Know Your Production Costs

Economists from the University of Georgia’s College of Agricultural and Environmental Sciences recommend that Georgia farmers understand their production costs before planting next year’s crops.

Amanda Smith, a UGA Cooperative Extension economist in the CAES Department of Agricultural and Applied Economics, says prices for diesel, some chemicals and land rent have increased, while seed and fertilizer continue to be significant expenses of growing crops. Farmers need to be diligent in their record keeping and know how increased production costs combined with low commodity prices affect their bottom line, she says.

Be On Top Of Your Numbers
“It’s good business practice to be on top of your numbers and ask, ‘Am I losing money with this crop? Can I afford to pay land rent on these acres?’” Smith says. “If you can’t afford it, you may need to step away and look for an alternative.”

Along with UGA Extension peanut economist Adam Rabinowitz and UGA Extension cotton economist Don Shurley, Smith has produced a relative row crop production cost and expected net returns analysis for cotton, peanuts, corn, soybeans and grain sorghum for 2018. In UGA’s projections, cotton is expected to bring an average price of 72 cents per pound; peanuts could be $400 per ton; corn may be $4.15 per bushel; and soybeans may bring $9.50 per bushel.

These price estimates are based on harvest time futures contracts adjusted for expected basis, except peanuts. Peanut prices are a weighted average of expected contracts on limited quantities.

Cover The Costs
Production costs for farmers are divided into two categories: variable and fixed costs. Variable costs consist of seed, fertilizer, chemicals, labor, land rent, fuel, and repairs and maintenance. Fixed costs refer to the cost of owning machinery, equipment, irrigation and buildings. These ownership costs include depreciation, housing, insurance and taxes.

Based on UGA’s projections, soybeans, cotton and peanuts offer growers more return above variable cost per acre for both irrigated and non-irrigated farmland. When making year-to-year planting decisions, growers need to look at the returns above their variable costs, Smith says. In the long run, farmers also need to cover those fixed ownership costs.

One significant variable cost for some farmers is land rent. This past growing season, the average land rent for irrigated cropland in South Georgia was $206.25 per acre, according to the United States Department of Agriculture National Agricultural Statistics Service. This was an increase from the $202 average that landowners charged in 2016.

For non-irrigated cropland, rent was $80.50 per acre in South Georgia, higher than the 2016 average of $76.25.

Look At Your State Budgets
UGA agricultural economists urge farmers to look at the enterprise budgets available online at www.agecon.uga.edu/extension/budgets, and adjust cost estimates to reflect production practices and yield.
“For cotton, we budget a 1,200-pound yield. Some growers shoot for three-bale cotton, which is 1,500 pounds of cotton per acre. That’s going to require a different mix of fertilizers and other inputs. They should account for higher costs associated with trying to get a higher yield,” Smith says.

One variable cost that Smith says varies is repairs and maintenance. She allotted $54 per acre in peanuts, but producers who operate older equipment may face higher repair bills.

Buy Or Repair?
“One farmer said, ‘I’ve got 10 years and 8,000 hours of use on a tractor. But the numbers aren’t there to buy a new tractor. I’m going to have to repair and maintain it best I can,’” Smith says.

Other variable costs that remain a significant portion of production costs are fertilizers. The price for liquid nitrogen has risen since August of this year, though it’s not expected to keep increasing, she says. Phosphorus has leveled out and will likely stay around the same price. Costs for potash, a form of the element potassium, have gone up just over 7.8 percent from last year but have not shown a dramatic increase as in 2011.
Smith and her UGA Extension colleagues offer more agricultural projections at the Georgia Ag Forecast seminars.

Article by Clint Thompson, UGA College of Agricultural and Environmental Sciences.