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Jim Meade / Iowa City
Senior Advisor

Who Cares About Break Even Costs?

I'm going to be a radical and say that I don't know my break even costs and I don't worry very much about them.  So, what is all the hubbub about knowing your break even cost?

 

When push comes to shove, I try to get the best price I can for my grain.  If it is over the cost of production, great.  I make money.  If it is less than the cost of production, too bad, I lose money.  I am not Ford Motor company.  I don't make fewer cars when sales are slow.  I grow about the same amount of about the same crops.  Yes, I know that in what corn farmers call fringe areas people rotate in and out of crops based on many factors and maybe cost of production is important to them.

 

Cost of production may affect whether I buy machinery, but I can' tthink of one time that cost of production has ever entered into my determination of making a sale.  Making a sale has more to do with how much money I think I can get and cash flow desires.

 

So, I'd like to ask two questions:

1.  How many of you really, really know your cost of production (not just swag it)

2.  How many of you really, really make marketing decisions based on cost of production?

 

In a commodity business, income and expenses tend to come together.  I worry more about being in the top 1/3 of prices than I do to meeting some number.

 

OK, fire away.  Just remember to tell what you really do, not what you were taught at Moo U.

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16 Replies
IllinoisSteve
Senior Contributor

Re: Who Cares About Break Even Costs?

Jim, I run break evens or cost of production reports at least twice a year and usually more. I usually run a rough one about now for next year and then firm it up a bit after Jan 1. I will then adjust as necessary if actual expenses differ from projected. I run one late summer after guesstimating yields and drying costs. I run a final one after everything is in the bin. Good grief! I run more of these in a year than I realized. Maybe too many. At any rate, yes my marketing decisions are somewhat based on cost of production. To me it is an important and helpful thing to keep a handle on.
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ellen3697897
Contributor

Re: Who Cares About Break Even Costs?

Thanks Jim. I thought I was alone in that camp. COP doesnt help me a lot because I have no way of knowing what yield or price will be anyway. By the way I have no idea how my wifes name got in my username box...

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Hobbyfarmer
Honored Advisor

Re: Who Cares About Break Even Costs?

 

I care about COP, just have limited control over it.

 

Still going to plant the acres ... just like everyone else.

 

Not something that is on my top ten things I lose sleep over anymore.

 

Mother Nature has more control over my cost of production than I do.

 

Am I going to have 48 bu corn or 160 bu corn Had both in the last 5 years.

 

Beans same story just different #'s.

 

Anybody can play with the #'s but Ol Ma Nature controls the COP around South Podunk Country.

 

*this post has been edited... changed entirely

 

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farmer46
Senior Contributor

Re: Who Cares About Break Even Costs?

I watch my COP close.  Why? To do my budget for next crop. I learn the lesson in the early 80's, after the fall in grain prices and the high interest cost, I needed to budget tight.  I needed to cut $10,000 to '$15,000 in order to make it thru the year. Changes had to happen.  I am starting it now for next year, I have adjusted some of cost alreadly and will do more as I am finishing harvesting 28% corn.

highyields
Senior Contributor

Re: Who Cares About Break Even Costs?

I guess I kinda understand what you are saying, And I think there is to much worry and numbers thrown around.   to much information can be a BAD THING.  But I still like to know my break even just because thats the challenge in the game for me.   

Breakevens numbers cost me a farm when I was first starting out about 12 years ago, I couldn't make it work with the past 5 year average on price and yield so I didn't buy it.   Turns out I would have been fine, even before corn went up.  I made the same mistake twice,, I guarantee you it won't happen again.  

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hanktbd
Senior Contributor

Re: Who Cares About Break Even Costs?

Nice to see someone else who believes that COP has nothing to do with selling price, at least in the short term. Over any 10 year period the number of farmers is being reduced significantly. Been that way for at least the last hundred years. Those who survive both reduce the COP as far as possible and maximize the selling price as best as possible. Anything less than that over time puts you on the "likely to be squeezed out" list. Selling grain for a small profit when a large profit is possible is just plain foolishness.This is especially since the true COP/BU or other unit measure is unknown until after the harvest season is completed. A certain amount of forward selling can reduce risk, but if overdone can easily lead to increased risks and even disaster. I believe that lot of the current marketing strategies promoted by advisory services carry a lot of additional risks that are ignored or poorly understood by those using them.

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hardnox604008
Advisor

Re: Who Cares About Break Even Costs?

If you're renting it certainly matters although a bit tricky as far as how you account for equipment/self on an added marginal acre- not necessarily the same as the average of existing but also not free. Unless you just gotta have it.

 

Also good to know in recent years when very clear profitable selling opportunites have often presented. I's not like I have to sell at my breakeven level but if you have a price that gives you a couple humdred profit per acre with average yields its hard for me to find a good reason to not be doing some selling or something to protect that.

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Shaggy98
Senior Advisor

Re: Who Cares About Break Even Costs?

Calculating COP should be relatively easy, calculating profit/loss per acre is determined by selling price. I make sale percentages based on covering costs and ROI anticipation. Selling the first X% to cover my costs is the easiest sale to make, making later sales to profit the most I can becomes an emotional roller coaster.
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timetippingpt
Honored Advisor

Re: Who Cares About Break Even Costs?

#1. know it exactly, it is actually a curve of possibilities before harvest, and a known number after it is all weighed and in the bins.

#2. NEVER...dumbest idea in history. Also, it is an accepted and recommended by IA state BMP (best mgmt practice), just proving BMP might not be BMP, especially if it is from IA state. Smiley Embarassed The numbers (input cost and output prices)  are actually positively correlated and therefore you should not fix inputs and outputs at the same time, at least as much as possible.