There is no way to truly know if you are making money on the farm unless you understand what your costs are. How can you develop a successful marketing plan for crops or livestock if you don’t know exactly what your cost of production is?
While most producers have a ballpark idea of their costs, one South Dakota ag banker suggests digging a little deeper into the numbers. Nate Franzen, president of the agribusiness division at First Dakota National Bank, Yankton, S.D., says that producers often get caught up entirely with straightforward costs like seed and fertilizer, but can forget a couple of less obvious costs that are also important.
“If you are figuring your cost of production, you want to cover everything,” Franzen says. “We find that producers often don’t allow for depreciation of their machinery and equipment. A second area is figuring the ‘owner draw’ or salary from the farm that goes toward family living expenses.”
One of the difficulties with figuring out depreciation is how to distribute depreciation costs between livestock and crops enterprises on farms with both. “Keep it simple,” Franzen advises. “It doesn’t matter so much how you allocate those costs between enterprises, but just be sure to get them allocated.”
You don’t necessarily have to figure out hours spent on each enterprise or the value of the enterprise as it relates back to the machinery. He suggests defining your depreciation costs and making sure those costs get assigned entirely throughout all of your enterprises. From year to year those numbers can be tweaked as the operation expands, in order to better reflect a new scenario.
Family living costs can be very difficult to keep under control. “We advise our customers to use some discipline when budgeting for family living,” Franzen says. “No matter how they handle family living expenses, if they take money from the farm to pay for those costs, they can budget monthly and then live within that budget.” Many of Franzen's customers have a personal account, where they draw in money from farm income to cover family living.
Franzen says that part of the budgeting should include the establishment of savings, so producers can be prepared for unexpected family living and household expenses. “Having a savings or retirement account is a way to diversify,” he says. “It can also make the transition of the farming operation from one generation to the next much easier.”