Cost of Goods Sold in Farming: How To Calculate Yours

When farms sell directly to consumers, there are a lot of costs to keep track of. Everything from storage and shipping to website maintenance and staffing affects your business' profitability.

When you look at an income or profit and loss statement, you’ll see a line titled “COGS.” This stands for cost of goods sold and is arguably one of the most important financial figures for a farm to know.

In brief, COGS are the expenses involved in purchasing or creating your products from start to finish.

A solid understanding of the cost of goods sold in farming can help you:

Improve your profit margins
Reduce your tax burden
Help you become more efficient

However, calculating COGS in farming can be tricky depending on the size of your operation and the variety of food you sell. In this article, we’ll explain why COGS is so important, how to calculate it, and give you a few tips on lowering your costs.

What Is COGS in Farming

The cost of goods sold is the total expenses that go directly into producing your food products. These costs are separate from operating expenses like insurance, rent, and utility bills. That said, some labor and facility fees factor into COGS. The calculation gets more complicated the bigger your operation is and the more types of goods you sell.

Some common examples of COGS for a farm or agricultural business include:

Animal feed
Vet bills
Seed, soil, and fertilizer
Packaging and labels
Buying animals
Labor costs

As we already mentioned, costs that are shared by multiple products (e.g., tractor maintenance, warehouse cost, subscriptions) would be considered indirect operating expenses, which are classed differently on a profit and loss sheet.

Determining exact COGS for small farms where labor and facility costs are often divided between management and production can be challenging.

Many small businesses use rough estimates (e.g., 65% of labor costs were used on planting/harvesting). This approach can be a good starting point if you strive for honesty and consistency.

Why Understanding COGS Is Important

Knowing the COGS value of your products is key to understanding their profitability and the financial health of your business as a whole. If the costs of producing a product significantly outweigh the profit you get from it, then it’s time to rethink your pricing strategy or production processes.

Tracking these metrics is essential to grasping the profit margin for each product you sell, as well as your business’ gross profit.

Gross Profit = (Revenue - COGS)

Gross profit can tell you a lot about the efficiency of processes from season to season. If gross profits dip from 70% down to 25%, that indicates that some aspect of your production process is inefficient or not cost-effective during that period.

The more accurately you track COGS, the easier it is to make informed decisions about your production processes and product pricing.

How To Calculate Cost of Goods Sold

Calculating COGS in farming is unique for different types of farms. Fundamentally COGS is calculated as:

COGS = (Beginning Inventory Value + Purchased Inventory Value) - Ending Inventory

The “beginning” and “ending” inventory refers to the cost of the inventory you have at the start or end of a given period (e.g., yearly, or during growing and harvesting season for produce).

Purchased inventory includes things like:

Packaging and shipping costs
Cost of inputs and raw materials (feed, seeds, etc.)
Labor costs associated with production (planting, harvesting, packing, etc.)
Estimate of facility and utility costs (percentage) that went toward production

Once you've calculated your COGS, you can determine your COGS percentage:

COGS Percentage = (COGS / Food Sales) x 100

This percentage will help you understand how much of your sales were spent on inputs and production. If you find your COGS percentage is high, it means you’re spending a lot more than you’re making.

3 Tips To Minimize Costs and Improve Profits

Understanding COGS is vital to your farm’s long-term growth. Here are a few tips to make calculating COGS in farming easier and how to use this information effectively.

1. Use Inventory Management Software

It’s nearly impossible to get an honest view of your expenses when you track inventory manually. Spreadsheets and paper-based processes are prone to data entry errors and hard to keep updated.

Instead, use farm inventory management software to track your inputs and products in storage. This will provide:

An accurate, real-time view of inventory
Easier reporting on COGS at year-end
Insight into production status at any given moment

On the fulfillment side, inventory management software can prevent stockouts and spoilage, which is good for customers and your bottom line.

2. Adjust Prices and Processes Strategically

Accurate COGS calculation provides a clear view of profitability. If you find that your COGS percentage is high, you might be inclined to raise prices across the board. This may be a mistake and put off customers.

Instead, analyze individual products. Different products will have different COGS and profit margins.

If a product is popular but has a high COGS percentage, consider raising its price or producing less of it. If a product sells at a high price but still isn’t profitable, it might be worth looking at the specific processes and inputs used to create it.

3. Leverage Data and Reports

The more you embrace digital tools to track your farm inventory and sales, the more you can discover. Combine sales data from your e-commerce platform or point of sale (POS) system together with COGS data to uncover insights that will help you better connect with customers and optimize pricing.

For example, you can use reports and analytics to see:

Profit margins on different items
Sales performance of product variations (e.g., ground beef vs. 10 lb pack of ground beef vs. ground beef subscription)
Bestsellers
Peak demand periods for different product types

…and more. Knowing what your most popular products are and when customers want them can help you make smarter decisions on what to raise and when. This, in turn, will help you more efficiently plan your production and reduce your COGS.

Simplify How You Sell Food Online With an Established E-Commerce Partner

When you operate a small, independent farm, it’s hard to find ways to cut costs and increase efficiency. Having access to all of your inventory, orders, and e-commerce tools in one place helps.

GrazeCart is specifically built for farm to fork e-commerce and packed with powerful, user-friendly features like a no-code website builder, advanced inventory management, sales reports, and more — and unlike generic e-commerce solutions, GrazeCart comes with everything food sellers need out of the box.

Get a free trial of GrazeCart today to see how it can simplify your online sales and inventory tracking. Or see GrazeCart in action by watching the demo below.