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Determining Farm Profitability

Posted Nov. 1, 2009

Many agricultural operations fail to determine if they are making a profit. Some think that spending money to create taxable losses to offset non-farm income is a good idea.

This philosophy may be good if the expenditures produce increased future revenues (e.g., cow and bulls) or increased efficiencies (e.g., equipment); however, this philosophy is generally not good if the taxable losses are from activities where costs exceed future revenues. If an agricultural enterprise is making production decisions based on tax information, the operation may be compromised. Best management decisions do not always align with strategies to minimize taxes.

In today's economic climate, producers are constantly challenged to reduce production costs and optimize production/revenues to remain competitive. In lowering production costs or increasing revenues, each operation should calculate its own unit cost of production to have the information needed to make management decisions. In a time where input costs continue to be high, it is imperative for each operation to calculate its production and financial performance.

Several years ago, a management tool called Standardized Performance Analysis (SPA) was developed to enable producers to complete a financial and production analysis of a cow-calf operation using financial statements and other data. By integrating the SPA method of farm analysis with their current recordkeeping system, producers can calculate their unit cost of production and measures of profitability. Then they are better positioned to meet their goals. The objective of SPA is to determine the production and financial performance of individual cow-calf enterprises, identifying potential areas for change, and to measure progress.

In 2008, producers participating in a Noble Research Institute producer program called Integrity Beef supplied the production and financial information necessary to analyze their cow-calf operations. This chart shows the averages of selected categories for those operations. Each of these operations has its own individual information for use in making future management decisions. If you want to have similar information for your farm or ranch, ask your Noble Research Institute consultant for help with this type of analysis.