What’s the Deal With Cost Per Bushel?

• Because inputs are purchased on a per acre basis and outputs are sold on a per bushel basis, there is a units mismatch.
• Reviewing budget projections on a per bushel basis can unlock powerful management insights.Great managers across business sectors understand their costs.

There has been an ongoing debate in farm management circles about calculating cost per bushel versus cost per acre throughout our careers. To be honest, we’ve wrestled with this over time. At some points, cost per bushel seemed like a clever, highly intuitive metric, but at other times it feels like hand-waving and just dividing total costs by a different number.

The Rub

The crux of the debate gets down to a mismatch of units: Inputs are purchased (or applied) on a per acre basis, while outputs are sold on a per bushel basis. We probably know our cost per acre, but we usually don’t sell corn, soybean, or cotton by the acre.

Reviewing budget projections on a per bushel basis can unlock powerful management insights. Great managers across business sectors understand their costs.

The biggest challenge with cost per acre is that we often don’t know what final yields will be until the end of the growing season. Even under irrigated conditions, yield variations can be enough to move the needle. Given this uncertainty and variability, cost per bushel can become confusing.

The short of this is simple — both have their advantages and flaws. Neither is a perfect, end-all measure of production expenses. At the end of the day, producers must know their costs — per bushel, per acre, total, etc.

Scenarios

To consider how per acre and per bushel can be relevant — or confusing — to producer decision making, consider the following scenarios:

• Buying or renting land — The per acre measure has a strong advantage in farmland situations. Social norms are such that submitted farmland bids are on a per acre basis. While bidding might take place for the entire parcel, everyone is doing the per acre math in their head.
  
  While farms aren’t often purchased on a per bushel basis, it can be a helpful metric for benchmarking, especially across several years of data. Furthermore, it is common to see soil productivity metrics used to adjust for quality variations.
• Selecting inputs — Comparing only per acre costs of alternative inputs can be very shortsighted, especially when there are different yield outcomes. There are two ways to reconcile cost and yield differences.
  
  The first option is to calculate the total per bushel cost of each alternative. For example, start with your initial budget assumptions and consider two alternative scenarios. For each herbicide program, plug in the yield assumptions and per acre costs. The program with the lowest per bushel cost is the better deal.
  
  The second option is partial budget analysis. For each alternative, consider the revenue gains minus the costs. The program with the highest return is preferred. For example, one fungicide program might cost $30 per acre and generate $45 per acre of additional revenue for a net benefit of $15 per acre. The alternative might cost $20 per acre but only generate $30 per acre in additional revenue.
  
  With both measures, the goal and outcome are the same: Don’t singularly focus on cost per acre and overlook potential yield differences.
• Initial budget projections — When creating farm-level budget projections, per acre measures are often the natural starting point. As previously discussed, inputs are typically discussed on a per acre basis.
  
  While challenging, converting and reviewing initial budget projections on a per bushel basis can unlock powerful management insights. You will need to establish a consistent method for the “average” yield used to divide by, but doing this can be insightful for benchmarking across fields or over time. Again, this isn’t easy but can be a powerful tool when done appropriately.
• Corn versus soybeans — This is the rare case where there is a clear winner: per acre basis. Compare the returns of alternative crops by comparing the per acre contribution margins or returns after variable expenses are paid — and what is left to cover the fixed expenses.
  
  The per bushel calculation of profits or contribution margins isn’t insightful at all. Why? Yields are different across the crops. For example, corn will almost always have small profits per bushel compared with soybeans but yield considerably more bushels. On the other hand, we’d expect soybeans to have more returns per bushel but considerably fewer bushels.
• Early growing season marketing decisions — Again, this is the rub: Inputs are per acre, but you are selling bushels. Perhaps the most significant advantage of per bushel measurement is when making early growing season marketing decisions. Initial cost projections — from budgets — reported on a bushel basis are decisive for making preharvest marketing decisions. While yield assumption must be made, the per bushel measure is extremely valuable in sizing up any market rally opportunities.
• Post-harvest marketing decisions — will often rely on both measures when making post-harvest marketing decisions. Starting on a per acre basis allows for all revenues to be considered (government payments, crop insurance proceeds, etc.). From there, producers can calculate the per bushel prices needed to reach their break-evens.
  
  There can be a few challenges when allocating fixed expenses, such as machinery or family labor, across different crops (irrigated versus non-irrigated) or a livestock enterprise. For example, the machinery cost of planted irrigated and non-irrigated corn will be about the same on a per acre basis, but the per bushel basis will differ given higher irrigated yields. Therefore, it’s helpful to start with the per acre basis, capture all the variables and convert the final numbers to the per bushel basis.
• Yearly review — Per acre measures make managerial sense for reviewing the financial performance, especially when benchmarking over time or versus initial budgets.
  
  Producers will need to use caution with per bushel measures as production abnormalities, such as the drought of 2012 or prevented planting of 2019, can heavily skew the results. Did final production costs come in over budget because Mother Nature walloped yields or input expenses were high? The implications are not always intuitive.

The Big Picture

Most of the time, conversations and debates about the cost per bushel versus cost per acre miss the big picture: You have to know your costs! At the end of the day, this is an exercise of allocating costs over units. In some cases, it makes more sense to consider the cost structure on an input basis (per acre). In other situations, it makes more sense to consider the cost structure on an output basis (per bushel). Set procedures and practices in place that allow you to have an accurate and up-to-date understanding of your costs. Then you can start to decide which metric is more insightful and intuitive for the questions at hand.

While we’ve focused on crops, the lessons are similar for livestock — cost per acre of pasture versus per cow (or calf sold), pens sold versus head (or pounds) of cattle sold, or per stall versus per hog.

This leads us to the last point: Sometimes, this debate comes across as an ag-related problem. In reality, it’s a situation every business and sector face. Only a few retailers buy bananas at wholesale and pass the same product along at a higher price. Airlines have seats, fuel, trips and hours flown as inputs, with passengers, seats and revenues as outputs. Whether a farmer or ag input supplier, great managers know their costs and challenge their thinking to generate, capture and utilize insights. Start simple and build a system that works for you.

Footer: Widmar and Gloy are the co-founders of Ag Economic Insights (AEI.ag). Founded in 2014, AEI.ag helps improve decision making for producers, lenders, and agribusiness through: the free Weekly Insights blog, the award-winning AEI.ag Presents podcast- featuring Escaping 1980 and Corn Saves America, and the AEI Premium platform, which includes the Ag Forecast Network decision tool. Visit AEI.ag or email Widmar(david@aei.ag) to learn more. Stay curious.