Real-time cost of production

Determining farm business profitability requires precise cost of production numbers, but there’s still work to do when it comes to accurate costing.

Darren Bond, farm management specialist with Manitoba Agriculture and Resource Development, finds that most crop farm operators are calculating their costs of production annually.

“They’ll calculate potential profitability to make crop rotation decisions and forecast potential cash flow requirements,” Bond says. How often partly depends on the type of operation they’re running.

“A poultry operation that turns over its broilers every eight weeks will be conducting more frequent reviews and actuals than a grain operation producing an annual crop,” says Leigh Anderson, senior economist at FCC.

Variables

Changing variables are other key factors that can affect cost of production.

Bond has seen large increases in seed, fertilizer and pesticide costs over the past few years. The cost of parts and repairs to farm machinery have also gone up.

“Fixed costs and land have seen increases, especially for those who have expanded their operations,” Bond says.

The Canadian dollar’s value is another factor to monitor as it impacts revenues and expenses. A lower Canadian dollar (CAD) value compared to the U.S. dollar supports commodity prices that Canadian farm operators receive since globally traded agricultural commodities trade in U.S. currency. However, a higher CAD helps offset higher prices on new equipment and farm inputs imported from the U.S.

Prices of commodities have seen the largest changes, making it difficult for farm operators to create accurate projections.

“This is the current challenge, to create costs of production and profitability projections that are realistic and aren’t too optimistic,” Bond says.

Overly optimistic projections lead to spending decisions that aren’t supported by what’s really happening on the farm and could lead to overextending on costs and investments.

Real-time costing

 

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