February 6, 2023
Understanding your Cost of Production
By: Daniele Ricci
Risk management is the name of the game. If you know your Cost of Production (COP), your risk management strategy can set you up to preserve three things: liquidity, equity for future investments and equity for retirement.
Markets are constantly going up and down. If you set risk management levels to cover your cost of production, the hills and valleys of the markets shouldn’t feel like such a drastic swing.
Before March 15, Crop Growers crop insurance agents aim to set spring crop producers up in a policy that covers their COP. The policy should cover inputs. With high input costs over the past two years and current commodity market prices, sometimes a policy cannot fully cover COP. In that scenario, area plans like Supplemental Coverage and Enhanced Coverage will help protect the high COP if the producer tracks with the county.
If you do not know your COP when you meet with your Crop Growers agent, they can help you calculate it. Below is a list of all inputs per commodity growers should be calculating.
|Seed||Equipment & Fuel (custom rates)|
|Nitrogen||Operating Credit or Mortgage|
|Storage & Custom Drying||Other|
Two important things to keep in mind when determining your COP include:
- Decide the unit of measure that fits your operation. Should you use dollars per bushel, cwt., ton, head, etc.?
- Determine what to include. These line items could vary from business to business, even varying within one business. Sometimes, COP varies depending on what is allocated to livestock and what is allocated to crops. For example, does the manure removal get allocated to livestock costs or to the fertilizer costs of the crop operation?
Knowing your COP can help in other forms of risk management beyond crop insurance. COP is essential for Dairy Risk Management, Livestock Gross Margin, forward contracts or open market hedging. Farm Credit East and Crop Growers specialists can help! Contact your Crop Growers agent for more information.