Why cost of production is a valuable agricultural metric

Based on Defra data, the cost of production for wheat increased from around £150-155/t in 2022/2023 to £175-185/t in 2023/2024. While most costs rose, the most significant increase was fertiliser, which raised the cost of production by £15/t. Given the slight fall in fertiliser price but increase in other expenses, the estimated cost per tonne for the 2025 harvest looks likely to be around £175-185/t. The big unknown (at the time of writing) is the average crop yield.

The calculation differs depending on the objective:

1. What wheat price is needed to ensure all obligations are met? This should include all actual costs, essential drawings, planned capital purchases, tax and loan repayments, but not depreciation or any notional rents.
2. What wheat price is necessary to justify the business economically? This should include all costs, a notional rent for owned land, and interest on capital employed. It should not include loan repayments and should include the annual depreciation needed to maintain the average machinery value.

For comparative purposes, both questions are helpful: the first determines the last person standing and the second the most efficient farmer. 

However, for most farmers, adding the crop variable costs (seed, fertiliser, sprays and enterprise-specific contracting and drying) per unit area plus all remaining costs per unit of productive land, followed by dividing the total by the crop yield, is good enough.  

The following illustrates the impact of fuel and fertiliser price changes over the last five years.

While the impact is significant, it is less than the change in the price of wheat.

Challenges to be aware of

Allocating fuel to the cost of production for the enterprise can increase sophistication. This may be worthwhile if cultivations differ a lot between crops, but there is still the problem of allocating rotational tasks such as moling, subsoiling, or even ploughing, where the objective is largely weed control. Cover crops pose a similar challenge since the benefit is sometimes for the crop after the following crop. 

Allocation of labour to the enterprise is possible where detailed timesheets are available. But be warned: spring cropping often means that full-time labour is higher than it would otherwise be, and consequently, there is a higher labour overhead associated with the crop despite fewer operational hours.

Different production volumes can easily undermine a low cost per unit of production. For example, wheat usually yields about 3t/ha without fertiliser or manure, producing a margin over fertiliser equivalent to the wheat price. Conversely, an 8t/ha crop will need around 160kg/ha of Nitrogen. At a price of £1/kg, the cost per tonne is £20, so the margin over fertiliser per tonne is lower, but the margin over fertiliser cost per hectare is substantially higher. This example also demonstrates an agronomic fundamental: inputs should be applied up to the point when the cost of the last unit of input equals the value it produces.  

One of the more interesting uses of the cost of production is to explore the change in exposure to risk. Using realistic assumptions, the cost of production for an organic wheat crop yielding 5t/ha and a conventionally produced crop yielding 9t/ha would be similar at around £170-£175/t. The optimum system depends on grain and fertiliser prices.

While the cost of production is a valuable metric and worth calculating for all crops to help set production and marketing targets, there are pitfalls to be aware of.

Further information

Contact Dan Murphy