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Commodity Production: the Low Cost Producer Always Wins

Date: 
Author: 
Matt Roberts
Educational Opportunities: 
Videos
Interests: 
Grain, Young, Beginning Farmers
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Hello, I’m Matt Roberts, founder and owner of The Kernmantle Group in Columbus, Ohio. Today I want to talk about a really important fundamental economic principle as it relates to crop production, and that is, in commodity production, the low cost producer always wins.

If you are the lowest cost producer, when prices go down you're the last one to continue making a profit; and when prices turn back up, you're the first one to resume making a profit. That part isn’t controversial, but the second part is what that actually means for your farm. It's impossible to be the lowest cost producer or even a really low cost producer, unless you know your cost of production.

If you're reading this, you've heard all sorts of talking heads tell you, "Hey, know your cost of production," and you're probably tired of it. In 2018, anybody telling a farmer, "You need to know your cost of production," is akin to someone telling Delta Airlines, "Hey, try to avoid crashing." It’s not great advice. It's lowest common denominator advice.

You should know your cost of production, but you also need to know your cost of production at the field level. Why? Because across fields, fertility changes, rent, ownership structure changes, and that means your cost of production is going to change. There's an old saying in business, "If you can't measure it, you can't manage it." By knowing your cost of production at the field level, it grants you the ability to see what's happening on your farm and know where your profitable fields are and where your unprofitable fields are. This allows you to know which ones you need to manage more, and which fields you need to manage less.

It also provides huge benefits when it comes time to rent negotiations. If you have your cost of production driven down to the field, it allows you to know which of those fields you need to work harder or lower to bring those rents in line. You can also see which of them you can give up a little on in those negotiations, and if you have a really contentious relationship with a landlord, having that cost of production driven to the field allows you to de-escalate that, make it a little less personal. Most contentious arguments about rent boil down to, "I need more rent. I want to pay less rent. I need more, I want to pay less." It's just head to head, just direct contention, and it really just boils down to whose kid gets to go to summer camp. It's not useful.

If you have all your fields laid out, you can sit with your landlord and say, "Look, here's my range of cost of production and here's you. Here's the rents I pay across all my fields and here's you, and we need to bring it back in line." And that allows those conversations to become a little more objective. It's not a silver bullet, but it's at least something you can try, but you can't even try that until you have your cost of production driven down to the field, and I firmly believe if there's one change that you can profit on your farm, it's from driving that cost of production to as high a level of granularity as possible.
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