Cost of Production: Crunching The Numbers
Cost of Production. Do you know yours? Its something that is preached to us at each seminar we have attended since the beginning of our farming careers. Knowing and keeping track of your costs is just another day spent in the office when there is work to be done outside. Over the years it seems like the workload continues to grow, although it should be the opposite. Most producers roughly know production costs, having jotted down roughly what their seed, fert and chem bills will be, and if you grow the big bushels, you should be in the clear most years.
There is the old marketing adage; Bull Markets have long tails. We are down from our highs we seen in 2022 and have been trending lower in recent months. Producers were presented with many $20.00 or better new crop canola opportunities in 2022, new crop prices have slowly drifted down into spring of 2023 and has left producers questioning where to go from here. If you would have listened to your buddy Paul, Richard or (enter crystal ball guru’s name here) who was holding all their canola for $28.50 “because I can feel it in my bones” you would be singing the blues today. Oh ya, the input dealer bill was due this week.
Production costs have skyrocketed in recent years. Fertilizer, chemical, fuel, labour and insurance just to name a few. Then there is the growing cost of capital, higher cost of replacing machinery and land costs as well. The Bank of Canada and the US Federal Reserve appear dead set on killing that inflation figure by increasing the cost of capital. Not exactly fun when you run a capital intensive operation.
So what does “Cost of Production” have to do with all of this? Most say, “It does not matter what my cost of production is, the market will only give me what it does” True; as producers of a commodity, we are inherently Price Takers…. But what price are we going to take?? My canola is interchangeable with my neighbors canola, Albertan Canola, Australian Canola, it is a commodity and for the most part it all crushes out the same, and it all fries the same French fries. When we put fuel in our car, most consumers shop for price, If Shell is $0.01 cent cheaper than Co-op, V-Power is the flavor of the day.
Okay, Enough Banter, Get To The Details:
How do you determine what is a good price for your crop? How do you decide what you are putting in the ground this year coming up? What crops yield and price combinations are we potentially looking at? Remember that $80,000 combine payment is harder to make at $9.00 wheat than it is at $11.00. Where are we going to enter into the market?
When we calculate cost of production we take into consideration, but not limited to, the following costs:
- Repairs / Maintenance
- Arms and Non Arms Length Labour
- Custom Work
- Crop Insurances
- Interest on Operating Capital
- Professional Fees
- Machinery and Building Costs
- Land Costs and Rents
- Land Taxes
The list goes on.
What we can create from this is a series of calculations that show estimated Return on Investment and Breakeven Scenario’s. Does it make more sense to be growing Barley, Wheat or Oats this year, given current marketing opportunities for the fall? Lentils, Chickpeas or Yellow Peas?
With all of your costs can you breakeven at $12, $14, $16 $18 Canola? This has a direct correlation with yield, absolutely, but it allows you to look at different scenarios. It allows you to play with different crop insurance scenario’s as well.
Once we have our cost of production calculated, it becomes a great tool for analyzing on farm decisions and planning going forwards. It helps us pull the trigger on some marketing decisions and gives a clearer picture of scenarios we may face in the year ahead.
Where do we come into play
We at Exceed Grain Marketing help producers market their grain not based off of pure speculation, leave that to Wall Street. We help producers better understand their whole marketing plan in general and bring an outsiders perspective to the operation. We use a program to input production costs, cash flow requirements, capital budgets, etc. Lets look at the true fundamental picture, market news, your current market position, ect. Are you oversold or undersold? What crops do you want to move or hold onto heading into summer? What is your plan for fall cash flow to ensure you minimize operating capital costs.
We work with some very sophisticated producers who are great marketers themselves. We help producers who are too busy and may overlook the small details. Remember, even Connor McDavid has a skating coach. Lets work together.
Reach out on our contact page or About Us page where you will find our list of Advisors. We have an excellent team spread across the Prairie Provinces and into Montana, North Dakota and Idaho.
Click on the link below to be directed to our main contact page.
306 873 7768