Bucks In The Ground: The Cost To Grow An Acre Of Potatoes
Patrick Trainor, Partner
April 2009
With today’s ever-increasing costs, knowing your cost of production (COP) is more important than ever. To be profitable, you have to consider everything from your crop inputs to machinery costs, land value, taxes and even a cost for your own labor. Mixed farms can only determine a true potato COP if they allocate expenses such as labor and fertilizer among the different commodities; otherwise, one commodity may look profitable when in fact it is a money loser. Once potatoe commodity expenses are identified, you can calculate your total COP as well as the cost per acre and per cwt. Only then can you determine whether the price you are being offered in the market is high enough to provide you with a profit. Once you figure out your cost of production, hopefully you can obtain selling prices or make changes to your operation to give you a satisfactory return.
For the 2005 crop, the PEI potato Board and its Processing Committee initiated a forward-thinking approach of developing a processing potato cost of production study. The report was seen as a benefit to growers, so a similar cost of production study was commissioned for both the 2007 processing and fresh market crops. The 2005 and 2007 studies encompassed all phases of production from repair and maintenance of equipment during the winter months up to and including delivery of harvested potatoes to the processors’ receiving facilities. The attached spreadsheet outlines a summary of all items to consider when determining the cost to produce an acre of potatoes on your farm; it encompasses all costs of production with virtually no actual costs excluded in the calculations.
All potatoe farms on PEI were contacted to request them to participate in the 2007 studies. The processing crop study was compiled by collecting and analyzing data from a representative sample of 12 processing growers. To be representative, the sample included farms from the eastern, central and western sections of the Island, and included farms of varying sizes. The final sample of participants contained the following characteristics:
- Four were west of Summerside.
- Four were east of Charlottetown.
- Four were centrally located between Summerside and Charlottetown.
- Three grew up to 300 acres of processing potatoes.
- Three grew in excess of 600 acres of processing potatoes.
- Six grew between 300 and 600 acres of processing potatoes.
- Total acres of processing potatoes planted by the sample were 5,019 which represented approximately 10% of processing potatoes grown on PEI.
- Six of the 12 participants also took part in the original 2005 crop study.
The 2007 fresh market sample contained 11 growers with the following characteristics:
- 3 were west of Summerside.
- 4 were east of Charlottetown.
- 4 were centrally located between Summerside and Charlottetown.
- 6 grew up to 200 acres of fresh market potatoes.
- 2 grew in excess of 500 acres of fresh market potatoes.
- 3 grew between 200 and 500 acres of fresh market potatoes.
- Total acres of fresh market potatoes planted by the sample were 2,642 which represented approximately 5% of fresh market potatoes grown on PEI.
The processing study concluded that the cost of producing an acre of processing potatoes on PEI was $ 2,711. in 2007. This represented a 7.5% increase over the cost per acre for the 2005 crop. The fresh market study concluded that the cost of producing an acre of fresh market potatoes on PEI was $ 2,750. per acre excluding packaging costs. Only three of the growers in the sample either packaged potatoes or could isolate the costs of having the potatoes packaged by third party packaging facilities. Due to the very small sample of three growers, the fresh market committee is still considering whether to include the cost of packaging in the final report.
When using these cost of production reports to plan for the 2009 crop, growers must obviously factor items such as packaging and the expected fertilizer cost increase into their decisions.
Other potatoe producing areas that have prepared 2007 COP studies include New Brunswick ($ 2,694. per acre) and Maine ($ 2,529. per acre). The methodologies used by each area are similar in most regards, except for calculating the cost of land. Land costs in the PEI reports include a prorated share of the cost of rented land for all crops. They also include a prorated share of the cost of owned land, calculated at estimated fair market value of all land used for growing crops (as determined by the participants) multiplied by a 7.10% interest rate. This calculation for owned land accounts for the estimated cost to maintain the land base required for all crops. Even if the individual participant incurred less cost than the calculated amount, they would have incurred an opportunity cost of having their equity invested in land rather than another income-earning investment. The estimated fair market value of land used by participants ranged from $ 2,000. to $ 3,500. per acre.
The 2007 per-acre cost excluding land for the two PEI reports, the NB report and the Maine report range from $ 2,293. to $ 2,390. per acre and average $ 2,338. per acre. All four areas have remarkably similar production costs, as do Manitoba and Saskatchewan when their older reports are compared to other areas for the same years. The similarity among areas lends credibility to the results of the PEI studies indicating a total cost in excess of $ 2,700. per acre including land but prior to packaging costs.
The attached table is the result of significant efforts on the part of processing and fresh market committees, as well as the study participants. The table should be an invaluable tool for growers to use and update on an annual basis when making production and selling decisions. With today’s ever-changing costs and market prices, it is more important than ever for growers to be able to react quickly when making these decisions. potatoe farming, like other industries such as manufacturing and retail, is becoming more and more focused on margins to ensure a sufficient bottom line profit and return on investment are achieved. Knowing your cost of production is essential to ensure your selling price is high enough to achieve your profit targets.
Patrick Trainor, CA is a partner with BFM Chartered Accountants.. He can be reached at 892-5365 or ptrainor@bfm.pe.ca.
