August 24, 2020
What’s the Deal with Cost per Bushel?
By David Widmar
The following is a condensed version of an AEI Premium article. Not a subscriber yet? You can access the full story – and much more – by starting a free trial here.
by Brent Gloy and David Widmar
Throughout our careers, there has been a farm management debate: cost per acre versus cost per bushel. To be honest, we’ve gone back and forth on this. At some points, cost per bushel seemed like a clever, highly intuitive metric. At other times it feels like hand-waving and just dividing total costs by a different number.
Earlier this summer, a reader (Cory from Nebraska) asked us to comment on calculating production costs on a per bushel basis. We shared the long form of our thoughts on the AEI Premium side in a “What We Are Thinking About (WWATA) Memo.” Given the popularity and response, we decide to share an abbreviated version with all readers.
The crux of the debate is a mismatch: inputs are generally purchased or applied on a per acre basis, with outputs sold on a per bushel basis. We might know our cost per acre, but we usually don’t sell our corn by the acre (the exception being crop insurance situations: the great white harvester, prevent plant, or old-fashioned droughts/floods). The biggest challenge with cost per acre is that we don’t know what final yields will be until the end of the growing season, even under irrigated conditions.
How can we navigate this? The reality is both metrics have their advantages and flaws. Neither is an end-all, be-all. As such, we’ve outlined a few scenarios and discussed the merits of each.
Buying or Renting Land
- Per acre (strong advantage) – In most cases, farmland bids are submitted on a per acre basis. The exception might be a bid for the entire parcel, but everyone is doing the per acre math in their head.
- Per bushel (neutral) – This can be a helpful metric for benchmarking, especially across several years of data. In some cases, you’ll even see soil productivity metrics to account for variability in productivity.
- Per acre (strong advantage) – When comparing two herbicide programs, it makes sense to compare these on a cost per acre basis. This is an intuitive comparison as the programs are priced per acre and you can quickly assess whether the perceived benefit of one program is greater or less than it costs.
- Per bushel (weak advantage) – Producers will be tempted to use this if they anticipate different yield outcomes, but don’t. Instead, use a partial budget or budget scenarios to weigh the added costs versus the added benefits.
Initial Budget Projections
- Per acre (useful) – Again, this is the natural starting point for most.
- Per bushel (difficult, but a strong advantage) – You would need to establish a consistent method for what “average” yield to divide by, but this can help benchmark across fields or over time. This isn’t easy, but if done correctly can be a powerful tool.
Deciding Between Corn and Soybeans
- Per acre (strong advantage) – This is especially helpful if you look at contribution margin, or returns after variable expenses are paid (what is left to cover the fixed expenses).
- Per bushel (worthless) – You would have to do the math to back into something more substantive.
Early Growing Season Marketing Decisions
- Per acre (weak) – Again, this is the rub. Inputs are per acre, but you are selling bushels.
- Per bushel (strong advantage) – This is where the cost per bushel metric shines. Initial cost projections reported on a bushel basis are powerful for making pre-harvest marketing decisions and considering marketing opportunities.
Wrapping it Up
Most of the time, conversations – or debates – about cost per bushel vs cost per acre miss the big picture: you have to know your costs! At the end of the day, this is an exercise of allocating costs over units. In some cases, it makes more sense to consider your cost structure on an input basis (per acre). Other times, it makes more sense to consider the cost structure on an output basis (per bushel). Establish procedures and practices that allow for an accurate, updated understanding of total costs. Then you can decide which metric is more insightful and intuitive for the questions at hand.
While this article has focused on crops, the same is true for livestock. Cost per acre of pasture versus per cow (or calf sold). Pens sold versus head (or pounds) of cattle sold. Per stall versus per hog.
This leads us to the last point: sometimes, this comes across as an ag-related problem. In reality, it’s a situation every business and sector faces. Only a few retailers are buying bananas at wholesale and passing the product along at a higher price. Great managers – whether a farmer, ag lender, or ag input supplier – know their costs and challenge their thinking to generate, capture, and utilize new insights. Start simple, build a system that works for you.