Calculating Breakevens

Net revenue per acre. Cost of production. Breakeven. All of these are point to an important part of farming. How do we know what they are?

Basic items

There are three things you'll need to know to figure out what your cost of production is. Those three things are: income, expense, and yield. Okay, that does seem pretty basic, but I'm sure that you've sometimes spent more time then you would have thought trying to come up with accurate numbers for that data.

You need to get all your numbers into the same point of reference. Usually we use costs and yield per acre. If you're trying to cost your tractor by the hour, and your fertilizer prices are in tons, then you're going to need to do some calculation to get them to be per acre.

You also need to decide on how accurate you expect the final breakeven price to be. You can just use some round numbers and have a basic idea in your head, or you can carefully sum and average and calculate every minute input for your crop. The earlier you are in the season, the more vague your numbers are going to be. After harvest is over, and the bills are all paid, you should have a very accurate number of your cost of production, but then it's too late to make any adjustments, isn't it.

Yield

Let's start out with some of the fun items first. The yield of your fields, regardless of your crops, is likely something you'll have in your head. However, if you think about your next year's crop, you'll likely have several different numbers in your head. There's the aspirational yield, the one that is just a few bushels higher then you've ever raised on that field in any of the past years. Or maybe your aspirational yield is what you've heard your neighbor raised on his field that is just across the road. Then you probably have a low yield number the year the planting was delayed because of the rain and then it hailed and knocked back the canopy, which resulted in some of the worst weed control you've ever had. After we get those two out of the way, there's the average yield, it's the amount you can ususally expect to raise in most years. Most of the time, at the beginning of the season, you'll want go with the average yield.

Income

Another fun item to think about is the income. That doesn't seem too hard either. Just multiply the yield by the price. We already decided to go with the average yield, so that number is established, but what about the price? Where do we come up with that? Today it's one price, tomorrow a different one, volatility seems to be an intrinsic characteristic of the futures market.

If you're running your numbers with a piece of graph paper and a calculator, you're going to want to go with a price that is quite reasonable. A level that you'll be able to sell your grain at sometime in the season. If you're using a spreadsheet or something like the profit per acre web app, you'll be able to easily adjust the price to the current market price, or to the price you'll think you'll be able to get sometime in the your marketing period.

Other income items such as government payments or stalk grazing may also need to be included if you wish to get as accurate as you can.

Expenses

The previous items, we usually try to make as big as we can. Now we're getting into the items that we try to make as small as we can, or conveniently forget. However, if you want to make good marketing decisions, if you want to take advantage of every opportunity that comes, you're going to have to be honest on the inputs that actually go into your crops.

If you keep good records of previous crops, you can just pull a report on the inputs that you used last year. However, there is a high likelihood that the pricing will not be the same. You can use the quantities and products from last year, but you'll need to get updated prices from your suppliers. If those prices change weekly, (Hello 2022!) you'll need to be able to update those with minimal effort.

Another way to get your expenses correctly tabulated for next year is to mentally go through the farming year and what you intend to apply for the crop. Fall applied fertilizer, starter fertilizer, sidedress application, etc. are items to think about for your fertilizer program. Chemical burndown and post application may be needed too. What tillage practices are going to need to be included?

Profit!

This is what it's all about, right?

Take the income and subtract the expense, if it's a positive number, awesome! If it's a negative number, uh-oh, there's a problem.

If you have a crop share rental agreement, you'll need to get what percent of each expense category is the tenants and what percent is the land owners. If you have cash rent or some other form of fixed land costs, those will need to be added into the expense of raising the crop.

Breakeven!

Now, take the tenant expense per acre, divide it by the yield per acre, that's the breakeven number. Ideally, your local market will pay you a higher price than that for the bushels you produce.

Now, this is just a brief outline of some of the things necessary for coming up with those elusive numbers that the marketing gurus always so blithely mention at the beginning of their presentations. ("You'll need to know your cost of production to take advantage of market rallies..."). The easiest way for you to get this data is to use Profit per Acre. So try it out. Check out the demo. Sign up and add confidence to your grain sales.