Production Economics

Running a well-organized agricultural production system allows you to produce superior products at maximum yield while reducing production costs. Components of a production system include farm facilities, equipment, purchasing and scheduling.

As a manager, you should perform an enterprise analysis, being mindful of performance measurements and environmental impacts and regulations. These considerations may impact the financial performance of your farm business when producing for a commodity market.

The key components of production planning are:

  • Quality of product or service
  • Cost of production
  • Facilities and equipment
  • Benchmarking
  • Production system
  • Transportation systems
  • Purchasing and supplier relationships

Benchmarking

Measuring and comparing (also known as benchmarking) against your farm’s past performance helps you make improvements within your system and is key to meeting and surpassing your goals. Benchmarking against other farms could also point out areas where you could make improvements to your system. You can benchmark production yields, quality, costs and margins.

Before you record anything, you must first decide on which key metrics to measure. Then, keep consistent and timely records to ensure data accuracy. Compare your results against different business units within your operation, past performance records, and industry benchmarks where available.

Adding Value

When doing work in a production system, the primary focus should be producing value for the customer. Unnecessary steps, specifically those that cost you money but do nothing for the customer, should be eliminated. Production practices aimed at increasing quality or creating new markets should not cost more than the potential increase in revenue.

Steps to add value to your farm business:

  1. Make a list of what your customer values
  2. Make a list of the steps in your production system
  3. Identify how each step contributes to what your customer values
  4. Look for ways to create greater value or the same value at less cost
  5. Eliminate the steps that do not create true end value

Consider purchasing rather than producing costly products. Foster positive relationships with your suppliers so they can provide you with product information, production advice, training, market trend information and market referrals.

Adoption of Technology

Agricultural technology can include machinery, production systems, conservation tillage, record keeping systems, marketing systems and more. How and when you implement technologies may greatly affect the success of your farm.

When deciding whether to adopt a new technology, watch for innovation trends and weigh all of the costs versus the benefits of adoption, it is recommended on a small scale basis, to try out a different technology each year. This way, you will be able to test technologies with minimal risk, and implement only those that provide a proven advantage to your farm.

Work-Life Balance

While implementing business procedures takes significant effort, the end result is an efficient production system that allows for multiple benefits. You will create time for personal, family and community activities, as well as time to manage the other aspects of your business.

Outside of production, you will need to devote some time to marketing, finances and human resources. If production is your passion, maximize the use of any other people on your farm who have skills and interest in these other areas of the business. If you do not have the expertise within your farm operation, acquire the expertise you need from outside suppliers or hire new workers.