ARTICLE SUMMARY: Cost per bushel is a vital decision tool for considering profitability of a range of agronomic practices. Receive guidance from a carbon farming expert on calculating your cost per bushel.
While attending a conference a few years back, the extension agent speaking to the crowd of 300 farmers asked two simple questions: Do you know your cost per bushel? If you don’t, how do you know what price to sell your bushels so that you are profitable? Both very good questions. Turns out, less than 20% of the growers in the crowd had answers.
Obviously, if you increase yield, then you have more bushels to spread costs across. But what about expenses that not only increase bushels, but also increase variable and/or fixed costs? How do you know when the purchase provides a net gain to your operation? Also, when you experience a jump in a fixed cost, or when you are considering a new fixed cost such as an equipment purchase, do you know if it improves or degrades your profitability? Taking the time to truly calculate your cost per bushel will help you evaluate all sorts of decisions and provide important perspective when considering changes in fixed or variable costs.
Establish three numbers:
Calculating variable costs becomes relatively simple. Variable costs line up generally within the annual crop production cycle. Fixed costs have an added step of annualizing one-time expenses. For example, consider the purchase of a 200-horsepower tractor. This can be annualized in two ways; the depreciation life based on current tax law, or the expected years of use on the farm. I prefer the expected years of use on the farm method as that more accurately reflects the annualized costs of each equipment purchase… which is the primary goal of calculating cost per bushel. Using expected years of use also addresses another challenge—how to expense or calculate farm equipment maintenance costs. There too, a significant initial cost gets spread out over the expected life. For example, you purchased a used tractor in 2015 and expect to use it for 15 years. Then in 2020, it needed an engine overhaul. The initial tractor price gets divided among the next 15 crop years and the engine overhaul gets divided among the next 10 crop years. For simplicity, any smaller repairs can get placed solely in the year they occur.
Using this formula, growers can then explore the cost per bushel impacts of various decisions. For example, let’s say you’re comparing a two-pass tillage system versus a no-till system. The differences in variable costs are straightforward (fuel, labor, repairs, etc.). In this example, the no-till reduces variable costs between $30 and $45 per acre, or around $.50-.75/bushel on an estimated 60 bushel soybean yield and $.15-.23 per bushel of corn on an estimated 200 bushel yield. Where some growers struggle in making such a comparison is in calculating the annual impacts of changes in the fixed costs. After all, that is a fixed cost covering years of production, how does one convert those big operational level expenses down to an annual comparison? In this example, removing tillage would allow the grower to significantly reduce equipment costs, from the tillage equipment to stepping down in tractor horsepower to avoiding significant wear and tear. A quick internet search indicated a typical savings around $43.04 per acre for equipment and repair for no-till over two tillage passes. With an estimated 60 bushel soybean yield that equates to $.72/bu for soybeans and around $.22/bu for corn assuming a 200 bushel yield.
So a quick, back of the envelope calculation shows a cost reduction of $1.22-$1.50 per bushel of soybeans and $.37-$.45 per bushel of corn when comparing two tillage passes to no till.
Now, of course, the story doesn’t end there. This is where we begin to get into small but significant details. First, growers will need to make a mental note of the expected yield impact on the final cost per bushel number when comparing the two tillage systems. Years of land-grant university data would indicate that there is minimal yield drag in the short term, and over the long term, growers who adopt carbon farming practices experience improved and more stable yields. So, from that side of the equation, growers ultimately grow more bushels, which helps spread out costs.
More importantly, we need to talk about financing and long-term changes to your soil’s productivity. Financing farm assets and activities, such as equipment and operational (variable) costs, need to be included in the equation. Here again, the important story is the cash flow pressure such financing places on an operation. The higher the monthly cash flow required, the more growers have to consider such cash flow needs when marketing their grains. Rather than selling at optimal market conditions, highly financed growers may need to sell in sub-prime market conditions to pay immediate bills. Operations that require more costs (think total costs per bushel) will likely experience still higher costs with financing and the added pressure of cash flow considerations when marketing crops.
One last note—the Cost Per Bushel equation has its shortcomings. It does a poor job of considering additional income and long term changes to the land. Luckily, growers can make simple adjustments. Adding carbon farming practices can give you the opportunity to earn additional income through carbon credits generated through Carbon by Indigo.