When and why did you start measuring cost of production?
I began measuring the farm’s machinery costs in the late-1990s, when considering buying a rubber-tracked tractor and wanted to know if the investment could be justified.
After a decade of keeping tabs on machinery costs, we started measuring total cost of production in 2007 when a change to the farm’s establishment system was being considered.
Grain prices were around £60/t a year or two before that, and we knew we needed to do something different.
How did you go about it?
We started by joining our local Lincolnshire Benchmarking Group in 2007.
The group was part of a national ADAS-funded scheme that gave like-minded farmers the opportunity to discuss financial benchmarking/ production costs.
Groups were facilitated by a TAG consultant who offered expert advice and devised costings spreadsheets for members to work from, with advice on the information to record.
When ADAS funding ended, the 14 farmer members representing 35,000 acres, kept the group going for several years, financing it ourselves.
The group’s not running anymore and we’ve not benchmarked our performance recently, but it’s something we should do again. The AHDB’s Farmbench service is a good option for that.
What record-keeping do you use for measuring Cost of Production?
There are three main sources of information we use to calculate production costs.
Around 70% comes from our Gatekeeper farm management software.
Annual tractor diaries (see next point below) provide additional detail, while we derive overhead costs from the farm’s end-of-year accounts.
We keep separate spreadsheets to record machinery costs, notably implement costs (£/ha) and tractor costs (£/hour). Data from these can be combined to calculate operational costs for specific tractor and implement combinations (£/ha).
This data can also be transferred to a central cost of production spreadsheet, which I’ve divided into five cost areas:
In total, 26 items are included in our cost of production calculation. Each is initially calculated on a £/ha basis, but can be converted to £/t based on average crop yield.
Is there anything you regularly record to help calculate cost of production?
The tractor diaries are the main additional information that is invaluable for analysing costs accurately.
On 1 January each year, I put a new A4 diary in each tractor cab. Within this the operator records details about the work carried out for individual fields. Staff record the field name, implement, tractor hours worked and total fuel used.
I collect diaries on 31 December and record the information on the relevant machinery cost spreadsheets.
We use this to examine actual running costs, work rates and fuel use of specific machines and implement combinations, and can break it down by soil type.
How easy did you find the process?
Having access to expert advice through the benchmarking group made the costings process much easier at the outset. They were able to set up, and provide us with, the spreadsheets we needed and advise on the information to record.
Since then it has been a case of fine-tuning the processes we use on the farm.
Once a system has been established and all staff support the concept, it is relatively easy to manage through the season.
It’s the single most time-worthwhile exercise I do, one that I base most of my management decisions on, and couldn’t operate or farm without.
What good or bad aspects has it highlighted?
The impact of black-grass on yield and profitability was the main issue we highlighted by measuring production costs.
Yield was falling, but cost of production was increasing, so we soon realised we weren’t making any money on the worst-affected areas.
Having accurately measured costs for a number of years now, I have also seen the impact of rising input prices. In 2007 our winter wheat cost of production was around £65/t, but that had almost doubled 10 years later.
What have you changed as a result and has it made a difference?
Seeing the impact of black-grass on profits prompted us to make a concerted effort to eradicate the weed from the farm with a “zero tolerance” strategy.
This involved changes to rotation, cropping, cultivation practices, chemical applications and the use of hand rogueing.
It has worked, as we had our fourth consecutive black-grass-free harvest in 2018, with greatly improved profitability on affected fields.
Elsewhere, production systems have been streamlined to manage costs.
We also recognise the value of knowing our cost of production when marketing grain, as we can be more confident about locking into a profitable price, either on forward contracts or spot markets.
What’s your advice to others?
With diminishing direct support for agriculture and increasing exposure to competitive world markets there has never been a better time to focus on production costs.
One of the trickiest parts of calculating production costs is allocating indirect costs to relevant parts of the business.