GoFarm Hawaii

GoFarm Hawaii

How much does it cost to grow or produce your product?

Once you’ve decided to turn your farm into a business, it’s essential to understand the importance of calculating your cost of production.  Cost of production is the dollar amount associated with growing a specific crop, making a specific product, or providing a specific service.

For example, when growing lettuce, you may incur some of the following costs:

COP Inputs

 

Determining your cost of production:

  • Helps determine your breakeven price at a particular sales volume;
  • Helps determine acceptable pricing; 
  • Allows you to evaluate the impact of changing costs (for example, rising fuel or labor costs) and changing prices; and,
  • If  growing or selling multiple products, it helps identify which are most profitable.

Getting Started

You will need the following to determine your cost of production:

  • Costs
    • Direct Costs: Expenses related to growing, making your product; also known as Cost of Goods Sold. This will include things like seeds, fertilizer, pest control, packaging, etc.
    • Operating Costs: also known as Indirect, Operating, Overhead, or Fixed Costs. These are costs relating to the maintenance or administration of the business. This will include things like land costs, insurance, phone, marketing, transportation, etc.
    • Capital Costs: Expenses related to larger, infrequent purchases. This will include things like equipment, wash station, buildings, etc.
  • Production Information
    • Labor
    • Input Usage
    • Harvest Yields
  • Projected Sales
  • Crop Plan

Basic Cost of Production: Based on One Crop

If you are growing one crop, it is fairly simple to calculate your cost of production.  For example:

Crop Lettuce
Annual Expense $50,000
Annual Harvest 150,000 pounds
Cost to Grow Each Pound Based on Harvest Annual Expense/ Annual Harvest

$50,000/150,000 pounds = $.33/pound

Therefore, you will need to sell 100% (150,000 pounds) at $.33/pound to break even.

However, to ensure that you cover all costs when determining your price, base your cost of production on your sales estimate:

Crop Lettuce
Annual Expense $50,000
Expected Sales 100,000 pounds
Cost to Grow Each Pound Based on Expected Sales Annual Expense/ Expected Sales

$50,000/100,000 pounds = $.50/pound
Expected Sales 50,000 pounds
Cost to Grow Each Pound Based on Expected Sales Annual Expense/ Expected Sales

$50,000/50,000 pounds = $1.00/pound

If you sell 100,000 pounds, you need to sell your product for $.50/pound to break even.  Following the same rationale, if you sell 50,000 pounds, you need to sell your product for $1.00/pound to break even.

Basic Cost of Production: Multiple Crops

Cost of production can get complicated when evaluating more than one crop.  Use the following steps to calculate your costs:

STEP 1:

Determine Direct Costs associated with one planting; then per pound/unit.  For example, the following estimates that one cycle of salad mix will take 9 weeks, 19 hours of labor, and $70 in direct costs:

COP Spreadsheet

 

 Sales Estimate 75 pounds
Total Crop Input Costs $70
Total Crop Input Costs per Pound Sold Total Crop Input Cost/Sales Estimate: $70/75 pounds = $.93/pound
Total Labor Cost Total Hours x Hourly Labor Rate = 19 hours x $15/hour = $285
Total Labor Cost per Pound Sold Total Labor Cost/Sales Estimate: $285/75 pounds = $3.80/pound

Note that you should include a cost of labor even if you are not currently paying for it (i.e. you are doing all the work).  Your labor has a value and should be calculated into the cost.

STEP 2:

Determine Operating Cost for farm for the year.  For example:

Annual Operating Costs
Business Registration $75
Cellular Phone $300
CSA Bags $100
Gasoline $1,200
Insurance $750
Lease Rent $960
Office Supplies $50
Website $25
Total Annual Operating Costs $3,460

STEP 3:

Determine operating cost per pound.  Select the most reasonable way to allocate operating costs for your farm.  Methods include:

  • “Rent” system: allocate based on time a bed row is used. Most accurate when growing multiple crops with various cycle lengths. Example:
Number of 100’ Beds 24 beds
Weeks in Operation 52 weeks
Sales Estimate 75 pounds
Maximum number of weeks that beds are in use in one year (use if always have crop in ground; no fallow periods) Beds x Weeks in Operation: 24 beds x 52 weeks = 1,248
Number of weeks that the beds are actually used based on crop plan 782 weeks
Annual Operating Costs $3,460
Number of Weeks Salad Mix in Ground 9 weeks
Operating Cost Per Bed/Week Annual Operating Costs/Number of Weeks Beds in Use = $3,460/782 = $4.42/week
Total Operating Costs for 1 Salad Mix Planting Operating Cost Per Bed/Week x Number of Weeks in Ground = $4.42 x 9 weeks = $39.82
Operating Costs per Pound Total Operating Costs for 1 Salad Mix Planting/Sales Estimate = $39.82/75 pounds = $0.53/pound
  • Pounds: allocate based on total expected pounds/units sold. Works well if don’t have a lot of data. Example:
Estimated Annual Pounds Sold for All Crops 5,000 pounds
Annual Operating Costs $3,460
Operating Cost per Pound Annual Operating Costs/ Estimated Annual Pounds Sold for All Crops = $3,460/5,000 pounds = $0.69/pound
  • Number of plants: allocate based on total number of plants in the ground. Works well with long term orchard crops.  Example:
Number of Plants in the Ground 50 trees
Annual Operating Costs $3,460
Estimated Annual Sales per Plant 150 pounds
Operating Cost Per Plant Number of Plants in Ground/Annual Operating Cost = $3,460/50 = $69.20
Operating Cost per Pound Annual Operating Costs/Estimated Annual Sales per Plant = $69.20/150 pounds = $0.46/pound

STEP 4:

Determine an annual capital cost.  Example:

Capital Expense Cost Life Expectancy (Years) Annual Cost
Equipment $15,000 5 $3,000

STEP 5:

Determine capital cost per pound.  Similar to step 3, select the most reasonable way to allocate capital costs for your farm.  In this example, the “rent” system will be used:

Annual Capital Costs $3,000
Number of weeks that the beds are actually used based on crop plan 782 weeks
Number of Weeks Salad Mix in Ground 9 weeks
Sales Estimate 75 pounds
Capital Cost Per Bed/Week Annual Capital Costs/Number of Weeks Beds in Use = $3,000/782 = $3.84/week
Total Capital Costs for 1 Salad Mix Planting Capital Cost Per Bed/Week x Number of Weeks in Ground = $3.84 x 9 weeks = $34.56
Capital Costs per Pound Total Capital Costs for 1 Salad Mix Planting/Sales Estimate = $34.56/75 pounds = $0.46/pound

STEP 6:

Determine total cost per pound.

Input Cost $0.93
Labor Cost $3.80
Operating Cost $0.53
Capital Cost $0.46
Total Cost Per Pound $5.72

Cost per pound should be evaluated in relation to the sales price of the product.  In this example, if the most you can get for each pound of lettuce is $5.00, growing this crop is not a good financial decision.  However, if you can get $9.00 per pound, earning a profit of $3.70 per pound, it would be a lucrative crop to grow.

Basic Cost of Production: Value-Added Products

When calculating cost of production for a value-added product, collect data for the batch size you plan to produce.  For example:

VAP

 

Input (Ingredient) Cost $0.89
Labor Cost $0.38
Kitchen Cost $0.67
Packaging Cost $0.90
Operating Costs In this example, all operating costs were allocated to the crop so no additional needed here. If not allocated to your crop, add a cost.
Capital Costs In this example, all capital costs were allocated to the crop so no additional needed here. If not allocated to your crop, add a cost.
Total Cost to Produce 1 Unit of Baba Ganoush $2.84

Notes and Tips When Calculating Cost of Production

  • To minimize costs, grow for market so that you are not spending money to grow product that you cannot sell. This may not be possible for all crops but when possible, balance your production and marketing to get the right mix.
  • Cost of Production should be the start of a broader analysis. Use your cost of production and sales prices to determine profitability by crop.
  • Just because something cost more to grow, doesn’t mean it’s less profitable. Compare sales price and cost to determine profit potential.
  • Just because a crop cycle is more profitable, doesn’t always mean it will make you more money. The number of cycles per year can affect the amount of money you can make.  For example:
    • Salad mix profit per cycle: $225 x 5 cycles per year = $1,125 annual profit
    • Eggplant profit per cycle: $450 x 2 cycles per year = $900 annual profit
  • Always add in labor to your Cost of Production even if you may not actually pay it. Value your time!
  • If certain costs apply solely to a particular market segments (for example, fees associated with a farmers’ market), consider analyzing those fees in relation to the market segment’s potential. See example in the Pricing section.
  • Lots of analysis can be done with your cost of production information. For example:
    • Is it more profitable to sell fresh or develop a value-added product?
    • What happens when costs change.
    • What happens when you change sales prices (i.e. price increase or selling to wholesale customers vs. retail customers).
    • Which crops can make you more money?
  • Cost of Production differs from Cash Flow
    • Cost of production may include items you don’t actually pay for in your cash flow (i.e. labor).
    • Cost of production allocates large expenses over time. Cash flow reflects when you pay for the expense.
  • Don’t be intimidated to start. If you don’t have exact numbers yet, use average labor hours, costs, and estimated sales.  You can modify as you refine your data.

Additional Resources for Determining Your Cost of Production

Determining your cost of production should be done periodically.  Explore some of the following resources to get more examples and methods: