Many arable farmers understand their headline figures. They know their fertiliser spend, machinery costs and overall budgets. But figures in isolation only tell part of the story.

If machinery costs appear high, are they genuinely high or broadly consistent with comparable farms? If variable costs are rising, is this being experienced across the sector or is there an inefficiency within the business? If margins are under pressure, where could change make the greatest difference?

These are questions we regularly explore with farming clients at Newton LDP. Understanding cost of production (COP) provides the evidence needed to answer them and make better-informed decisions.

What does cost of production include?

Cost of production is the total cost of producing a unit of output – for arable farmers this is a tonne of grain. It should include variable costs, such as seed, fertiliser, and sprays, alongside an appropriate allocation of fixed costs, including machinery, fuel, labour, property and finance.

Allocating these costs across individual enterprises provides a more complete picture than gross margin analysis alone. A crop may appear profitable at gross margin level but still fail to cover its share of the farm’s fixed costs.

For the analysis to be useful, it must be based on reliable information. Budgeted yields can be optimistic, particularly when they reflect what a farm might achieve in a very good season rather than its consistent performance. Using actual historic yields and costs provides a more realistic understanding of the farm’s productive capability.

Finding the right balance

Improving COP generally comes through two routes: reducing costs or increasing output. However, neither should be considered in isolation.

Maximum yield is not necessarily the same as optimum yield. Additional inputs may increase output without delivering a sufficient financial return. Equally, cutting expenditure too far may reduce yield or quality by more than the saving achieved.

Over the last five years, input costs have risen by 31% with fertiliser having the greatest impact, rising by 75%. It is critical that farmers and their advisers are realistic about their farm’s yield potential. Whilst many farms have exceptional yields in some years, their average yield potential is much lower and growing costs should be matched to this potential, particularly while input costs are so high.

Reviewing COP on a per-tonne basis helps businesses find the most commercially effective balance. This is why comparisons based solely on cost per hectare can be misleading. A farm with greater yield potential may justify a higher level of expenditure than one operating under more limiting conditions. The important question is not simply how much is being spent, but what that expenditure is producing.

COP analysis can also help distinguish between cost increases caused by external market conditions and those arising from the structure or performance of the individual business. This enables management to focus on areas where change is possible and likely to have the greatest financial impact.

Examining machinery costs

In our experience, machinery costs are often one of the first areas worth examining because the true cost can be difficult to see without detailed analysis. AHDB data suggests that the best performing farms are spending 21% less on machinery than the worst performers.  

Reviewing utilisation and replacement policies may identify where machinery sharing, leasing or using a contractor could offer a more cost-effective solution.

The lowest-cost option will not always be the right one. Timeliness, reliability, labour availability and the operational requirements of the farm must all be considered. Understanding the true cost of machinery allows these decisions to be made using evidence rather than assumption.

Supporting marketing and investment decisions

Knowing the break-even price of a crop gives farmers a sound basis for grain marketing decisions and can help remove some of the emotion from the process.

A budgeted COP can be used during the season to assess sales opportunities, with the figures updated as costs become clearer. The final position can then be calculated after harvest, once actual yields and expenditure are known.

The same information supports wider strategic decisions. Whether a business is considering purchasing machinery, taking on additional land, changing its rotation or introducing a new enterprise, understanding the effect on production costs allows the opportunity to be assessed with greater confidence.

COP analysis can also inform purchasing decisions, including the timing of fertiliser and fuel orders. Used alongside yield mapping and variable-rate technology, it can provide further insight into how efficiently resources are being used across the farm.

Adding context through benchmarking

Calculating COP is an important first step, but its full value comes from placing those figures in context.

Effective benchmarking can reveal whether a particular cost is genuinely out of line or reflects a wider trend affecting comparable farms. It also helps identify where improvements could have the greatest effect.

For benchmarking to be meaningful, there must be confidence in both the farm’s own figures and the comparative data. Through our work with farm businesses, we see how important it is to compare like with like. Farming system, scale, land type and productive potential can all materially affect the figures.

Building a consistent record over several years is equally valuable. It allows changes in costs, yields and profitability to be monitored and helps separate one-off seasonal effects from longer-term trends.

Cost of production is therefore far more than an accounting exercise. Used effectively, it becomes a practical management tool that supports efficiency, investment, grain marketing and long-term planning. At a time when margins remain under pressure, understanding not only what it costs to produce a crop, but why, gives farm businesses a stronger basis for future decisions.

Take part in the COP benchmarking pilot

Indigro is currently developing an online Cost of Production Benchmarking Tool, with input from Newton LDP. The tool will enable arable farmers to enter their own production figures, calculate their cost of production per tonne and compare key measures anonymously with other farm businesses.

Farm businesses taking part in the pilot will receive a free basic report. If you would like to test the tool or need support extracting the relevant figures from your farm records, please contact Charlotte Gore or another member of Newton LDP’s Rural & Agribusiness team.

Read more about why Indigro is developing the Cost of Production Benchmarking Tool.