Cost of Production
Originally written February 1, 2006 | Last updated
February 23, 2013
"Careful attention to all costs generally means good profits can be achieved
with a wide range of cropping systems."
Cost of Production Worksheets
Variable versus Fixed Costs
Fuel, seed, fertilizer, herbicides, equipment repair, hired labor
Some tractor depreciation and interest
Property tax, insurance, self-employed labor
Some tractor depreciation, implement depreciation and interest, land charge
Cash costs involve actual cash transactions.
Non-cash costs include expense items such as depreciation, which are not
associated with an actual cash transaction.
Variable costs increase (or decrease) as use increases (or decreases).
Fixed costs remain constant as use increases.
Fuel, seed, fertilizer and herbicide purchases are cash costs that vary with the
number of acres farmed. Property tax is a cash cost that is fixed because
it is incurred whether or not the land is farmed.
Because tillage equipment depreciation and interest are functions of age
rather than use, they are fixed, non-cash costs. Equipment depreciation occurs whether
or not the implement is used. Tractor depreciation is a partially fixed and
partially variable non-cash cost. Fixed depreciation occurs on tractors as they
age, regardless of use. Variable depreciation occurs on tractors as they are used
more intensively. To estimate farm machinery costs use: http://www.apec.umn.edu/faculty/wlazarus/
Land charge is a non-cash cost of land ownership. Principal and interest
payments are cash expenditures associated with land ownership. Land charge or interest,
when used to estimate the cost of production, is the value of the land farmed times
the rate of return that could be gained if the land were sold and the money invested
elsewhere. Land charge is a fixed cost incurred whether or not a lien exists on
the land and whether the land is farmed or left idle.
Hired hourly labor is a cash cost that increases with the number of acres
farmed or cropping activities performed. Self-employed and salaried labor
is fixed because farmers have a certain cost of living that must be met regardless
of how many acres are farmed. Self-employed and salaried labor is a cash cost that
does not necessarily change with the number of acres farmed.
Examples of Variable Costs
Examples of Fixed Costs
- Other chemicals
- Crop insurance
- Custom work
UWEX Software: ABCS Simulator (Available from the Center for Dairy Profitability)
Budgets on a per acre cost
basis are a powerful tool for assisting farm management.
A listing of inputs and prices helps estimate how much operating capital is needed
for production. An estimate of the per bushel cost
of production is useful
in making effective marketing decisions. Crop share leases can be evaluated using
the contributions attributed to both landowner and tenant in a crop budget. The
economics of different systems, such as conservation tillage and no-tillage production,
can be compared.
Grower return = (Price x Yield) - Costs
Crop budgets are relatively simple for individual farmers to develop. They consist
of listing various field activities and the inputs associated with them, along with
prices, to arrive at an estimate of the cost of production. The step-by-step methodology
allows for quick development and easy verification to see if the breakdown is accurate.
Creating generic budgets to compare management practices. First, farmers
are likely to differ on weed management philosophy. One producer may choose tillage
as the major weed control method while another relies almost entirely on chemical
control. Any two producers using predominately chemical weed control will choose
different chemicals to use and apply them at different rates, depending on specific
Second, the machinery cost aspects of evaluating different tillage systems
can be confusing. Estimating the cost of eliminating a particular activity such
as disking may not be best represented by subtracting the custom rate for that activity.
Rather, decision makers need to determine what will be the change to their financial
situation. In other words, would eliminating a disking decrease their actual cost
of producing a crop? And if so, how much?
Overhead is hidden costs not easily accounted for in an operation. These
costs are usually related to overall expenses of managing a business and not directly
related to a specific crop enterprise (i.e. tools in a shop, heating the shop, etc.).
Usually overhead costs range from 15 to 50% of a budget.
The partial budget is the best budget tool to evaluate a change in farming practices.
Partial Budgeting is the process of examining only those costs, returns and resource
needs that change with a proposed adjustment. The costs, returns and resource needs
of the business that are not affected by the proposed adjustment are ignored. This
technique compares added revenues and costs of the proposed change (zero tillage
seeding on all or part of the farm) with revenues and costs of the present practice.
In order to compare the systems, you must know your farm operational costs, some
fixed costs, and the potential returns from each practice.
What is your yield potential?
Establish Realistic Yield Goals
- Yield Potential of Soil
- Growing Season - Growing Degree Units
- Sub-soil Moisture
- Management Ability & Philosophy
- Attitude Toward Risk
- Willingness to Be Timely
Highest recorded corn yields (bu/A) in Wisconsin counties (1983-2012). Data
includes participants in the NCGA yield contest and Wisconsin PEPS program.
How do you rank relative to other grain crop producers in Wisconsin?
Regional Cost and Return data
Wisconsin Crop Enterprise
Budgets also see Season
Computer Decision Support Systems
Precision Farming database
Estimating Agricultural Field Machinery
Costs UWEX Bulletin A3510
Wisconsin's Custom Rate Guide
(updated every 2 yrs) UWEX Bulletin A3510 A3656
Soil Compaction: Causes, Concerns
and Cures UWEX Bulletin A3367
Machinery Economic Cost Estimates University of Minnesota (FO-6696)
Minnesota Farm Custom Rate
Survey University of Minnesota