WSU Cooperative Extension
210 W. Broadway
Ritzville, WA 99169

Phone: (509)659-3215
FAX: (509)659-3303

Questions about PNW Risk Management Project? Send us mail!
PNW Project Coordinator

What is Your Cost of Production Presentation

Public & Private Partnership Understanding Agriculture's Risk
Funded by: USDA Risk Management Education Initiative
Cooperative State Research Education and Extension Service
USDA Risk Management Agency
Commodity Futures Trading Commission
USDA Office of Outreach

Learning materials and decision tools for Agricultural Risk Management:
Managing Financial, Production, and Price Risk.

"Available to Download"

Chapter 4

Table of Contents

1. Instructor Guidelines

2. Introduction

3. Meet Profit Farms

4. Understanding Production Costs

5. Two Approaches for Determining Your Cost of Production

6. Basing Marketing Objectives on Production Costs

7. Grain Storage Enterprise Economics

8. References

9. Appendix-Exercise Answers

This chapter provides a guide that will assist a producer in identifying the cost of production of a particular crop, or for all the crops grown on a farm. The differences between economic, financial, and cash costs are developed and interpreted. Assigning whole farm expenses and the costs associated with multiple use equipment are the most difficult aspects of developing the cost of production for a particular crop. In this chapter,
several different methods for developing and assigning farm expenses to multiple crops are discussed. Three different methods for calculating and assigning equipment costs including depreciation are developed.

The chapter then discusses how a producer might develop their marketing objectives based on their production costs. A very practical and useful stair step approach for establishing pricing goals is presented clearly showing which costs and returns are covered at different pricing levels.

As an alternative to costing out each crop, the cash flow budget is developed and information is presented on how to identify the breakeven price that is necessary to cover the cash requirements of the farm. Finally, an exercise is presented on how to compare grain storage alternatives.

A Power Point presentation is provided on the CD-ROM that covers the material in this chapter. Without discussion, the Power Point presentation can be covered in about an hour. This chapter also lends itself to one or more in depth presentations. One example would be to have producers modify the information in the examples with information from their own farms or to have the audience provide suggestions of how a different set
of information might better fit farm they know about in their vicinity. It is also very instructive to have producers discuss the differences between the cash and economic approach to costs and to think about why it might be useful to consider the economic costs even if they make short term decisions on their cash cost needs.