Your goals and the cost of production by Rod Luke Rendell McGuckian
GroundCover™ Issue: 37
WHAT is your adequate level of profit compared to cost of production? The answer lies with the goals you share with your families - some will continue to expand profits while others will trade off profits for other goals.
Knowing what you will be happy with helps you understand your cost of production. Part of the cost of producing grain is achieving a reasonable return for your labour as well as a reasonable return for your capital.
Some businesses have strengths in labour use; others have strengths in operating costs, or use of capital. To achieve strengths in one part of your business, you will need to trade off other parts.
Interestingly, while prices and costs have crept closer together to make it progressively harder to generate profits, agricultural land has generally increased in value. Higher land values continue to lift the bar for making competitive returns on capital.
Grain production is a process of combining land, labour and capital to produce an income. And while each year prices fluctuate, in the toughest of price periods some businesses still make a profit.
I argue that these worst years are the best years to analyse, because it is at that time you see your weaknesses exposed. As one grain grower told me after analysing business performance for the 1993 floods and 1994 drought:
"These are the two worst years I have had in 27 years of farming and I still came out in front. If these are my worst years, I'm pretty happy with the way I've got things working."
Your goals will ultimately determine how hard you work and where you want to live to produce grain, but when considering cost of production you are not only benchmarking yourself against other grain producers but also comparing against other forms of employment and investment.
Some trade-offs can be expected for lifestyle and tradition, but knowing your cost of production will help you quantify your decisions.