As we round the corner into harvest season, many of this year’s crop production financial details are becoming clear. You have a good handle on what your yields will be and the input investments you made to achieve those yields. But do you know what your true breakeven is and how that number should affect your long-term marketing plan?
Your breakeven point should serve as a road map for your marketing strategy. Even though it’s a seemingly simple calculation, arriving at a true breakeven price involves some complications even the most seasoned producers can overlook.
How to calculate breakeven
In simple terms, your breakeven point is the minimum market price you need to recoup all production costs, including land, inputs and family living expenses. While this may seem straightforward, the number will fluctuate throughout the season as weather and other growing conditions impact expected yield.
A full breakdown of your operation’s costs should include:
- Seed and fertilizer
- Any weed, disease or insect control measures
- Interest on all lines of credit
- Land – owned or rented, including debt service, depreciation and rent payments
- All equipment expenses, including debt service, depreciation and maintenance
- Energy costs such as fuel or electricity
- Labor, including wages and benefits
- All taxes, including income tax and property tax
- Family living expenses, including health care
Many producers use simple Excel spreadsheets to look at high-level budgets, then do some fast math on their projected breakeven. This method is great for determining how land rent and variable costs impact the bottom line. But including some significant fixed costs will give you a better look at the market price you need to stay in the black.
Family living is a constant expense
Many farm families fail to track what goes in and out of the checking account for things like groceries, school supplies and health care. But family living costs absolutely impact your bottom line and should be considered an operational expense.
Income taxes are often calculated at the end of the year, and so are out of sight and out of mind. Subtract the tax liability from your profits to get the final number.
Loan Principal payments
Be sure to account for the principal portion of term debt payments. Sometimes we see farmers only accounting for interest payments. An operation needs to make enough profit after taxes to pay down the principal.
Owned Land costs
Be sure you have a full understanding of total owned land costs. Rent or lease payments are easier to track than items like property taxes and return on investment, which can take years to realize.
Along with working capital, your breakeven point is one of the most important measures when it comes to your marketing strategy. Including all correct costs in your breakeven calculation will help ensure your operation’s profitability.