Paying yourself: be sure to value your labor in farm budgets
Improving Your Farm Profitability: #4
by Craig Chase, FFED program manager
Over the years, I have given numerous presentations and had discussions on developing enterprise budgets. I explain using those budgets to make decisions on pricing, product mix, and production changes. And as farmers get used to developing budgets, they find they can, in fact, make those kinds of decisions.
However, in many of those discussions I find farmers typically don’t want to put a value to the labor they provide and/or the land and machinery they own and use. After all, why do I need to pay for my own labor? Isn’t that part of the economic return I get for farming?
The following example shows why each farmer needs to include his or her own labor when developing an enterprise budget.
Are you really making a profit?
Let’s assume you have a small vegetable farm of about two acres and you provide all the labor for it. You have a good mix of vegetables to ensure your farmers’ market booth has 5-8 different items per week. One of your customer’s favorite items is your green beans. Early in the season you can get a premium price and they go fast at each market.
This green bean is one of your primary products. So you want to make sure you price it above your cost of production and marketing, plus a profit margin of 25 percent. How? You develop an enterprise budget.
You determine that your out-of-pocket costs for crop inputs and supplies is about $25 per bed (your beds are about 400 square feet). You also calculate your farmer’s marketing costs for the season allocated equally over each of your beds is $35 for a total cost of $50 per bed. Your sales are about 120 pounds per bed, resulting in a total cost per pound of $0.42.
You add your 25 percent profit margin and come up with a price of $0.56 per pound. You realize this is much lower than the other market vendors’ prices for green beans. You must be getting a lot more than 25% because the average price per pound at your markets is $2.75 per pound over the season. You stick with the average market price and believe you are making a great profit margin.
Labor costs affect your bottom line
But what if you contribute 18 hours per bed in labor for production and another $35 in labor per bed for marketing? At $12 per hour for labor, you will need to add $251 per bed to your cost of production and marketing. The total now is $301 per bed and $2.51 per pound. If you add your 25 percent profit margin you should be selling your beans for $3.35 per pound on average—not $2.75 per pound.
Granted, green beans may be an extreme example because they are labor-intensive. But the example does illustrate what may happen if you don’t consider all costs associated with growing and marketing a product. In this case, a $2.75 per pound average price is above your total costs, indicating some profit level will be achieved (actual margin is 9 percent). But it is below your 25 percent goal by $0.60 per pound. In some cases, not including your labor will even result in a loss.
To ensure you understand what your margins truly are for each of your major products, develop an enterprise budget including your labor, land, and machinery contributions. Below are some resources to help you.
More information and tools
- Iowa Fruit and Vegetable Production Enterprise Budgets (originally by Craig Chase, updated Nov. 2019 by Emily Coll)
- Market-Based Vegetable Enterprise Budgets Toolkit (FFED web resource). Emily Coll, Feb. 2020.
- Organic Crop Production Enterprise Budgets (FFED 27). Craig Chase, Kathleen Delate, Olivia Hanlon, Nov. 2019.
- Adapting Enterprise Budgets for Organic Crops (FFED 23). Craig Chase, Nov. 2019.
- Livestock Enterprise Budgets for Iowa – 2019 (FM 1815). Tim Christensen, Lee Schulz, May 2019.
- Also see this list of various crop decision tools from Ag Decision Maker.