Why and How to Estimate Costs of Production in a Coffee Farm?

Estimating the real costs of producing coffee in a farm is a common question among coffee growers all over the world. In this article, we will briefly describe the importance of calculating the costs of production in a farm and how to do so.

 

To begin, we first have to take into account the following question: What is the purpose of knowing your costs of production?

   3 Minutes Read

Por Luis Guillermo Cortes

Director Regional PECA de Caravela Coffee

  • As its name suggests, the objective is to understand the cost of producing coffee based on a particular measuring unit, be it a kilogram, pound or quintal (or the measurement used to weigh coffee in your country) of dry parchment coffee or green coffee. The main objective is being able to identify whether your coffee business is profitable or not. Once you know the costs of production of your farm, you can then compare them with those of other coffee growers in your same region, in other regions of your country, or even with coffee growers in other countries, thereby having a benchmark to compare against other producers.

 

  • Another benefit of calculating your costs of production is being able to know your break-even point. In other words, knowing the minimum price by which a coffee producer should sell his coffee in order to be profitable. For example, if it costs $5,440 Colombian pesos to produce a kilogram of parchment coffee in your farm, your selling price should be higher than this value. The margin will be calculated as follows:

Profit Margin =  Selling price – Cost of Production X 100

Cost of Production

 

Example:

 Profit Margin =$6,000 – $5,440 X 100 = 10,29%

$5,440

 

  • Other benefits that the producer will have from knowing his costs of production:
  •  

    • Keeping track of costs helps coffee growers have information about all the activities done at the farm and then analyze performance
    • Simplifies the planning of activities and helps coffee growers prioritize and optimize activities
    • It helps coffee growers have a proper accounting of their farm. Once they know their costs of production, they can carry out an annual budget, which may be very useful when asking for financing to a bank
    • Coffee growers can make easier selling decisions, knowing to whom they should be selling their coffee to at the right price
    • It allows coffee growers to identify the areas of their own farm where they are being inefficient or where they can be more efficient to improve and reduce costs
    • At the end of the year, it allows coffee growers to compare their budget versus the actual costs, therefore being able to take corrective measures
    • Have a great tool to evaluate the general performance of their coffee business.
    To estimate the costs of production is important to take into account the following information:

    1. Know the area on the farm cultivated with coffee, hopefully even knowing the number of trees planted in this area
    2. Know the exact area in production on the farm (i.e., area not under renovation)
    3. Know the unproductive area (i.e., area under renovation) and any newly planted areas, if there are any.
    • Once you know this information about your farm, you must be diligent and responsible to register, on a daily or weekly basis, the following data, grouping them under the following categories. These categories will allow you to refer and share information with other coffee growers who are also keeping track of their costs of production to make decisions in the future.
      A. Costs of lots under production
      1. Harvesting
      2. Weed Control
      3. Fertilization
      4. Pests and disease controls
      5. Post-harvest and drying
      6. Other labor and costs

     

      B. Cost of lots under renovation

     
     

      C. Administrative costs
      1. Administrative expenses
      2. Financing costs

     

    • It is also necessary to register the weekly sales of coffee, the amount of coffee sold (kg) and income received.
    • A coffee grower that knows his costs of production is an empowered producer, one who is able to make better decisions and run a profitable and successful coffee business.

    “For the specialty coffee community to be able to taste the vibrancy of the finest Peruvian coffees, those coffees must be dried with a consistent drying rate at temperatures below 35 degrees Celsius.”

    Ben Schweizer

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