High Cost – High Return : Low Cost – Negative Return
During the late 1990’s and early 2000’s I was a part owner of a plastic packaging company. We had always used a costing mechanism that relied upon standard costs and return for various products. This usually resulted in accurate information except when the cost of the product got too high.
In many cases, we would have a product with a very large material cost and many of our managers did not want to produce the product since the percentage return was much lower than many of our other products.
However, after showing them what the bottom line return to the company would be on a per hour basis (almost all of our machinery returns were based upon an hour of production), these managers came to understand that the bottom line return to the company per hour of machine time was much more important than the percentage return.
This brings us to farming. Many times, as a farmer, we want to minimize our cost of production, when in fact, we should try to determine what the bottom line return to the farm will be, not the lowest production cost.
The University of Illnois has produced their crop budgets for 2009 for corn, soybeans and wheat. These budgets show what various farmers in Illinois have as a 2009 farm budget . If you tried to minimize your cost of production, you would most likely either plant soybeans or wheat, however, the return for soybeans is actually less than the return for corn and planting wheat is budgeted to result in a loss.
Corn is most cases will cost the most to farm, but has the highest chance of returning the most to the farmer on a per acre basis. This is what I call High Cost- High Return versus Low Cost – No Return. Make sure that you are checking your budgets each year to determine what should provide the most to your bottom line.
There are many good spreadsheets at this site to help you with your farming decisions. Farmers in other states should be able to use these budget tools and simply put in their respective numbers to come up with a good budget.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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