Farm Management Minute: Forgotten costs of production

Lori Tonak Instructor, South Dakota Center for Farm
Ranch Management

As we start into the new year, many agriculture producers are already calculating the break-evens they need to cover with the 2018 crops and livestock. Costs on seed, fertilizer, chemical and possibly fuel may have been prepaid or ordered for the coming year. Planting rate and application rates are calculated; feed costs for the year are estimated. What more is needed for calculating costs of production or break-evens? Nothing, right? It depends on the producer if this is where they stop on calculating expenses. There are some costs of production many people overlook — overhead or fixed costs.

When calculating cost of production, most producers think of the variable/direct costs, but many forget the overheads. These forgotten costs of production can put a major financial strain on farms/ranches. Overhead costs are items such as depreciation, intermediate and long-term interest payments, real estate taxes, hired help, insurance, fuel, and repairs.

Most producers will calculate some machinery costs to cover repairs and fuel, but forget depreciation, interest and hired labor in their calculations. A number of farms/ranches today are struggling because they have forgotten to include these overhead costs when calculating sale prices on crops and livestock.

Operations working with the South Dakota Center for Farm/Ranch Management (SDCFRM) have these overheads calculated on every enterprise-crops and livestock. Fixed costs calculated at the field level, or to a split of the cow/calf and backgrounding, are reported by the analysis software used. Toolkits with state averages of all costs for a number of enterprises can be found on the SDCFRM website at sdcfrm.com. These toolkits are available to anyone and can be downloaded to a personal computer to be used.

If any producer would like more information on calculating costs, enterprise analysis, or record management, the South Dakota Center for Farm/Ranch Management can help. To contact the SDCFRM office or any of our instructors, call 1-800-684-1969 or email us at sdcfrm@mitchelltech.edu.