Estimating your Estimating your Cost of ProductionCost of Production

for Growing for Growing Irrigated CornIrrigated Corn

Paul D. MitchellPaul D. MitchellAgricultural and Applied EconomicsAgricultural and Applied Economics

UW-Madison and UW-ExtensionUW-Madison and UW-ExtensionHancock ARS February 1, 2006Hancock ARS February 1, 2006

Goal TodayGoal Today

Present basic cost concepts and Present basic cost concepts and methods to estimate cost of productionmethods to estimate cost of production

Simple method to estimate a Simple method to estimate a typicaltypical cost of production for a farm your sizecost of production for a farm your size

Work through an exampleWork through an example Cost of Center Pivot IrrigationCost of Center Pivot Irrigation Returns to Irrigated Corn Returns to Irrigated Corn

Major cost categoriesMajor cost categoriesfor crop productionfor crop production

Variable Input CostsVariable Input Costs Seed, fertilizer, herbicidesSeed, fertilizer, herbicides

Machinery CostsMachinery Costs Fixed: depreciation, capital costFixed: depreciation, capital cost Variable: maintenance, fuel, lubricationVariable: maintenance, fuel, lubrication

Land, Labor, and ManagementLand, Labor, and Management Often unpaid costs of your time and Often unpaid costs of your time and

your management skill and energyyour management skill and energy

Variable Input CostsVariable Input Costs

Amount of each input times its priceAmount of each input times its price Add them all up to get variable input costsAdd them all up to get variable input costs Simplified examples for cornSimplified examples for corn

Seed: $110/bag x 0.425 bag/ac = $46.75/acSeed: $110/bag x 0.425 bag/ac = $46.75/ac(80,000 seeds/bag, 34,000 seeds/ac)(80,000 seeds/bag, 34,000 seeds/ac)

Nitrogen: 200 lbs N/ac x $0.35/lbs = $70/acNitrogen: 200 lbs N/ac x $0.35/lbs = $70/ac Prowl: 1.5 lbs/ac = $9.75/acProwl: 1.5 lbs/ac = $9.75/ac

Machinery CostsMachinery Costs Substantial component of costs (25-40%)Substantial component of costs (25-40%) Difficult to measure/estimate: user specificDifficult to measure/estimate: user specific Variable Cost, Use-Related Cost, Operating CostVariable Cost, Use-Related Cost, Operating Cost

Costs due to using the machineryCosts due to using the machinery Fuel, lube, maintenance, use-related repairs and Fuel, lube, maintenance, use-related repairs and

laborlabor Fixed Cost, Time-Related Cost, Overhead CostFixed Cost, Time-Related Cost, Overhead Cost

Costs paid whether you use the machinery or notCosts paid whether you use the machinery or not Interest, insurance, taxes, housingInterest, insurance, taxes, housing

Depreciation: both a variable and fixed costDepreciation: both a variable and fixed cost

Machinery CostsMachinery Costs

Best method: keep accurate records and Best method: keep accurate records and use them to determine your use them to determine your actualactual costs costs

Estimate CostsEstimate Costs When do not have records, or want to When do not have records, or want to

compare costs for different optionscompare costs for different options Economic EngineeringEconomic Engineering Custom RatesCustom Rates

Economic Engineering Economic Engineering ApproachApproach

Estimate machinery costs based on Estimate machinery costs based on careful engineering data collectioncareful engineering data collection

Use the machinery and carefully Use the machinery and carefully document document repairs, maintenance, fuel/lubricationrepairs, maintenance, fuel/lubrication speed, turning time, laborspeed, turning time, labor

Develop formulas to estimate fixed Develop formulas to estimate fixed and variable machinery costsand variable machinery costs

Farm Machinery Economic Cost Farm Machinery Economic Cost Estimates for 2005, Lazarus and Estimates for 2005, Lazarus and Selley at U of MN, Center for Farm Selley at U of MN, Center for Farm Financial Management Financial Management http://www.apec.umn.edu/faculty/wlazarus/mf200http://www.apec.umn.edu/faculty/wlazarus/mf2005.pdf5.pdf

Numbers seem too low?Numbers seem too low?

Economic Engineering Economic Engineering ApproachApproach

Machinery Cost ExampleMachinery Cost Example What does it cost to run a chisel plow?What does it cost to run a chisel plow? Lazarus and Selley 2005 (23 ft): $6.81/acLazarus and Selley 2005 (23 ft): $6.81/ac Iowa 2005 Custom Rate $11.05/acIowa 2005 Custom Rate $11.05/ac Wisconsin 2004: $13.30/acWisconsin 2004: $13.30/ac Indiana 2004 Custom Rate $11.78/acIndiana 2004 Custom Rate $11.78/ac South Dakota (East) Custom Rate: $10/acSouth Dakota (East) Custom Rate: $10/ac Missouri 2003 Custom RateMissouri 2003 Custom Rate

$10/ac ($12.10/ac heavy soil)$10/ac ($12.10/ac heavy soil) SW Minnesota 2001: $10.83/acSW Minnesota 2001: $10.83/ac

Economic Engineering Economic Engineering ApproachApproach

Ron Shuler (UWEX/BSE): Updated A3510 Ron Shuler (UWEX/BSE): Updated A3510 “Estimating Ag. Field Machinery Costs”“Estimating Ag. Field Machinery Costs”

Print copy with worksheets, spreadsheetPrint copy with worksheets, spreadsheet Estimate costs when no recordsEstimate costs when no records Recommends using actual data to Recommends using actual data to

determine your actual machinery costsdetermine your actual machinery costs

Why not just use Custom Why not just use Custom Rates?Rates?

Custom rates not good estimates of Custom rates not good estimates of typical farmer costs—usually too low typical farmer costs—usually too low as wellas well Run over more acres, spread fixed costsRun over more acres, spread fixed costs Volume discounts or search for best Volume discounts or search for best

price, so lower purchase priceprice, so lower purchase price More efficient operatorsMore efficient operators Family/friends not charge enoughFamily/friends not charge enough Discounted because not perfect timingDiscounted because not perfect timing

Converting Custom RatesConverting Custom Ratesto your Costto your Cost

Adjusting custom rates is an easy way Adjusting custom rates is an easy way to estimate typical machinery coststo estimate typical machinery costs

K. Dhuyvetter and T. Kastens at Kansas K. Dhuyvetter and T. Kastens at Kansas State University developed a formula State University developed a formula using KFMA cost data and custom ratesusing KFMA cost data and custom rates

Scale Factor = 1.241 + (33.026/acres)Scale Factor = 1.241 + (33.026/acres) Your Cost = Scale Factor x Custom Your Cost = Scale Factor x Custom

RateRate Acres is annual acres operatedAcres is annual acres operated

1 – Scale Factor = % increase (as decimal) that your costs exceed the Custom Rate

Acres Scale Factor100 1.571200 1.406300 1.351400 1.324500 1.307600 1.296700 1.288800 1.282900 1.278

1000 1.2741100 1.2711200 1.2691300 1.2661400 1.2651500 1.2631600 1.2621700 1.2601800 1.2591900 1.2582000 1.258

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

0 500 1000 1500 2000 2500 3000

Acres of Cropland

Sca

le F

acto

r

CaveatsCaveats Custom rates have wide ranges—call around, Custom rates have wide ranges—call around,

use WI publication and those from other use WI publication and those from other statesstates

Formula to adjust custom rates not perfectFormula to adjust custom rates not perfect Use these machinery costs as a guide, not Use these machinery costs as a guide, not

gospelgospel Need good records to estimate your costsNeed good records to estimate your costs Returns to land and Management does not Returns to land and Management does not

include Farm Program paymentsinclude Farm Program payments Government Payment Calculator at Government Payment Calculator at

http://www.afpc.tamu.edu/ to estimatehttp://www.afpc.tamu.edu/ to estimate

Irrigation SummaryIrrigation SummarySUMMARYANNUAL OWNERSHIP COSTS $/irg acDepreciation Pivot & Well $31.17Interest/Opportunity Cost $51.80Insurance $3.70TOTAL ANNUAL OWNERSHIP COST $86.67

OPERATING COSTS $/irg acElectric Power $29.68Labor run/manage pivot $1.33Maintenance $11.10TOTAL ANNUAL OPERATING COST $42.11

TOTAL COST$128.78

Irrigated Corn SummaryIrrigated Corn SummarySUMMARY $/ac

Total Machinery Costs $101.99Total Variable Input Costs $165.16

Total Irrigation Costs $128.78Total Variable Harvest Costs $44.88

TOTAL COST $440.81

Average Yield (bu/ac) 220Expected Price ($/bu) $2.00

Expected Revenue ($/ac) $440.00

Net Returns to Land & Management - $0.81

SummarySummary

Can make money on irrigated field cornCan make money on irrigated field corn Keep costs low (inputs, irrigation, Keep costs low (inputs, irrigation,

machinery)machinery) Get good price — good marketingGet good price — good marketing

Crop insurance (GRP/GRIP + Hail) and Crop insurance (GRP/GRIP + Hail) and forward pricing to remove some of the forward pricing to remove some of the yield & price riskyield & price risk

Questions ???Questions ???Paul MitchellPaul MitchellAgricultural and Applied EconomicsAgricultural and Applied EconomicsUW-Madison and UW-ExtensionUW-Madison and UW-Extension(608) 265-6514(608) 265-6514pdmitchell@wisc.edupdmitchell@wisc.edu

My Extension HomepageMy Extension Homepagewww.aae.wisc.edu/mitchell/www.aae.wisc.edu/mitchell/

extension.htmextension.htm