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Jan 11, 2024
Understanding your operation’s financial details is key to ensuring success for your farm. Knowing your yields and the investments you made on inputs to achieve those yields will not only put you on the path for success, it will also help your farm’s marketing strategy. That’s why it’s important to conduct a breakeven analysis.
In this post, we’ll cover:
The breakeven point takes into account all of your production costs (land, inputs, and living expenses) and helps you understand the minimum market price you’ll need to recoup in order to breakeven. This number can fluctuate based on growing conditions and weather, which can impact expected yield.
Here’s an example of how a basic breakeven calculation could look:
Start by answering some very simple but important questions:
How many acres will you plant?
What crops will you plant?
What’s their average yield per acre?
Answering these questions will help you take into account both your projected income and expected expenses.
Knowing your average yield or production per acre will help you build a baseline. To do that, start by building a budget that accounts for expenses like fertilizer cost and seed cost on an annual basis.
Make sure to include all costs for your ag operation, including those that are easy to overlook. Here’s a list of costs people sometimes forget to include:
Payments and depreciations
Return to management and labor costs
Interest charges on loans
Machinery costs
Overhead costs
Looking at these overarching expenses will help you break down your costs to a per acre level.
Get your free Balance Sheet Template here.
Figuring out your cost per acre will give you more insight into how your operation is performing. Here are four steps for calculating cost per acre.
Start by generating your average yield by looking at your crop insurance APH. This is the best number to use when looking at your base breakeven yield number.
After looking at your base breakeven number, calculate what a best-case scenario and a worst-case scenario would look like for your operation.
To figure out your best-case scenario, think back to the best year you’ve had in the last 10 years. What’s your breakeven if you hit that figure? That is your best-case-scenario breakeven number.
To figure out your worst-case scenario, determine what your breakeven would look like if you had to rely on your crop insurance.
Once you’re able to figure out your best- and worst-case scenarios, you’ll be able to generate your average production. You’ll now know your revenue per acre by utilizing the number of acres that you have as well as your yield per acre.
There’s always a wild card that comes into play: price. Be extremely conservative when forecasting price.
To get the most accurate numbers, try to use the new crop price at your local elevator. Those numbers can go up and down.
However, you don’t need that price to create a true breakeven. When you figure out your expenses, you’ll know what your price needs to be because your breakeven price will tell you what you need to sell for. When you compare that to the local price at the elevator, you’ll know if it’s profitable or not.
Your breakeven number is just like everything else in your operation. It’s a tool to help you make informed marketing decisions.
Every operation is different. When you should sell will depend on when you need cash flow. Do you have payments that need to be made? Rent due? A tax liability?
Whether you’re buying equipment, buying land, or taking on new acres will have an effect on your cash flow.
All of these decisions have pros and cons on your overall operational breakeven. Utilizing the breakeven analysis allows you to know whether you're selling at a profit and when to market your crop.
Get your free Cash Flow Projection Template here.
Knowing what to plant each year isn’t always an easy decision to make. Trying to outguess the market doesn’t always end well so consistency is best in this type of scenario.
Understanding your expenses and financials will help you make solid business decisions and be better equipped to market your crop based on true data.
Ultimately, knowing your breakeven per crop will help you in making planting decisions on ground that you may be undecided on. As well, it will help you make better crop insurance coverage decisions.
Planning a farm budget and applying it to your breakeven analysis will help you make decisions throughout the season.
As an example, many farmers use different inputs (herbicides, fungicides, chemicals, and fertilizers) to help generate more yield. Consider the following:
How would the cost of crop protection impact your breakeven?
Would spending on crop protection generate a higher yield?
How would a higher yield impact your breakeven?
All of these questions come into play, and having a budget planned out allows you to make important decisions for your operation.
Our team is available to walk you through the process of applying for a custom financing solution for your unique ag operation. FBN® Finance has already served 1,700+ farmers and committed more than a billion dollars.
As ag professionals ourselves, we understand that farming income has a seasonal timeline. If you’re looking to scale your operation, a farm operating line may be right for you.
A farm operating line is a line of credit that helps farmers cover agriculture-related expenses such as:
Buying inputs
Paying rent
Covering labor costs
Purchasing equipment
FBN Finance offers farm operating lines up to $5 million. It doesn’t cost anything to apply, and you can apply online.
Find out more about a farm operating line.
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Jan 11, 2024