Knowing how much it costs to produce your main crops is essential to ensuring your business is financially stable. Analyzing your cost of production (COP) information will help you know which crops are contributing towards the overall profit of your business and which are not. COP is also used to help you determine when you need to make changes on your price point or reduce costs for specific crops. It can also be used to help you make hard decisions, such as when to stop producing a crop.
For instance, if it costs you more to produce a crop then you can sell it for, then the more you sell, the more youʻll be losing. In other words, a negative contribution margin will always create a negative profit, then selling more of it will NOT make you more money.
If you don't take the time to calculate your COP, you might focus you're energy on working harder to push more sales on a crop that has a negative contribution margin. Until you make changes to improve the contribution margin of a crop that is losing you money, more sales will not equal more profit. In calculating and analyzing your COP youʻll learn where you can work smarter, not harder.
So what is a ʻcrop contribution marginʻ and how can you make changes to ensure youʻre making a profit through the crops youʻve selected to grow? What are some of the first steps you can take towards calculating the cost of production for your crop(s)?
In this lesson, youʻll learn:
The difference between fixed and variable costs;
How to calculate your cost of production for one crop;
A working definition of "crop contribution margin" and how to use it to support decision-making to improve profit and efficiency on your farm;
How to use the Know Your Cost to Grow online tool to help you track, calculate and analyze your cost of production.
Required
CompletedIncomplete
Fixed verses variable costs
Fixed versus variable costs
To increase your profit, you can change your variable costs. Fixed costs are the costs that are attributable to all products or your whole business operations, not just the costs to produce one crop or product. Your electric bill or rent are an example of fixed costs. Your variable costs are based on how much it costs to produce a specific crop or product. To cover your variable costs, you need to sell each of your crops for a price higher than the cost you spend to produce it. But to make a profit, your profit margin needs to cover not only your variable costs but also the fixed costs for running your business. What variable costs do you want to analyze for your main crop(s)?
Uploading...
Labor is often a large variable cost
Labor can be one of your highest costs.
For many small, diversified farms, labor is a major expense. As a rule of thumb, if more than 40% of your variable costs are labor, then you do not have a viable business model. So how many labor hours does it cost you to grow, harvest and sell your green bean crop? If you haven't figured out your cost of production for your main crops, it is difficult to get an accurate understanding of the finances for your business and the price you need to set to ensure youʻre making a profit. Which of your crops are the most labor intensive to produce? Do you know if those crops are making you a profit?
Uploading...
Required
CompletedIncomplete
Learn to calculate your labor costs for your main crop(s): Step 1: List labor activities
The first step to calculating how much your cost of production for a specific crop is attributed to the cost of labor, is to generate a list of all the labor activities required to produce that specific crop. Labor activities may include: prepping a field, seeding or growing your starters, applying amendments, fertilizers, pesticides, herbicides or weeding. Weeding can be a huge labor cost. You also need to list all of the labor associated with harvest and post-activities. Is there anything holding you back from creating a list of labor activities required to produce your main crop?
Uploading...
Required
CompletedIncomplete
Learn to calculate your labor costs for your main crop(s): Step 2: Conduct time studies for each labor activity
Use a stop- watch to time how long it takes you to do each labor activity. Record this time in a notebook or other record-keeping system you can use in the field. Some farmers just record the time in their phone and transfer their time studies when they get to their computer. As part of your time study, youʻll also need to note how many people were doing the activity and if any equipment was being used.
Many of the labor activities required to produce one crop are similar to the activities to produce similar crops. The activity of prepping a 100 foot bed for kale is likely very similar to how you prep another 100 foot bed that is planted with chard. You may prep the bed similarly even if you’re planting a root crop, like beets. So once you do time studies for labor activities, such as bed prep, you can use those same numbers to calculate some of the labor for other crops. Is there anything holding you back from doing a time study for each of the labor activities on your list?
Uploading...
Required
CompletedIncomplete
What is ʻCrop Contribution Marginʻ?
So how do you know which crops are contributing the most to your overall profit margin? By determining your “Crop Contribution Margin” for specific crops, you can identify which crops have a higher contribution margin and can make you the most profit. If you calculate the contribution margin for your tomato crop and it turns out low. This means your tomato crop isnʻt making you much money or could even be costing you more money to grow it than you can sell if for. At this point, you can decide to drop this crop or identify ways to reduce the costs to produce this crop. Remember, if the contribution margin of a specific cost canʻt cover your variable and fixed costs, you arenʻt making a profit. Can you text a step towards figuring out your contribution margin
Uploading...
Required
CompletedIncomplete
Calculate the contribution margin for your main crop: Step 1: Use the marketable unit
To determine which crops are contributing the most to your profit, youʻll need to figure out the “Crop Contribution Margin” for each of the crops that youʻre analyzing. (Note: You need to have the cost of production information on specific crops in order to analyze their contribution margin).
Step 1: Figure out how much it costs you to produce a single ʻmarketable unit” of the crop youʻre analyzing. If you're analyzing eggplant and you sell eggplant for $3 per pound, then a “marketable unit” is a one pound bag of eggplant. What is the marketable unit for your main crop? Is it in pounds or another unit of measurement?
Uploading...
Required
CompletedIncomplete
Calculate the contribution margin for your main crop: Step 2:
Step 2: Next, look at how many ʻmarketable unitsʻ of your crop, such as eggplant, youʻre able to sell after youʻve graded out the ʻsecondsʻ from your harvest. So if you harvest 120 lbs of eggplant, but you can only sell 95 lbs of eggplants, then you have 95 marketable units for this crop. How many units of your main crop are you able to sell from this crop cycle?
Uploading...
Required
CompletedIncomplete
Calculate the contribution margin for your main crop: Step 3: Multiply Step 1 with Step 2
Step 3: To figure out the contribution margin of your main crop, multiply how much your profit margin is for one unit of your crop, such as eggplant (the amount calculated from Step 1) times the number of marketable units (the amount calculated form Step 2).
Uploading...
Required
CompletedIncomplete
Reducing costs or increasing price points to improve the crop contribution margin of a crop
To increase the contribution margin of a crop that is currently low and not making you money, you can reduce costs or increase your price point. In many cases, the high cost of production is due to the amount of labor that is required to plant, maintain or harvest this crop. To reduce costs you can identify ways to reduce the amount of labor you spend to produce this crop by using more efficient practices or investing in equipment or infrastructure that will reduce labor hours. You can also determine if you can increase your price point to cover your variable and fixed costs. Do you have a sense of which of your crops have a low contribution margin and if reducing costs or increasing your price point would be best?
Uploading...
Required
CompletedIncomplete
It Only Takes One Crop to Improve Your Overall Business!
Increasing the profit margin of one of your crops will improve the profit for your overall business. If you love growing a crop that has a low crop contribution margin and you donʻt want to drop it, you can ʻbuffer this costsʻ by increasing the sales volume of a crop that does have a high crop contribution margin. Do you have a sense of which of your crops has the highest contribution margin? Are there any crops that have a low contribution margin but that have other benefits of growing that canʻt be put into monetary terms?
Uploading...
Required
CompletedIncomplete
KYCTG- An Online Cost of Production Tool
Oregon Tilth and the Center for Small Farms and Community Food Systems at Oregon State University have developed the Know Your Cost to Grow curriculum. It is now accompanied by an online tool and can now be viewed by the public at: Know Your Cost to Grow (https://www.knowyourcosttogrow.com/). Using these resources will help you track, calculate and analyze your production costs for specific crops. Once you create an account and generate the cost of production for one crop, you can run various scenarios to learn how the contribution margin for this crop could be improved by tweaking variables, such as labor hours, input costs, yield, sales volume or sales price. In addition to being able to run scenarios, you can also generate the cost of production for additional crops easily by saving and applying any applicable labor activities, time studies and input costs you used for your first crop. Will you check out this tool and take a huge step towards improving the viability of your business.
Uploading...
Wahine Voices in Agriculture
Watch this video to hear from Aunty Kathy Maddux about the need to support each other as farmers and to not be afraid to price our produce and value-added products based on the true cost of production.
