Purdue economist: Profit isn't just about cost per acre

October 28, 2015  

WEST LAFAYETTE, Ind. - Corn and soybean growers should not scrimp on crop inputs because of lower grain prices and tightening profit margins, a Purdue University agricultural economist says.

Michael Gunderson, associate professor and associate director for Purdue's Center for Food and Agricultural Business, said cutting corners on inputs can be more costly for producers because of yield reductions.

"The current commodity price climate might cause crop producers to focus more intensely than usual on managing costs of production," Gunderson said. "Producers often budget on cost per acre. While this is an excellent start and certainly better than no budgeting at all, focusing only on total costs per acre might cause producers to overlook important productivity tradeoffs.

"While it would be easy to lower total per-acre costs by simply reducing the amount of various inputs, doing so could reduce yields."

Instead, Gunderson said growers should consider budgeting based on outputs - or the production cost per bushel of grain - for three reasons:

* Ease of evaluating decisions.

* Per-unit fixed costs can decline with output increases.

* There is a tradeoff between productivity and cost.

"The most straightforward reason for calculating costs per bushel, rather than per acre, is that the crop being produced will be priced in dollars per bushel," he said. "Having the costs and benefits in the same units makes comparison easy."

In addition, budgeting based on outputs takes the focus off cost per acre.

"The result of budgeting based on the costs per unit of input, or dollars per acre, is that spending additional money on inputs always will appear to raise costs," Gunderson said. "This type of analysis ignores the impact of inputs on the productivity of the operation. Some inputs increase yields more than others.

"A grower budgeting based on cost per acre might forego the more expensive input simply because it costs more, while someone budgeting based on cost per unit of output might note that spending additional money per acre actually reduces total cost per acre because that input yields more bushels."

The drawback of this method is the same as with any: No budget can perfectly predict the future. Instead, Gunderson said, the key is to use history and trends to make predictions.

Gunderson recently wrote an in-depth article about budgeting and pricing inputs, complete with tables and graphs, titled "Sometimes you have to spend money to make money." It's available on the Center for Food and Agricultural Business blog at http://agribusiness.purdue.edu/blog/spend-money-to-make-money

Writer: Jennifer Stewart-Burton, 765-496-6032, jsstewar@purdue.edu 

Source: Michael Gunderson, 765-496-2010, mgunders@purdue.edu

Ag Communications: (765) 494-2722;
Keith Robinson, robins89@purdue.edu
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