Break-even before you plant: the price and yield your crop needs

Most planting decisions are made on hope: the rains will come, the price will hold, this year will be better. Hope is part of farming, but it is not a plan. A break-even calculation done before planting turns a season's worth of risk into two plain numbers: the price per ton and the yield per hectare your crop needs just to cover what you are about to spend. Then you can see how much room you have for a bad year, and know a good offer when it comes.

If you already know your cost of production per hectare, you have done most of the work. This guide turns that figure into targets before you commit money to the land, and shows how to use them when you sell.

Do it before the money is spent

After planting, most of your costs are sunk. Seed, fertiliser and the first herbicide are in the ground whether the price rises or falls. Before planting, every cost is still a choice. That is when a break-even can still change what you do: which crop goes where, how much fertiliser the expected yield can pay for, whether to plant the marginal field, and whether to lock in part of the price now.

Split your costs three ways

For a break-even to be honest, put each cost where it behaves the way it really does:

• Direct (variable) costs per hectare: seed, fertiliser and lime, crop protection, fuel and repairs, contractors, crop insurance and interest on production credit. You spend these on every hectare you plant, good season or bad.
• Costs per ton: transport to the silo or buyer, handling, storage, levies and commission. These grow with the harvest, so they belong per ton, not per hectare.
• Overheads: land rent or bond, permanent labour, depreciation and admin. The farm carries these whatever it plants, so give each crop its fair share per hectare.

Keeping per-ton costs separate matters. Folded into a flat cost per hectare, transport makes a bumper crop look cheaper to market than it is. Kept per ton, it scales with the yield the way your transport invoice will.

The two break-even numbers

Break-even price is the lowest price per ton that covers your costs at the yield you expect:

Break-even yield is the lowest yield that covers your costs at the price you expect. Each ton earns the price less its own marketing and transport cost, so that is what has to pay for the per-hectare costs:

With no per-ton costs, these reduce to the familiar cost per hectare divided by yield, or by price. Work each out twice: on direct costs only, and with overheads added. The direct figure shows whether the crop is worth planting this season, since it covers money you would not spend if the land lay fallow. The total figure shows whether the crop pays its full way on the farm.

A worked example

These round numbers show the method; they are not a budget for any region. Use your own records and current quotes.

Margin of safety: how much can go wrong

The break-even on its own does not tell you how comfortable the plan is. The margin of safety does. It is the share by which the price or the yield can fall before you make a loss:

In the example, after overheads, the price can fall (4 000 − 3 500) ÷ 4 000 = 12.5%, and the yield (6 − 5.17) ÷ 6 = about 14%. On direct costs alone the cushion is much wider: 27.5% on price and about 31% on yield. If your records show yields swinging by a third between good and dry years, a 14% yield cushion is thin.

Each margin assumes the other number holds. When price and yield fall together, the cushion disappears much faster than either figure suggests.

Using the numbers before planting

• Compare crops on the same land by their margin of safety, not only by their expected profit. A crop with a smaller profit but a much wider cushion may be the better bet on risky land.
• Test each big input against the yield it must buy. If extra fertiliser costs R1 500 per ha and the net price is R3 600 per ton, it has to add about 0.42 t/ha just to pay for itself.
• Check your break-even yield against your records. If a realistic yield on a field is below the direct-cost break-even, that field may be better left, rented out or planted to something else.

Using the numbers when you sell

Your break-even price becomes the floor for every marketing decision. If a forward contract or buyer's offer is above your total break-even, pricing part of the expected crop at that level locks in a margin on those tons. Many farmers commit only part of the expected harvest before it is in, because contracting tons you do not reap can be costly. If offers sit between your direct and total break-even, the crop is covering its running costs but not its share of the farm. Below the direct break-even, every ton sold at that price loses cash.

Update the calculation as the season moves: after emergence, after a dry spell and near harvest, put in your best current yield estimate. The break-even price shifts with it, and so does the lowest offer worth accepting.

Key points

• Work out break-even before planting, while costs are still choices.
• Keep marketing and transport per ton so they scale with the harvest.
• Calculate on direct costs and on total costs; they answer different questions.
• Use the margin of safety to see how much room the plan has.
• Treat the total break-even price as the floor for forward sales, and update it as the season unfolds.