Cost of Production is Over Rated

It seems every formal grain marketing course starts with a lecture about how important it is to know one's cost of production. Most of these courses are taught by people who never farmed for a living. I agree it is a great thing to know your cost of production, but the problem is the high futures price for the year is almost always three to four months before harvest and usually within 20 to 45 days after planting. No one knows what their yield will be and, therefore, their cost of production is a total unknown! A grain producer needs to look at the futures price and basis each year relative to history and seasonal trends to make well informed marketing decisions.


Forget cost of production when pricing a crop in the field or still in the seed bag when it comes to marketing that crop.


You should know within a few cents a bushel what your cost of production was for every year you farmed to give you guidance for the next crop, but if you have been farming 20 years and don’t know your cost of production, you sure don’t need a market advisor to tell you must know your cost of production to be a good marketer.


When December corn is above $4.20 or November beans are above $10 or September wheat is above $5.40 (in 2009 dollars), a producer needs to seriously consider pricing a high percentage of his (unknown) production.


A producer needs flexibility in his marketing tools, most notably the ability to postpone delivery one year if production turns out to be substantially less than expected. He also needs the ability to buy put options and do bear spreads so one can make the money on the way down that was not made on the way up after a sale.


Think about 2012. It took two years, but corn declined from $8.49 to $4.00. How much of that $4.49 did you catch on the way down $4.00? And 2021… looks like a repeat of 2012. Many of you have already sold substantial amounts of 2021 production. What is your plan to capture money on the way down you did not capture on the way up?


Knowing the cost of production is overrated. Knowing the market facts is under-rated.


Knowing what the carryover projection is for the current crop year and the next crop year for the USA and the world is much more important than knowing your cost of production.


If you do not know that carryout projections, it is like driving your pickup truck at night with only the parking lights on. A producer should always have command of the supply and demand facts and market outlook to form a valid opinion of the direction of the market price.


If the market price is likely to decline substantially before one needs the money, he better be selling grain, even if the price is below the cost of production. If the market price is likely to go up, even though it is currently a profitable price, don’t be leaving money on the table.


If I had a choice between knowing my cost of production in advance of a planting a crop or knowing what the market high will be, I would take the market high every year over knowing my cost of production.


So would you if you think about it more than five seconds. Spend your time tracking carryout numbers, not your new crop cost of production.


For those of you fortunate enough to be able to not sell any bushels until after harvest, then there is no excuse for you not to know the cost of production. But there again, if you have been farming 20 plus years and don’t know your cost of production, you don’t need to know your cost of production.

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