Lessons learned from the 2019 season part 3
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EmailThis article will focus on the break-evens and how to predict for future references.
Break-even is that point at which costs equal revenues. The farm has made no money, but at the same time it has not lost money either. This is the scenario farms want to achieve when the potential for profits seem unlikely. As the 2019 season progressed, much of the focus switched from earning profits to earning enough revenue to break-even. This change in strategy emphasizes the importance of knowing your farm’s cost of production, which is linked and often used interchangeably with the concept of break-evens.
There are typically two types of break-evens that farms focus on: one for price and one for yield. The break-even for price takes the cost of production and divides it by the expected yield. The break-even for yield takes that same cost of production and divides it by the expected price.
Understanding the farm’s break-evens can help in two distinct ways: 1) determine if the market price offered will maximize revenue and 2) determine if the price for inputs is favorable to justify purchasing (i.e. lock-in).
Let’s examine an example of a farm where the expected yield will be 180 bushels per acre and the expected price is $4.00 per bushel:
| Break-even Price (Corn) | |
| Direct Expense | $350 |
| Overhead Expense | $225 |
| Total Dir & Overheard Expense | $575 |
| Expected Yield | 180 bushels |
| Break-even | $3.19/ bushel |
| Break-even Price (Corn) | |
| Direct Expense | $350 |
| Overhead Expense | $225 |
| Total Dir & Overhead Expenses | $575 |
| Expected Price | $4.00/ bushel |
| Break-even | 144 bushels |
The example illustrates that at the expected yield and prices, the break-evens are both positive and the farm is capable of to cover expenses. Should we consider taking out a marketing contract on some of our expected grain? Or purchase some of the inputs at the given price? Remember, cost of production doesn’t stop at just Net Farm Income (NFI). We have to include cash flow and net worth into this equation as well. What do our break-evens look like if we add in debt payments of $100 per acre?
| Break-even Yield (Corn) | |
| Direct Expense | $350 |
| Overhead Expense | $225 |
| Debt Payments | $100 |
| Total Dir & Overhead Expenses | $675 |
| Expected Yield | 180 bushels |
| Break-even | $3.75/ bushel |
| Break-even Yield (Corn) | |
| Direct Expense | $350 |
| Overhead Expense | $225 |
| Debt Payments | $100 |
| Total Dir & Overhead Expenses | $675 |
| Expected Price | $4.00/ bushel |
| Break-even | $1.69 bushels |
With just the inclusion of an additional $100, the break-evens for this example change significantly. The break-even price rose from $3.19 up to $3.75, while the break-even yield rose from 144 to 169 bushels per acre. This means there are increasing demands on the farm to reach the expected yield and for market prices to stay steady.
This helps farm managers to consider the impact of input costs and market prices on potential farm revenues. How would the example values change if fertilizer or seed expense caused direct expenses to increase another $25? And a rise in land rent increased overhead expenses by another $50?
We have seen increases like these in recent years and have even asked what changes should be considered by the farm? This is often a struggle for most farm managers. Sometimes the factors that need to be changed are not completely within our control (i.e. market prices). We encountered situations like these routinely this past year. The uncertainty of the weather caused added concern about expected yields and market prices. Even in some cases where we felt we had decent market prices, the uncertainty of yield caused farms to hesitate and not pursue contract opportunities.
How are farms expected to be prepared for the uncertainty of a poor yield or a significant change in the prices offered on the market? The answer revolves around a set of tools and services that most farms already pay for, but seldom fully utilize in their decision-making. It’s also the next stop on our roadmap: Crop Insurance as a Marketing tool.
