Budget Based Adjusted
Cost of Production
Crop Enterprise Profitability Workgroup
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2
Price Risk Management
Using information that you have to
help make better marketing decisions.
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Knowledge of your Cost of Production
(COP) is essential for making sound
marketing decisions.
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Methods of Determining COP
Producer’s knowledge of their cost of production
falls along some point of a continuum.
A
B
C
D
E
Continuum of knowledge about Cost of Production Estimates
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Methods of Determining COP
Point A of the continuum:
 The producer’s COP estimate is an approximated
guess.

COP is usually formulated using general
production costs.


Dividing total cost of production by total yield to
get an expense per bushel.
Cost estimates could be based on popular press,
University or industry estimates.
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Methods of Determining COP
Point B of the continuum:
 The producer’s COP estimate is based on total
crop expenses
Total costs are allocated between crop enterprises.
 Cost figures are based on acres and yield as an
expense per bushel.

This approximation is likely better than a producer
at point A, but still isn’t very accurate.
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Methods of Determining COP
Point C of the continuum:
 Producers use University and/or industry
estimates of production costs.
Derived from pooled data from a variety of sources.
 Generally, these estimates do take into account all
expenses that should be considered.
 Allocations are based on previous research.

This approximation is accurate for the pooled data
but producer’s actual costs may be higher or lower.
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Methods of Determining COP
Point E of the continuum:
 Producers with advanced record keeping skills.

A
Develop detailed budgets for each enterprise of their
operation.
B
C
D
E
Likely the most accurate COP estimate even though
this method also has some limitations.
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Challenges with Determining
Accurate COP Estimates

Determining COP takes a great deal
of time and effort.


Record keeping
Accurate information is often
unavailable.

Information from input suppliers can be
lacking or confusing.
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Challenges with Determining
Accurate COP Estimates (cont.)

Allocation of resources between
enterprises is difficult.
Fuel usage by crop
 Labor hours per crop enterprise
 Capital ownership and use
(Depreciation, interest, repairs,
taxes and insurance)

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An Easier Method to Determine an
Accurate COP Estimate
Budget Based Adjusted Cost of
Production
(BBACOP)
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What is a Budget Based Adjusted
Cost of Production?

A method of determining your COP that
achieves point D on the continuum.
May not be as accurate as the detailed enterprise
budget illustrated by point E on the continuum.
 Method far exceeds point A, B or C on the
continuum.

A
B
C
D
E
Continuum of knowledge about Cost of Production Estimates
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What is a Budget Based Adjusted
Cost of Production? (cont.)

It is a method based on:
COP research from Midwestern States data sets that
show a relationship between production expenses
for corn and soybeans
 Individual producers have higher or lower than
“average” production costs

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Cost Ratios of Crop Production
Jefferson County, Wisconsin PEPS data
Year
Corn
Soybean
Cost/acre Cost/acre
Cost
Ratio
1998
264
217
1.22
1997
257
220
1.17
1996
232
179
1.30
1995
212
170
1.25
1994
212
166
1.28
Average Cost Ratio = 1.244
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Cost Ratios of Crop Production
Illinois Farm Bureau Farm Management
Year
Corn
Cost/acre
Soybean
Cost/acre
Cost
Ratio
1998
427
347
1.23
1997
432
351
1.23
1996
414
334
1.24
1995
395
317
1.25
1994
360
291
1.24
Average Cost Ratio = 1.238
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Cost Ratios of Crop Production
Iowa Farm Costs and Returns
Year
Corn
Cost/acre
Soybean
Cost/acre
Cost
Ratio
1998
391
318
1.23
Average Cost Ratio = 1.231
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Advantages of BBACOP



The COP estimate provides a “reasoned” base
estimate for setting for target prices.
The estimate is more accurate than most other
methods.
The estimate can be determined in a short
amount of time.
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Advantages of BBACOP (cont.)


The estimate is adjusted for high- and low-cost
producers.
Limited financial information and production
numbers are needed.
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Information needed for BBACOP

For a cash crop producer:

Tax Schedule F from last year
 Total Schedule F expenses
 Total interest paid
 Depreciation claimed
 Wages and Benefits paid
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Information needed for BBACOP

For a cash crop producer (cont.):




Change in accounts payable
Change in prepaid expenses
Acres of each crop in the rotation
Yield estimate for the next year
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Conclusions


BBACOP provides a more accurate way to
determine COP estimates for setting target
prices.
The method provides a much faster way of
determining your COP.
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