Cost of Goods

Using the right tools to maximize profit

Published in the April 2015 Issue Published online: Apr 30, 2015 Jerry Wright, UPGA President/CEO
Viewed 1920 time(s)

After decades of lending to agricultural enterprises of all sizes and types, a principle agricultural loan officer with Wells Fargo Bank recently said that it had become clear to him that those who succeed best happen to be those with the most sophisticated accounting systems. He added that encountering sophistication in farm and ranch accounting is rare. A further observation he made was that, in a general sense, farmers and ranchers are production people. They think and act like production people, people charged with maximizing production. They do not think like accountants. In fact, they often resist having their production plans interfered with by their own accountants! What does this mean?

Lately, accountants with advanced degrees resent being called accountants any longer. With their advanced degrees they have moved on, now referring to themselves as “business analysts.” And what’s their purpose? Their purpose is to analyze costs, to advise production managers about what costs really are, to anticipate what costs are going to be, to explain the effects of changes in costs, and to provide a thorough cost analysis from angles scarcely imaginable to the untrained mind. Not surprisingly, they also spend a great deal of time estimating demand. Do they play an important role in the company’s success? Who in your farming operation fulfills that role, and what tools exactly does that person use in fulfilling that role?

Idaho, as with many other ag-based states, decided long ago that farmers need to have available to them as thorough a crop-by-crop cost accounting and tracking system as can be reasonably provided.

Enter Paul Patterson. For the past 30 years, Patterson, a University of Idaho professor and agricultural economist, has been tracking production costs for Idaho’s principle crops: potatoes, small grains, sugarbeets, alfalfa hay and so on. In constantly refining this process, Paterson sits down annually with growers and processors of these crops to review and to improve his methods. Upon reviewing his processes and results, one would be hard-pressed to find a more reliable or accurate method for tracking crop production costs. Recognizing the value of Patterson’s Idaho work, in 2013 commissions in Colorado, Wisconsin and the Columbia Basin enlisted his services in calculating the estimated growing cost for potatoes in each of their areas. Space for this article does not allow for even a cursory comparison of all that these analyses contain. Suffice it to say that life isn’t always as it appears.

In a flash of genius, and taking advantage of the IT revolution, UPGA has placed on its website a series of downloadable interactive crop-accounting Excel spreadsheets. The program is called CROP (Crop Rotational Optimization Program). Using CROP as it is, a grower can run a quick analysis of any number of crop rotational cycles for his particular operation. Using CROP as it will be once an operation’s actual numbers have replaced Patterson’s numbers, life could well take on new meaning. So might a farm’s profitability.