The Most Important Number on the Farm This Spring

Spring has sprung. The grass is growing again—but so are expenses on the farm.

Cash rents are negotiated. Most fertilizer has been applied or is going on now. Seed is delivered and will be in the ground soon. Herbicide programs are largely mapped out. At this point, a large share of 2026 expenses is known, and we can start zeroing in on the total cost of production for  the year.   

Of course, we can’t forget the “miscellaneous” category—the things we can’t predict but know will show up. Things like equipment repairs, outside labor, utilities for grain bins and the shop, and family living all add up quickly. If those numbers are hard to estimate, the best place to start is your historical earnings statements or your tax return. They tell the story better than your memory.  With all of this information, you can begin to find out what your cost of production will be for the year, and furthermore find out what prices you need for your commodities to break even.   If you need a refresher, here is a formula to help guide you:

Total Farm Expenses + Family Living + Income Tax – Non-Grain Income - Depreciation + Current Portion of Term Debt ÷ Total Expected Bushels Corn/Soybeans = Corn/Soybean Cash Flow Breakeven

Despite what many of our childhoods might suggest, one of the hardest jobs on the farm isn’t physical—it’s marketing. It’s a job that happens every day, from before the crop is even planted to long after it’s hauled away. The overarching goal is simple: sell for the highest price possible.

But the market doesn’t always cooperate and price targets don’t always hit. That’s why it’s just as important to know what your floor needs to be.  Your cash flow breakeven—based on realistic yields and projected expenses—gives you that floor to shoot for.

In today’s ag economy, even breakeven can feel out of reach. The market gives, and the market takes. Good years are good. Bad years can be tough. And if we’re honest, there tend to be more tough years than easy ones. With current margins, the goal sometimes shifts from maximizing profit to minimizing loss.

Every farm’s cost structure is different, but the end-of-year balance sheet tells the truth. A drop in working capital and a decline in owner’s equity usually signal a loss. If that trend continues and the outlook doesn’t improve, changes have to be made—renegotiating rents, letting acres go, repairing the planter instead of trading for new, trimming family living, or eliminating payments for equipment that aren’t necessities for the immediate crop seasons.

At the end of the year, sometimes hindsight stings. Maybe this wasn’t the year to pull the trigger on that combine?

Understanding your breakeven isn’t just about marketing—it’s a management tool.

Take this example: say you made $200,000 in equipment payments for the year.  Half of the payments went to principal on the loan and half went to interest.  You didn’t take on new loans and felt like you held your own for the year, yet your working capital and equity still declined. Why?

Depreciation plays a role. If $1.5 million of equipment value loses 10% of its value for the year, that’s a $150,000 decrease from your total assets.   Throughout the year you made your equipment payments of $200,000 which paid down principal $100,000 and paid $100,000 to interest. and then at the end of the year you find your working capital dropped $200,000.   

Then we remembered we had a few cash purchases—like a $50,000 grain cart and $50,000 corn head trade before fall—both of which depreciate after use. While they were relatively small purchases to the operation, these small purchases can have some big impacts for the next year.

Before depreciation your equipment is valued at $1,600,000 including the trades.  However, a full season has been put on the equipment so let’s say it depreciated 10% or $160,000 and is now worth $1,440,000.  

You paid down your equipment debt by $100,000, and paid $100,000 to interest which are now both sitting on the line of credit accruing interest likely leading to an increased interest expense for next year.

Here’s what that formula looks like:

(Beginning Equipment Value $1,500,000+$50,000 of trades - $160,000 = ending equipment value of $1,440,000)

Beginning of year equipment debt $750,000 - $100,000 of principal payment = $650,000 of remaining equipment debt

Line of credit balance increases $200,000

Overall, our total assets declined by $160,000, from $1,500,000 to $1,440,000, even though we had a close to breakeven year, our equipment debt was paid down by $100,000. However, it is now sitting on the line of credit as well as the $100,000 of accrued interest on the loan, so our liabilities for the year increased by $100,000, which of course will accrue interest for the next year.    

On the other hand, say we turn back time and don’t make that $100,000 purchase for the corn head and grain cart.   

(Beginning Equipment Value $1,500,000-$150,000 of depreciation = $1,350,000 of ending equipment value.)

(Beginning of year equipment debt $750,000-$100,000 of principal payment = $650,000 of remaining equipment debt)

Line of credit balance increases $100,000.

In the second scenario total debt did not increase or decrease.  Equipment value did depreciate 10% so we did lose ground for the year but we ended up in a much better place.  

While either situation is not the goal for the year, multiple years of adding debt and the added interest expense can quickly erode working capital and your ownership equity.      

These numbers are just quick examples, but the lesson is real. Even good investments may not be the right investments right now.

Doing the homework early—understanding your breakeven and your cost structure—helps you stay ahead of these situations by being proactive instead of reactive.  

Farmers have to be optimists. But that doesn’t mean we can’t also be realists.  In times like these, the value of knowing your costs of production can set the road map for the year on how to manage your expenses, capital purchases and investments to set up the next year for success.