Fixed Costs
Fixed costs are those expenses that occur regardless if we grow a crop or not. Assets included with fixed costs are machinery, buildings, and land. Fixed costs are normally associated with the following items.
Depreciation
- Machinery and buildings lose value just because they are older (time depreciation) which is a fixed cost. If you use the machinery and buildings they lose value faster (use depreciation) which would be a variable cost.
Interest
- Interest paid for the cost of a fixed cost needs to be paid regardless if you grow a crop or not.
Owned Land
- Owned land is a cost you need to cover regardless of what crop you grow or the yield of that crop. Land is a fixed cost which you could recover if you rent out the land to another grower.
- Also consider irrigation, there is an ownership cost of irrigation on owned land.
Repairs
- Repairs are many times taken as a fixed cost, but in reality repairs should be split between variable and fixed costs. Some of these repairs are not always captured in the repairs on buildings and facilities.
- Land repair, although there can be washouts to some of the land, technically aren’t considered part of repair. Keep those costs in mind.
Taxes
- Taxes are sometimes reflected in the land cost, but they also should be taken into consideration.
Insurance
- Property insurance, liability insurance, or some of those other insurance costs are fixed costs because they would occur whether you’re growing the crop or not.
Variable Costs
Variable costs are those cash expenses needed to grow, harvest and store a crop. These expenses are generally easy to determine:
- seed corn cost,
- fertilizer expense, or
- crop scouting for growing the crop.
Some expenses and costs are straightforward. Others are a little more complex. Use your financial records, Schedule F of your 1040 income tax form, and/or crop budgets from your consultant to determine your variable costs. Be sure you are not calculating your variable costs based on expenses for more than one year. Also note your Schedule F may include prepaid expenses, such as seed and fertilizer to be used the next cropping year.
Crop Enterprise Budget Tool
The Crop Enterprise Budget Tool gives some flexibility in looking at these numbers. For budgeting purposes you may use custom rate guides to determine machinery cash costs per acre. Your actual numbers are more accurate, but sometimes very difficult to determine.
Custom rate guide resources include:
Spreadsheet Tutorial
Jerry Clark, Regional Crops Educator and Professor, demonstrates using the Crop Enterprise Budget Tool for your fixed and variable costs.
Fixed Costs
Variable Costs
Summary
The lines between variable and fixed costs can sometimes get blurred. We don’t necessarily need to worry about what that line is. It’s more important to be consistent in how you’re calculating your costs.
