Categorize Expenses
- Grant Wiese
- May 19
- 4 min read
Updated: May 20
SW Financial Literacy
Categorize Expenses
Fixed Costs vs. Variable Costs
We all create and update our cash flow or income/expense report throughout the year (at least I hope you are doing this!). Many cash flow projections for row crop producers at the start of 2025 were breakeven at best due to high input costs and lowering commodity prices.
An up-to-date cash flow during the year can help you decide:
grain marketing.
if additional expenses (think chemical/fertilizer) will help the bottom line.
if there is enough profit for farm upgrades or purchases.
Here is one more powerful way to categorize expenses on your cash flow to determine strengths and weaknesses in the structure of your operation.
Variable Costs
Variable costs are made up of your crop and operating inputs to raise the livestock/grain.
Here is a full but not exhaustive list of what makes up your variable costs:
Car & Pickup, Chemicals, Custom Hire, Feed, Fertilizer, Freight & Trucking, Fuel, Insurance, Interest – Operating, Labor, Marketing, Repairs, Seed, Storage, Supplies, Utilities, Vet, Miscellaneous Expenses
Note: Land rent and equipment rent are not considered Variable Costs but are considered Operating Costs. More on this below.
You should be familiar with these line items, they come from the Schedule F on your tax returns. Together with land and equipment rent they make up your Operating Expenses.
Note: Depreciation is not included as Variable Cost or Fixed Cost as it is a tax number for purchased assets, not a physical expense you write a check out for each year. If you want to factor in replacement costs as ‘depreciation’, you can figure that math in at the bottom of the article.
Now, take these Variable Costs + land and equipment rent to come up with your Operating Expenses. Then Operating Expenses divided by your Gross Farm Income to find your Operating Expense Ratio.
Total Operating Expenses / Gross Farm Income = Operating Expense Ratio
A typical Operating Expense Ratio is between 70-80% for a row crop operation in the Midwest. Ask your lender if you are high or low compared to your peers. A lower % signifies you are more efficient at generating income.
If your cash flow is constantly tight and the operation is losing money, check this number. Often, the producer has an Operating Expense Ratio > 80% for several years going back. This makes them a high expense operator, and the money they spend raising the crop is not being realized with sufficient increases to their Gross Farm Income. The operation needs to reduce their input spending to return to profitability.
Fixed Costs
Fixed costs consist of expenses that you must pay to keep existing assets, and there is very little movement in how much these will cost you. They include:
Term Principal Payments, Term Interest Payments, Taxes, Land Rent, Equipment Lease Payments.
Land rent and equipment lease payments are a signed contract very similar to a loan payment. You are locked into this and if you don’t pay, you forfeit the asset. Just like any asset you make loan payments on.
Machinery rent by the hour from a dealership is not locking you into a multi-year contract and would be considered a variable expense.
Now, let’s create a Fixed Cost Ratio the same way we made our Operating Expense Ratio.
Total Fixed Costs / Gross Farm Income = Fixed Cost Ratio
You ideally want this figure below 20% as it represents how much of your income goes toward making contracted payments. If you have a very strong Operating Expense Ratio in the lower 70’s%, maybe you can handle slightly more debt obligations than your peers. Find where you are efficient and where your expenses are out of line and need correcting.
Fixed costs are easier to control than variable expenses because variable expenses vary year to year, obviously!
Note: None of these include your living expenses! If you don’t have off farm income to cover living expenses, then you need to leave room to cover for living!
Land/Equipment Rent
Hold on! You had land rent and equipment rent under Operating Expenses and Fixed Costs!
That's right! Here's how it fits in:
Operating expenses are the costs required to run the farm during a production cycle, and land rent qualifies because it’s paid regularly (usually annually) and tied to the operation of the farm.
It shows up on the Schedule F (Profit or Loss From Farming) under "Rent or lease—vehicles, machinery, equipment, and land" in U.S. tax accounting.
Fixed expenses are costs that do not change with the level of production. Land rent, whether it’s a cash lease or a share lease, typically remains constant over the lease term (e.g., per acre per year), regardless of how many bushels you produce.
It’s a committed cost that must be paid even if you plant less acreage or have a poor yield year.
Exception:
If land rent is structured as a flex lease—where the rent amount changes based on crop prices or yields—it can have variable characteristics, but it's still usually categorized under fixed expenses for simplicity in financial planning.
Summary:
Operating Expense — included in income statements and cash flow statements
Fixed Expense — doesn't vary with production level (in most leases)
So land rent is both:
A fixed cost (most of the time), and
An operating cost
Conclusion
With land and equipment rent counting towards both operating expenses and fixed expenses, obviously the ratios won't add up to 100%. The ratios are meant to be tracked separately and year over year to establish trends within your operation and identify where your expenses are getting too high.
Final Note: If this bothers your type A, you are welcome to run a Variable Cost ratio against your Fixed Cost ratio. Just make sure this number then comes in below 100%!
Need help with your operation's financials?
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Have a great week!
Grant
