Decision Tool Helps Identify Crop Break-even Numbers2/08/2017
Unless he knows what his costs are, and what price and yield he has to get to break even, a farmer can’t know how much money he’s likely to make — or lose — on any given crop in any given season. Math is required. Records are essential.
The process may be a little less intimidating with the use of a Texas A&M AgriLife Extension decision aid tool that simplifies the process, says Extension Economist Jackie Smith at Lubbock, who explained the Crop Profitability Spreadsheet at the recent Red River Crops Conference at Childress, Texas.
“We’ve designed this tool so producers can plug in their own numbers,” he says. The tool is available at http://southplainsprofit.tamu.edu/ and offers some basic numbers, but Smith says the tool is more helpful when farmers add their own figures. “Calculations are pretty simple to identify break-even prices and returns above variable costs.”
The program includes spreadsheets for 24 separate crops. “It also considers ‘what ifs’ to calculate break-even numbers and net returns under different circumstances.” The spreadsheet does the calculations and identifies break-even levels. “The break-even price will cover variable costs,” he says. “Break-even yields will show what’s necessary to cover all costs — fixed and variable.”
It will calculate the break-even price necessary to cover costs, as well as break-even price to cover all costs. “These break-even prices are calculated for the yield entered in the budget, and for two yields below and two yields above that yield.”
The 2017 spreadsheet was made available on the website February 6, “or you can come by my office in Lubbock.”
The spreadsheet offers a way to measure expenses, compare the advantages of one crop with another, and assess yield and price estimates, Smith notes. “It makes farmers better decision-makers. Producers plug their own numbers into the budget, and the equations come up with the figures.”
Farmers with more accurate records are likely to find more benefit from the tool, he says, but it’s a good starting place for any producer who wants a better handle on the economics of a crop.
As an example, a worksheet showing budgets for irrigated cotton and irrigated sorghum, includes estimated income, including estimated price and yield projections. Cost estimates are detailed, and include fixed and variable expenses.
In the example, cotton, at 65 cents a pound and 1,250 pounds per acre lint yield, plus .888 tons of seed per acre, creates an income of $990 per acre. Variable costs total $773.78 per acre, leaving a return of $216.22 above variable costs. Adding $189.25 in fixed expenses drops the returns over total specified expenses to $26.97.
For grain sorghum, estimating a 55 cwt. per acre yield at a $6.80 price, total income is $374. Variable expenses total $382.68, leaving a loss of $8.68 per acre. With fixed costs adding another $189.25 per acre, the returns above total specified expenses result in a loss of $197.93 per acre.
Smith includes a chart showing break-even prices to cover both variable and total costs for a range of yields for both irrigated cotton and irrigated sorghum.
Budgeted yield percentages show that at 75 percent and 937.50 pounds per acre, cotton needs 62 cents per pound to cover variable costs, 82 cents to cover total costs. At 90 percent of estimated yield, 1,125 pounds per acre, price to cover variable costs drops to 52 cents per pound, and 69 cents to cover all costs. At 100 percent yield, 1,250 pounds per acre, 48 cents covers variable costs and 63 cents covers total expenses. With 125 percent of estimated yield, 1,562.5 pounds per acre, 39 cents covers variable costs and 51 cents covers total costs.
For sorghum, 75 percent of estimated yield, 41.25 cwt. per acre, would need a price of $9.08 to cover variable costs and $13.66 to cover total costs. At 90 percent, 49.50 cwt., $7.66 covers variable costs and $11.49 covers total costs. With 100 percent of estimated yield, 55 cwt., break-even to cover variable costs is $6.96, and $9.51 to cover all costs. With a bumper yield of 125 percent of estimated production, 68.75 cwt., $5.69 covers variable costs, and $8.44 covers total costs.
Producers look at their own yield histories, consider production costs, and possibly look at options to reduce those expenses or whether another crop offers a better opportunity. The process, Smith says, is a lot simpler than working it out in a spiral notebook with a No. 2 pencil and a pocket calculator.
The budget figures help producers adjust cropping strategies, examine expenses, and provide a sound baseline for determining marketing objectives.
Information may be one of the most valuable tools a farmer has when prices are less than robust.
Source: Texas A&M AgriLife