Farming is all about profitability. Especially in this environment where everyone is concerned about rising input costs. We’re all talking about “Break-evens” to see how profitable our sales are, what crops to plant next year, or where grain prices have be in order to make money.
When many of us talk about break-evens, what we’re actually referring to is Cost of Production. We’re going to talk about Cost of Production and Break Evens here to help better forecast when and where to sell grain.
Unfortunately, we really don’t know our true “break-even” point until all our Corn, Soybeans, and Wheat have been harvested, delivered, and we’ve been paid for them.
Sure, we know the costs of fertilizer, land, and equipment far ahead of time. But what about the cost of grain storage, transportation, and labor? Those costs don’t show themselves until later in the growing season.
However, the biggest factor here that often gets overlooked is yield. How much grain is produced per acre of land is often the single largest variable in your overall farm profitability per bushel of grain.
Here’s an example: Let’s assume we’re looking at a 500 acre farm that produces an average of 100,000 bushels of Corn per year at a total cost of $500,000.
That would make the Actual Production History, or “APH”, 200 bushels per acre.
Simple math dividing total cost by bushels produced gives us a break-even of $5 per bushel.
So any sale above $5 is profitable right?
Not necessarily… this example assumes the land will produce exactly 200 bushels to the acre. Too many of us stop there at the beginning of the season and use that number as a profit projection.
Using that scenario alone just accounts for our Cost of Production ($500,000) with a trendline yield. This is not a true break-even.
Let’s take a closer look at how this changes when we add in yield variation.
With today’s resilient seed genetics, we might expect a 10% variance in yield over or under that 200 bushel per acre figure. That means yield could disappoint us with 180 bushels, or surprise us with a bumper crop of 220 bushels per acre! If we adjust for those two scenarios, we see that our break-even cost per bushel ranges from $5.55 to $4.45! That’s more than a dollar per bushel hanging on a relatively tight band of yield variation. If we had stopped at a $5 break-even at the beginning of the season, a sale at $5.50 would look great! But if that crop came out to 180 bushels per acre, it would actually be a 5 cent loss!
Of course, Actual Yield Production can’t be known until after the crop is harvested. That’s why we need to keep adjusting our yield forecasts and grain marketing plans as the growing season progresses.
Remember, strong grain marketing plans are not rigid in their forecasts. They adapt to crop yields as the growing season progresses. As we get closer to Harvest, yield changes from a prediction to a fact.
This example should help give some perspective into differentiating between Cost of Production and Break-Even so you can understand your true on-farm profitability.