“What will these 300 acres of wheat leave, and at what price do they leave nothing?” A Kansas farm bank loan officer asks this before approving the seed and fertilizer line. A grower with no written answer is guessing. In the example below, which uses invented figures, the grower budgets $18,000 and finds on paper that a bad year turns it into a $6,000 loss. Before seeding, write the margin, the yield and price where the crop only breaks even, and a range for each number. Date the sheet and compare it with the harvest.
What should this crop leave, and where does it break even?
Margin is what the crop leaves after every cost: the revenue, less the variable cost of the whole field, less the share of fixed cost this crop carries. Variable cost is what you pay per acre to grow the crop, such as seed, fertilizer, chemicals and fuel. Fixed cost is what you pay whether or not you seed, such as machinery payments and the land payment. Only the share this crop carries goes in the budget.
The example is a 300-acre field of winter wheat in central Kansas. Every figure is invented for the example, and none is a Kansas price or cost.
Write the break-even yield and price right beside the $18,000, because together they show how far the crop sits from losing money. A published budget cannot stand in for this page. The University of Florida’s extension service (UF/IFAS) says posted enterprise budgets “do not represent individual operations”.
How far can the price or the yield fall before the crop loses money?
The total cost of $72,000 is 80 percent of the $90,000 revenue. Either the price or the yield can therefore fall 20 percent before revenue only covers cost, and that distance is the room. The room always equals the margin as a share of revenue, here $18,000 of $90,000. A farm that keeps 5 percent of revenue has 5 percent of room.
The break-even yield is the total cost divided by the expected price. The Food and Agriculture Organization of the United Nations (FAO) gives that formula in its manual on farm production cost statistics. Here $72,000 divided by $6.00 is 12,000 bushels, or 40 an acre. The manual also says production should count only what can be sold, leaving out waste, losses and the farm’s own consumption. A yield that includes the losses between field and scale makes the room look bigger than it is.
Embrapa, Brazil’s federal agricultural research corporation, calls the same distance a margin of safety. Its onion budget for the São Francisco valley puts the total cost at 9,018.70 reais a hectare and the price at 0.68 reais a kilo. Break-even is 13,262 kilos a hectare (about 11,800 pounds an acre) against an expected 20,000 (about 17,800). The study concludes that the quantity or the price can fall by as much as 34 percent.
A second choice is which costs the break-even covers. FAO lists a break-even price for variable cost only next to one for total cost. In the example the first is $3.80 a bushel, which is $57,000 divided by 15,000 bushels, and the second is $4.80. Between the two, the wheat pays its own costs and part of the fixed cost, and leaving the field empty would not remove the $15,000.
Which moves the margin most: price, yield or cost?
Per percentage point, price and yield move the margin by the same amount, and by more than variable cost. One percent of the price or of the yield is $900, a hundredth of the $90,000 revenue, and that is 5 percent of the $18,000 margin. One percent of variable cost is $570. Price and yield win whenever revenue exceeds variable cost, so the ranking says little about your farm. On a farm that keeps 5 percent of revenue, each 1 percent of price takes 20 percent of the margin.
What the arithmetic cannot say is how far each one moves in a real year. Rosa and colleagues, agricultural economists who simulated crop portfolios in Italy, point to a “mix of market (price fluctuation) and production (yield variation), with the higher risk generated by the market”. Sherrick, a farm finance economist at the University of Illinois, found across Illinois counties that “price risk represents about 66% of the cause of revenue variability”.
A percent of price and a percent of yield are worth the same money, but price usually moves more percent in a year. The ranking covers only the numbers you entered. If variable cost is a single total per acre, the items folded inside it are never tested one by one.
Where do the ranges come from, and what does the bad column show?
A range is how far a number can move up or down, written as a percent. Take it from records, because a range typed from memory comes out too narrow. Cruz Júnior and colleagues, agricultural economists, surveyed 90 corn growers in southern and central-western Brazil in October and November 2008. For most of them, the variance of the prices they expected was lower than the variance of the market, which the authors read as a perception of risk below the real one. A tight range makes the budget look better than it should.
The price range comes from the highest and lowest local price for the same month across recent years, from your own price record with its dates and sources. The yield range comes from your last seasons in that field, and the cost range from the quotes in hand. The example uses 15 percent for price, 10 for yield and 5 for cost. Price should come out the widest, since the studies above find it moves more than yield. Cost should come out the narrowest, but those studies do not measure that; it is Rurivia’s own reasoning, because an input already bought has its price fixed.
Embrapa measured a cost range. It simulated about 5,000 cost sheets for the onion budget, and the break-even moved from 12,335 kilos a hectare at the low end to 14,160 at the high end.
Then run the bad column with all three moving together. UF/IFAS explains why: “changes in economic conditions often cause two or more input variables to fluctuate together”, and “analyzing them in isolation can underestimate the true financial risk”. Sherrick found that prices and yields in the Corn Belt tend to move in opposite directions, with 51 percent of a rise in one offset by a fall in the other. He also found that this pull weakens down to the single producer. Hail on one farm cuts the yield and leaves the price where it was.
What do you write first, and what do you do with the room?
Divide the room by the price range from your own record. In the example, 20 percent of room over a 15 percent price range is 1.3. Below 1, an ordinary bad price year reaches the break-even. From 1 to 2, it takes a year worse than usual. Above 2, only a year outside your record reaches it.
At 1.3, a 15 percent fall in price alone leaves $4,500 of the $18,000, since each 1 percent of price takes 5 percent of the margin. The wheat ends in the black with three quarters of the margin gone. The bad column ends $6,000 in the red, so the grower writes beforehand what to do in that case, who decides and by when.
Above 2, the work is protecting the margin: take the break-even price into the sale, the number the break-even price article works out from the selling side. Below 1, one ordinary bad year takes the whole margin, and a better guess at the numbers will not change that. Settle before seeding what you will do, and test it with price and yield falling together, as in how bad a year a cycle can take.
The budget leaves out cash. UF/IFAS notes that enterprise budgets “generally exclude financing and cash flow considerations, which are critical to a farm’s overall financial health”. A crop with an $18,000 margin can still empty the account in the month the fertilizer invoice falls due. The free crop budget calculator runs the margin, both break-evens and the three columns, but it treats all variable cost as a cost per unit of area. Harvest and hauling are often paid per bushel and fall with a short crop, so its break-even yield comes out a little high.
Two hours with last season’s invoices, your price record and your field notes are enough, and the sheet should exist before the seed order.
Put a name beside each number. The person who signs the yield should be whoever answers for it at harvest, not whoever is most optimistic in the meeting. Filled in after harvest, the empty column shows which way your own estimates lean, and after three seasons the ranges come from your sheets instead of a published average. The same habit of writing the number first runs through farm management.