunities. Even with the LDP and other government payments, grain prices are low and margins are tight. To set sales goals in this situation, knowing the average cost of production won't "cut it." You have to know your costs. If you don't know your costs and need help to figure them, get it! ---Melvin


University of Missouri ExtensionDecisive Marketing - March 23, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010323.html -- Revised: April 20, 2004
breesm@missouri.edu