Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa. Following are the questions they are answering this month.
Calculate crop costs, plan for 2019
My son and I grow 2,400 acres of corn and soybeans. I’d like to get an accurate accounting of production costs for 2019 borrowing and planning purposes. What’s the best way to add up what we spent to produce the 2018 crop? Should we look at cost per bushel or per acre?
Plastina: One way to calculate your cost of production in 2018 is by making a list of all the inputs used in preparing the field, planting, spraying and harvesting each crop in 2018. A typical list would include fertilizer, lime, herbicide, insecticide, fungicides, fuel and oil. Then, estimate the total cost of each input for each crop, based on total quantities used in 2018 and purchase prices (in 2018 or in previous years for prepaid inputs).
If you custom-hired some work, allocate the expense across crops proportionately to the work done in the production of each crop. Add any repairs to the paid expenses in 2018. Add any interest paid for financing inputs, proportionately to the amount financed in the production of each crop. Include the total crop insurance premiums for each crop. Add up all the expenses described so far for each crop and divide by the total number of acres planted to each crop. The resulting (two) values will be the average variable cost per acre.
The next step is to estimate your fixed machinery costs per acre. Start by making a list of all the machinery used for your 2,400 acres in 2018. Calculate a reasonable market value for each piece of equipment if it was to be sold in current conditions in the local market. Estimate fixed machinery costs by multiplying those market values by 10% and adding the annual associated real property taxes. Sum up all these machinery costs and allocate them across crops proportionately to number of acres planted to each crop and intensity of use in production of each crop. Divide the resulting two values by the corresponding number of planted acres to estimate fixed cost of owned machinery per acre.
Finally, the total cost per acre is obtained by adding up the variable costs per acre and the fixed machinery costs per acre, plus land costs and labor costs per acre. Land cost per acre is the cash rent for rented acres, or the sum of real estate taxes plus 20% of the cost of any existing improvement, such as tile, terraces or fences. Labor costs per acre are typically wages paid or the local hourly wage rate multiplied by number of hours spent operating and managing, divided by 2,400 acres.
After obtaining total cost per acre, your cost per bushel is derived by dividing cost per acre by corresponding average yield. You can find more information on the budgeting process and templates to develop your own budgets in Ag Decision Maker Files A1-20 and A3-29.
Stout: First thing I would do is add up all crop expenses for corn and soybeans, such as machinery, interest and labor, including your own, to come up with a total accounting of all expenses. Some expenses are for one crop only, and some you just have to account for in both crops.
That will be one of the things your bankers will want to let them know your borrowing needs for the year, depending on how much working capital you must contribute. Adding up total expenses for 2018 is a good starting place for estimating next year’s budget. Then you can replace 2018 numbers with actual costs as you purchase inputs for 2019. It’s always a good idea to be aware of any unexpected extra expenses, such as herbicide resprays, or major machinery repairs that could add to your potential expenses.
The total will make it easy to determine your per acre expense, and from there based on an estimated average yield, to come up with a per bushel expense. Once you have actual yields, you can come up with a more accurate cost per bushel, which will be an asset when you are marketing your crops.
Miller: For cash flow purposes, I want my customers to know their cost per acre and cost per bushel. It’s very important to know what the cost per acre is so we can accurately plan for future financing needs. Cost per bushel is necessary to establish marketing plans for the operation.
It’s extremely important that our customers include the indirect and fixed costs of production: living expenses, liability insurance, property taxes, principal payments, etc., along with cost of seed, fertilizer, chemicals, fuel, repairs, custom work and crop insurance.
When we plan with customers, we take the input costs per acre and add in the fixed costs of the operation (on a per acre basis) to gauge the impact on a farmer’s breakeven sale point given different yield levels. We use a spreadsheet that displays how breakeven changes given every 5-bushel increase or decrease in yield. We’ve shared this spreadsheet with landlords (using an average of costs from our customer base) to demonstrate how reasonable their cash rent “ask” might be when compared to the yield potential of the farm.
Tight finances make farm transfer tougher
Our two sons began buying shares in our operation, as my wife and I began to slow down about five years ago. I’m now 68. One son couldn’t buy any more shares in 2017 due to tight times. It’s looking like he might not be able to do so again in 2018. Do we continue carrying him? The other son continues buying shares. How do we keep this fair?
Stout: There are a few blanks that aren’t filled in that leave me with questions. Are both of your sons in the farming operation? Are they working equally and getting the same salary? There is no rule that says they must have an equal share of the farm operation. But if that is your desire that they own an equal part of the operation, then you could gift them equal shares so that one isn’t paying and the other one is.
Then when farming profits get better down the road, maybe they can both afford to buy an equal amount of shares and keep an even split. It might be a good idea to talk to a farm succession specialist to assist you before you get any further along in the process.
Miller: If the final goal is to have each son own half of the operation, the son going through tight times could eventually catch up. However, in the interim, I think it would be fair if you base any payments from the farm to your sons on a dollar per hour or wage basis. If additional money is to be paid to the sons from the operation, then they should be paid on a pro-rata basis depending on each son’s number of shares.
I also recommend you sit down with your sons to determine if they are both still interested in owning half the operation. It may be that one son is not that motivated to buy into the operation. If that’s the case, then maybe the other son should be able to own more than half the operation.
Zhang: I applaud your careful considerations to try to be fair with both of your sons, especially under current situations when margins are tight. Due to interest rate hikes and trade disputes, among other things, the U.S. and Iowa farm income is projected to decline again this year. In other words, it might not be fair to deprive your son’s ability to buy the shares when tight margins are not necessarily his fault.
However, I advise hosting a family business meeting and understanding the desirable shareholding goals for both of your sons. What do they each want as a targeted share as percent of the operation? Also, what is the timeline?
Once both sons and daughters-in-law agree, I would consider lending the money to the son who might struggle a bit more than the other son. You can make a low-interest loan whose interest payments won’t be due until two or three years later. Also, consider plans such as possibly reserving 10% of operation shares for him to buy within the next five years but not any longer.