How to Run a Breakeven Analysis For Your Farm
05 January 2023, US: 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.
What Is Breakeven
The breakeven point takes into account all of your production costs (land, inputs, 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:
How to Calculate Breakeven
The first thing you need to do is answer 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/production per acre will help you build a baseline. To do that, start by building a budget that accounts for expenses like fertilizer cost or seed cost on an annual basis. These are the kinds of expenses that are easy to think about.
Too often, people overlook things that should be included in their breakeven analysis. Here’s just a list of things people forget:
- Payments and depreciations
- Return to management and labor costs
- Interest charges on loans
- Machinery costs
- Overhead costs
Looking at all of these overarching expenses will help you break down your costs to a per acre level.
Cost per Acre
Figuring out your cost per acre will give you more insight into how your operation is performing. The first thing you’ll want to do is generate 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, consider a best case scenario and a worst case scenario for your operation.
That may mean thinking about having to rely on crop insurance and how your breakeven will look if you do. On the other hand, if you think of the best year you had in the last 10 years, what’s your breakeven if you hit that figure?
Once you’re able to figure out your best/worst case scenario, 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 is that wild card. 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 make decisions. It will help you make better marketing decisions.
When to Sell
Every operation is different. It 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 or when to market your crop.
What to Plant
Knowing what to plant each year isn’t always an easy decision to make. Asking yourself which commodity makes the most sense is difficult to predict.
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.
Overall Management Expenses
Planning a farm budget and applying it to your breakeven analysis will help make decisions throughout the season.
As an example, many farmers use different inputs (herbicides, fungicides, chemicals and fertilizers) to help generate more yield.
How does that affect or counterbalance spending an extra $50/acre on inputs during the season? Will that affect your breakeven or yield?
Will this help generate a higher yield? All of these questions come into play and having a budget planned out allows you to make important decisions for your operation.
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