Purdue economists urge farm budget calculations, offer guide
Included in the guide are illustrations of how to calculate variable costs - fertilizer, seed, fuel and chemicals - and overhead costs, such as machinery, operator labor and land rent.
The guide focuses very heavily on figuring out a farm's opportunity costs when calculating overhead. Opportunity costs include the loss of money from alternatives that aren't chosen. For example, if farmers own land and choose to farm it themselves, they give up potential rental income.
"We basically have two bottom lines in this guide," Langemeier said. "The first one is called a contribution margin - that's market revenue minus variable costs. The second is earnings - the contribution margin minus overhead costs. The contribution margin should be positive because you have overhead costs you need to be able to cover. The earnings we would expect, over a long period of time, to be close to zero.
"Farmers need to include opportunity costs in a budget, such as the cost to own machinery, land rent and the fact that their labor is worth something."
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