Calculating Costs

“But I’m too small and diversified to be able to figure out my costs”
—Anonymous Farmer

Many new and small farmers think that they can’t figure out their costs. On small and beginning farms, costs of production are often calculated by adding up the farm’s total revenues and subtracting the total expenditures. It is a rough method that can give you a general idea of your financial situation. While it is important to understand how your farm is doing as a whole, this method alone is not very accurate or robust for guiding change.

Some small farms keep detailed records of “blocks” of production (for example knowing exactly how much seed, time, and compost went into a sub-unit of the field and how much product was harvested, its price and profit). If the costs/revenues for that block is known, then it can be multiplied for other equivalent blocks. This method can be useful in establishing margin/profit target for fields and making crop choices. For example, you have an available field, e garden, should you grow lettuce or carrots or something else? Some farmers have a revenue (total sales), or profit margin (Revenue minus costs) or an equivalent hourly wage target to help guide crop or livestock choices.

Detailed record keeping is the only way to understand how you are spending and making money, which crops or livestock choices are best and where improvements can be made. The better your records, the more informed choices you can make.

Records can include:

• How much time is spent by you, your family or staff? What is the hourly dollar value?
• How much inputs or feed was added? What was the cost?
• What financial, physical or business infrastructure and assets are required (buildings, insurance, certification fees, tractors, etc…) If assets or costs are “shared” among crops, can they be proportioned by percentage of acreage or time?
• Have costs such as planning, marketing and transportation been included?

As you can see, much of the information that you need to track for organic certification is the kind of information you need to understand your operating costs.