Calculate Your Cost of Production to Improve Your Profitability

December 14, 2022

Knowing your Cost of Production (COP) makes it easier to understand and manage your business and can help with decision-making.

According to a survey of Canadian producers, only 65% of farms are likely to analyze their profitability; yet there is a noticeable trend towards indebtedness, higher interest rates, and overspending.

The benefits of calculating your COP

  • Know your spending limits in order to maintain your break-even point
  • Identify your fixed costs and determine whether they can be reduced
  • Decide whether it is best to purchase or repair equipment
  • Choose the right crop option for maximum profitability
  • Evaluate your enterprise’s potential for advancement
  • Compare your profitability to that of other farming operations
  • Make it easier to develop a grain marketing plan

The key elements

Direct variable costs

In the case of soybean crops, direct variable costs can change from one plot to the next, depending on the variety and the soil needs; for instance, seed price, fertilizer and other crop protection costs (herbicide, insecticide/fungicide).

Indirect variable costs

Indirect variable costs change according to the level of production (fuel, labour, and utility costs). A cost per acre must be determined and apportioned fairly among the different cultures.

Fixed costs

Fixed costs are constant costs that do not change. For example, the loan interest payments on a land purchase, insurance, property taxes, or recurrent payments on machinery.

In mixed farming operations, such as soybeans and livestock, the fixed costs must be apportioned  according to the activity sector. For example, the machinery-related expenditures must be calculated for both sectors, that is soybeans and livestock.

Net profit

To calculate the net profit, subtract the total revenue from all variable and fixed costs

Budget forecasting

To make predictions for the future, you should make budget projections. The trick is to draw on last year’s figures for inspiration.

Comparative profitability of GMO vs non-GMO soybeans

Here is a sample comparison of the expenses associated with the phytosanitary treatment of GMO vs non-GMO soybeans:

GMO: glyphosate used with a residual product; the cost of this treatment can run between $30 and $50 depending on the product that is used.

Non-GMO:

A product is applied pre-emergence, followed by a 2nd pass post-emergence; the treatment cost can range between $70 and $100 depending on the products used.

Notice that there is a difference of $40-$50 in the cost of weed control treatments for these two crop types.

Use your own farm’s figures to calculate your additional net margin with non-GMO soybeans.

  • Weed control costs are higher for non-GMO soybeans than for GMO soybeans, but the difference is offset by a premium that amounts to dollars-per-ton.

Finally, we recommend that you analyze the COP for your last 3 to 5 harvests. These calculations will help you determine what is profitable and what is not on your farm.

We hope you enjoyed reading this article and that the advice it contains proves useful.

Calculate your cost of production using the document available at : DO THE MATH

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