Cost of Production
Budget Based Adjusted Cost of Production
The Challenges of Determining Accurate Cost of Production Estimates for Crop Enterprises
Cost of production is a term used to describe the average cost of producing one unit of a commodity.
Estimates of cost of production are useful for setting target prices for crop marketing.
Farm business owners that primarily raise crops for cash sale often do not know their cost of production
because of a variety of reasons. First, the process of developing a detailed crop enterprise budget, used to
accurately determine cost of production estimates and differentiate the costs between enterprises, is usually
not implemented because of time constraints and the mental effort required. Second, accurate information
often isn’t available. Information provided by input suppliers can be lacking, combined as one item and/or
confusing. In addition, certain information is very hard to determine. Allocation of fuel usage by crop or
fixed costs of machinery ownership and use (the D,I,R,T,I five) and labor hours for each crop enterprise
are difficult for even producers with advanced record keeping skills. Therefore, even with a great deal of
time and effort detailed enterprise budgets have limitations.
There are software programs available to assist farm business owners determine the cost of production for
crop and livestock enterprises. The FINAN (FINancial ANalysis) portion of the FINPACK software
package is designed to do this. Unfortunately for the reasons outlined above, the task is difficult and the
resulting cost of production estimates has limitations.
Other Methods of Determining Cost of Production Estimates
In the absence of detailed enterprise budgets farm business owners may rely on their own SWAG
estimates. Others may estimate their cost of production using their known total expenses for crops and
calculating a figure based on the acres and yield as an expense per bushel. Alternatively, some farm
business owners may use pooled university or industry information for average cost of production
estimates.
The Enterprise Profitability Workgroup has developed a way for farm business owners to more accurately
estimate the cost of production for various crop rotations grown. The estimate is based on crop enterprise
budgets that are adjusted for the individual farm business owner’s total cost structure. This estimate is
called the Budget Based Adjusted Cost of Production (BBACOP).
Evaluating the Accuracy of Cost of Production Estimates – A Continuum
The premise of the proposed BBACOP approach is that a producer’s knowledge of the cost of production
for the crop enterprises grown falls along some point of a continuum.
A
B
C
D
E
________________________________________________________________________
Continuum of knowledge about cost of production estimates
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At one extreme (point A), producers may rely on the use of the SWAG method of approximating their
costs of production. The producer really doesn’t know the cost of production; therefore the estimate is an
approximated guess. The SWAG estimate could be based on a previous effort to break out costs of
production by crop enterprise or by the producer’s knowledge of general production costs using figures
reported in the popular press or University or industry estimates.
At some other extreme (point E), producers with advanced record keeping skills are developing detailed
enterprise budgets to analyze their operation. These are likely the best cost of production estimates even
though they have the limitations outlined above.
At point B of the continuum, producers may estimate their cost of production using their known total crop
expenses, allocating these total expenses between crop enterprises and calculating cost figures based on the
acres and yield as an expense per bushel. Is the estimate at point B better than the SWAG estimate at point
A? Probably, but the estimate isn’t very accurate.
Point C of the continuum represents University and/or industry estimates of production costs. These can
be derived from pooled data from various sources including farm management associations, record keeping
services, and research projects. Generally, these estimates do take into account all expenses that should be
considered and allocations are based on previous research. Are these estimates very accurate? Yes, these
are accurate average cost estimates for the pooled data. However, an individual producer’s actual costs can
be higher or lower than these average estimates.
The Budget Based Adjusted Cost of Production is represented by point D on the continuum. It is more
accurate than the average pooled university or industry data represented by point C. However, the
BBACOP estimate may not be as accurate as the detailed enterprise budget-based cost of production
estimate represented by point E, if the producer is spending the time and effort to use accurate information
to develop the enterprise budget and allocations are made correctly.
Advantages of the Budget Based Adjusted Cost of Production Approach
There are many advantages to the Budget Based Adjusted Cost of Production estimate. Advantages
include the following:
 The cost of production estimate is a “reasoned” base estimate for target prices
 The estimate is more accurate than most other methods of estimating cost of production
 The estimate can be determined in a short amount of time
 The estimate adjusts for high- and low-cost producers
 Limited financial information and production numbers are needed
Additional field experience is needed to evaluate the BBACOP approach.
Information Needed for the Budget Based Adjusted Cost of Production Estimate
The following information is inputted into the BBACOP Excel spreadsheet:
 Schedule F Expenses
- Total Interest Paid
- Wages and Benefits Paid
- Depreciation Claimed
- Total Livestock Expenses (if applicable)
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
Acres of each crop in the rotation

Yield estimate for the next year

Change in Accounts Payable (if applicable)

Change in Prepaid Expenses (if applicable)
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Cost of Production
Able Acres Example Crop Marketing Plan
Able Acres Example - Business and Family Situation as of January 1
The Able Acres decision-makers are sitting down on New Years Day to talk business. They want
to get an early start by developing a marketing plan for the crops that they plan to grow. They
realize that there are many factors that can influence crop prices throughout the year – weather,
domestic use, exports and local supply and demand situations to name just a few. Able Acres
has done a so-so job of marketing their production in recent years. They believe that part of their
problem is a lack of confidence in knowing the prices they need to meet production, business and
family goals.
Able Acres has decided that one of the first steps in developing a marketing plan is to determine
some target prices for the crops they plan to grow. These target prices will help them evaluate
prices available to them from the market.
Able Acres does not know the cost of production for the crops they grow. They have decided to
use Budget Based Adjusted Cost of Production estimates to determine target prices they can use
in the development of their marketing plan.
Information for Worksheet 1A: Determination of Basic Cost of Production
First, the Able Acres decision-makers pull out copies of their Schedule F tax returns and end of
the year balance sheets for the last 4 years. They have operated about 2000 acres for the past
several years. For the coming year they plan to grow 1200 acres of corn, 700 acres of soybeans
and 100 acres of hay. For the coming year Able Acres projects the following:
Total Schedule F Expenses: Able Acres has gone through their Schedule F tax returns for the
past several years and have made projections for each of the expense categories. They are
projecting total Schedule F expenses to be $561,500.
Accounts Payable: There has been $4,700 in accounts payable at the end of each of the past two
years. No change is anticipated in accounts payable at the end of the coming year.
Prepaid Expenses: For tax planning purposes and to take advantage of year-end discounts, Able
Acres has tended to increase their year-end prepaid expense purchases. For the coming year-end
prepaid expenses are projected to increase $5500
Livestock Expenses: Able Acres does not plan to raise any livestock in the coming year.
Total Interest Paid: Able Acres has been trying to pay down their debt and total farm liabilities
have been decreasing. Interest rates are also expected to be lower in the coming year. Interest
expense is projected to be $41,500.
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Cost of Production
Wages and Benefits Paid: For the past three years, wages and benefits paid have been $33,000,
$24,950 and $32,700. Hired labor expenses are expected to be considerably higher this year with
a projected total of $41,500 ($33,000 labor hired and $7,500 employee program benefits).
Depreciation Claimed: Able Acres has purchased additional farm machinery and equipment
over the past few years. They expect to claim roughly $30,000 of depreciation in the coming
year.
[Complete Worksheet 1A]
From Worksheet 1A, Able Acres’ total projected Basic Cost of Production is $444,000
Information for Worksheet 1B: Calculation of Adjusted Basic Crop Production Costs
Able Acres will use Worksheet 1B to determine a Budget Based Adjusted Cost of Production
estimate for each of the crops they plan to grow in the coming year.
Able Acres is planning to raise 2000 acres of crops in the coming year – 1200 acres of corn, 700
acres of soybeans and 100 acres of hay. Of the total 2000 acres, Able Acres determines that 60%
of their planned crop rotation will be in corn (1200 divided by 2000), 35% in soybeans (700
divided by 2000) and 5% in hay (100 divided by 2000). The list of crops to be raised, planned
acres and percent of each crop in the rotation are written in columns a, b and c.
UW-Extension has developed estimated crop budgets for Central Wisconsin, Southern
Wisconsin and a Wisconsin Dairy Farm. These crop budget figures are shown in the table below
Worksheet 1B. Detailed information about these estimated crop budgets is presented in the
Appendix. Able Acres is located in Southern Wisconsin. Using the budget figures, Able Acres
multiplies the acres of crops in the planned rotation (column b) by the crop budget figure for each
crop in the planned rotation. These figures are placed in column d. For example, 1200 acres of
corn multiplied by $259.75 per acre for corn in Southern Wisconsin provides a cost of $311,700
that is placed in column d.
Based on the crop budget figures, Able Acres’ total basic cost of production would be $460,231
based on Southern Wisconsin data. This figure is $16,231 higher than the predetermined basic
cost of production value of $444,000 that Able Acres determined in Worksheet 1A. In other
words, Able Acres has a cost of production that is lower than average for Southern Wisconsin.
Able Acres now determines the percent of the total $460,231 budget based cost that would be
attributed to each of the crops Able Acres plans to grow. To do this Able Acres divides the total
expected cost for each crop (column d, $311,700 for corn for example) by the total expected cost
of all crops ($460,231) and enters the figure for each crop in column e. 67.7% of total expected
crop expense would come from corn, 27.7% of total expected crop expense would come from
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soybeans and 4.6% of total expected expense would come from hay.
Using the $444,000 total basic costs determined in Worksheet 1A, Able Acres now uses the
budget based percentage of total costs to determine the basic costs they can expect for each of the
crops they plan to grow in the coming year. To do this Able Acres multiplies the projected
$444,000 total basic costs by the percentage of total costs for each crop listed in column e. These
figures are placed in column f. Able Acres determines that they can expect the basic costs for
corn to be $300,707, the basic costs for soybeans to be $123,069 and the basic costs for hay to be
$20,224.
The expected cost per acre for each crop is now determined. This is accomplished by dividing
the total expected costs for each crop (column f) by the acres of each crop Able Acres plan to
grow in the coming year. These figures are entered in column g. Able Acres’ basic cost to raise
an acre of corn, soybeans and hay is $250.59, $175.81 and $202.24 respectively.
In column h, Able Acres enters its estimated yields, 150 bushels of corn, 50 bushels of soybeans
and 5 tons of hay. Using the total basic cost per acre for each crop and the estimated yield for
each crop, Able Acres is now able to determine the basic cost per unit of yield for each of the
crops they plan to grow - $1.67 per bushel for corn, $3.52 per bushel for soybeans and $40.45 per
ton for hay.
Able Acres understands that these are estimates for prices to cover only the basic costs of
production for each crop, that is, Schedule F Expenses excluding projected interest, wages and
benefits and depreciation.
[Complete Worksheet 1B]
Determining and Prioritizing Farm Business and Family Goals
List of Farm Business and Family Goals: The Able Acres decision-makers and other family
members sat down and discussed what farm business and family goals they want the crop
enterprises to pay for. They did not try to hold themselves to reality at this point. Rather, they let
their minds wonder and dream about what their crop business would pay for in a perfect world so
to speak.
Setting Priorities: Finally, the family came to the difficult decision of prioritizing what they are
going to pay for first, second, third, etc. Table 1 summarizes their results. They took into
consideration what absolutely had to be paid for to stay in business and those family goals that
are a must. One of their tractors needs to be replaced as soon as possible. They, of course, want
to keep the bank happy and some minimal level of family living has to be a priority. Of utmost
importance for them is paying the basic costs of production – seed, fertilizer, chemicals, land
rent and other production expenses. They enjoyed a good reputation in the county and very much
desired to maintain that. Paying their hired help (family and non-family) was also right up there
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at the top of their priority list. The far-left column of Table 1 gives the final priority ranking
results. Able Acres is surprised to know that to meet all of the identified business and family
goals they need $645,500.
TABLE 1
Able Acres
Production Costs and Farm Business and Family Goals
To Be Paid By Crops in the Coming Year
Priority
For
Payment
Cost/Goal
Estimated Total Dollar
Needs This Coming
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Basic Costs
Interest
Wages & Benefits
Term Debt Service
Minimum Family Living Draw
Additional Family Living Draw
Tractor Replacement
Field Cultivator
Grain Storage Bin
Winter Vacation
College Fund
Replace Pickup Truck
Savings
Savings
Price to Meet All Goals
$444,000
41,500
40,500
32,000
18,000
12,000
8,500
9,500
18,000
3,500
2,500
5,500
5,000
5,000
$645,500
Information for Worksheets 2A, 2B and 2C: Estimating, Prioritizing, and Determining
Price Targets To Meet Production, Business and Family Goals
Able Acres now has the task of determining some target prices for the three different crops they
plan to grow – corn, soybeans and hay. They do this by completing a Worksheet 2 for each crop
they plan to grow.
To begin, the costs to meet production, business and family goals are arranged in prioritized
order, starting with the $444,000 needed to cover the total basic production costs and ending with
their second $5000 goal for savings.
Previously, in Worksheet 1A Able Acres determined that the percent of total costs by crop is
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67.7% for corn, 27.7% for soybeans and 4.6% for hay. In worksheets 2A for corn, 2B for
soybeans and 2C for hay, they use these same percentages to determine the amount each crop
should contribute to pay for the basic financial costs & goals to be achieved. To do this, Able
Acres multiplies the amount needed for each item of the basic financial costs & goals to be
achieved by the percent of total costs to be paid by each crop. For example total basic costs are
projected to be $444,000. As a minimum, Able Acres would like their 1200 acres of corn to pay
for 67.7% ($300,707) of that cost. Likewise, for the final $5,000 Able Acres would like to save,
$3,386 would come from the corn enterprise ($5,000 multiplied by 67.7%).
Finally, to determine the price per unit of yield needed for each cost/goal item, Able Acres
divides the amount each crop should contribute by the total yield projected for each crop. For
example, the $300,707 amount that corn should contribute to pay for total basic production costs
translates to $1.67 for each unit of the estimated yield of 180,000 units (in this case bushels).
Likewise, for the final $5,000 Able Acres would like to save, an additional $.02 per unit (bushel)
will be needed.
[Complete Worksheet 2A, 2B, 2C and 2D]
Information for Worksheet 3: Summary of Cumulative Crop Price Needs to Meet Target
Worksheet 3 carries the price per unit of yield needed for each crop (Worksheet 2A, 2B and 2C)
one-step further. In Worksheet 3 Able Acres sees the cumulative price needed for each crop to
pay its share of the total basic financial costs & goals to be achieved. As we found in Worksheet
1B the basic cost per unit of yield stays the same for all three crops - $1.67 per bushel for corn,
$3.52 for soybeans and $40.45 per ton of hay.
[Complete Worksheet 3d]
Information for Worksheet 4
Finally, the Able Acres decision-makers determine some price targets. They know that they can
always go back to Worksheet 3 for more detailed information. They start by looking back over
Worksheet 3 to determine what costs/goals can be grouped together in common categories of
priority.
They follow the four suggested descriptions of priority categories as shown on worksheet 4 to
determine a Red, Blue, and Purple Ribbon price target. For Able Acres the Red Ribbon Target
Price is a “breakeven plus” price goal. This target price would cover total basic costs, interest
costs and wages and benefits. To achieve this cost/goal Able Acres has target prices of $1.98 per
bushel for corn, $4.17 per bushel for soybeans and $47.92 per ton for hay.
The Blue Ribbon Target Prices are at a level that Able Acres believes their farm business will be
successful. In addition to covering all the costs/goals of the Red Ribbon Price, the Blue Ribbon
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Target Price pays for the term debt service, the minimum family living draw, the additional
family living draw and the tractor replacement. To achieve this cost/goal Able Acres has target
prices of $2.24 per bushel for corn, $4.72 per bushel for soybeans and $54.34 per ton for hay.
The Purple Ribbon Target Prices are above expectations. The Purple Ribbon Target Prices pay
for all of the costs/goals of the Blue Ribbon Price as well as $9,500 for the field cultivator,
$18,000 for the grain storage bin, $3,500 for the winter vacation, $2,500 for the college fund,
$5,500 for a pickup truck replacement and $5,000 for savings. . To achieve this cost/goal Able
Acres has target prices of $2.41 per bushel for corn, $5.07 per bushel for soybeans and $58.35
per ton for hay.
Grand Champion Target Prices reflect an exceptional market. At these prices Able Acres will be
able to put even more money ($5,000) into savings. To achieve this cost/goal Able Acres has
target prices of $2.43 per bushel for corn, $5.11 per bushel for soybeans and $58.80 per ton for
hay.
Finally however, Able Acres decides they should add a fifth category that describes for them a
“drop dead” price that just covers production costs. Paying their bills is very important to them.
Even in the toughest of times, the family has made sure the bills got paid. If they have to borrow
money for family living, etc. then so be it, but they all agree that one major price target for them
is one that allows the production costs to be paid. They title this their “drop dead” price. It’s the
prices needed to cover just the basic costs of production; $1.67 per bushel for corn, $3.52 per
bushel for soybeans and $40.45 per ton for hay.
In addition to Worksheet 4, Able Acres highlights the 4 target price levels they have determined
on Worksheet 3.
[Complete Worksheet 4]
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