Budgets Uses in Farm Management Types of Budgets

Budgets: Uses in Farm Management

Types of Budgets n Whole-farm n Enterprise n Partial

Whole-Farm Budget n Identify the resources available for use in production n Determine physical production data that will be used in the input/output process n Identify reliable prices (input/output) n Calculate expected costs and returns n Provides a plan for maximizing the returns to owned resources.

Enterprise Budgets n Provide an estimate of potential revenue, expenses, and profit for a single enterprise n Each type of crop or livestock is an enterprise n The base unit for crops is usually one acre n The base unit for livestock may be one head or some other convenient size

Partial Budgets n Focus on costs and benefits of alternative plans on a small part of the farm n Consider only the costs and returns that will change n Isolate the impact of change n Organize data to minimize the chances of overlooking something or counting an item twice

Why Budget?

Why Budget? n Planning q Evaluate options before you commit resources q Test economic and financial feasibility of alternatives (different enterprises, different production systems) n Estimate profits n Project cash flows q Estimate the size of farm needed to earn a specified return q Develop a production and marketing plan q Uncover costs that you may not have considered

Why Budget? n Implementation q Provide the documentation necessary to obtain/maintain creditworthiness q Estimate the amount of rent that can be paid for land or machinery q Identify production and financial risks and whether they may be managed q Monitor cash flows

Why Budget? n Control q. Think of the enterprise budget as an enterprise specific “income statement” q. Compare projected to actual results

Constructing an Enterprise Budget n Revenue q all cash and noncash revenue from production n Operating or variable expenses q all costs that would be incurred only if the crop/livestock is produced n Ownership or fixed expenses q costs that must be paid even if no crop/livestock is produced n Profit q return to all resources that were not charged in the budget (usually management)

Revenue n Crop q Yield q Price q Government payments q Crop insurance proceeds q Changes in inventory q Other sources n Livestock q Production: calves, pigs, milk, etc. q Price q Breeding herd replacements q Changes in inventory

(Operating) Variable Costs Crop Budget q Seed, fertilizer, and chemicals q Fuel, oil, and lubricants q Repairs q Labor (operator and hired) q Interest on variable expenses q Other cash expenses Livestock Budget q Feed q Veterinary and health q Repairs q Labor (operator and hired) q Interest on variable expenses

Fixed Costs n Machinery, equipment, building/facility q Depreciation n Economic useful life q Interest n Average investment (opportunity cost on funds) n Interest rate q Taxes and insurance n Land charge?

Interpreting and Analyzing Enterprise Budgets n An economic enterprise budget includes information on opportunity costs of labor, capital, land perhaps management. n The profit (or loss) is what remains after covering all expenses, including opportunity costs.

Interpreting and Analyzing Enterprise Budgets n Returns Above Total Operating Costs q Production economically rational if total receipts minus total operating costs is greater than zero in the short run n Returns Above All Specified Costs q Return to management, risk, and land must be positive to survive in the long run

Budget notes n Many possible input levels and combinations. n Least cost input combinations should be incorporated into budget. n Fixed cost estimates are usually based on an assumed farm size or level of input use. n Unit of measurement n Time period n Multiple products

Other budget notes n Price and production assumptions q A budget to be used in next year’s plan should use an estimate of next year’s prices and production levels. q A budget that is used to make long range plans should use long-run estimates of prices and production levels. q Price received - ready markets or limited buyers? n Use budgets to conduct sensitivity q Average, best case, worse case yields or performance q Average, best case, worse case prices

Break-Even Analysis n What quantity of yield/price is required to cover wheat production costs? Operating costs $157. 73 Fixed costs 31. 37 Total costs $189. 10 To cover variable costs: n $158 cost/33. 4 bu = $4. 72 break-even wheat price n $158 cost/$6 wheat price = 26 bu break-even yield To cover all costs : n $189 cost/33. 4 bu = $5. 66 break-even wheat price n $189 cost/$6 wheat price = 32 bu break-even yield

Sensitivity Analysis

OSU Enterprise Budgets Crops Livestock Hay & Pasture Barley Cow/Calf Perennial Forages Canola Stocker Cattle Annual Forages Meat Goats Alfalfa Corn Silage Stocker Goats Cotton Horticulture Grain Sorghum Blueberries Oats Grapes Peanuts Native & Improved Pecans Rye Peaches Soybeans Watermelon Wheat As a part of Annie’s Project, you can select any 4 budgets free!

Summary: Enterprise Budgets n Organize projected income and expenses for a single enterprise. n Economic budgets will include opportunity costs in addition to cash costs and depreciation. n Can be used to compare the profitability of different enterprises and are useful for developing a whole-farm plan. Need to know cost of production to n Calculate break-even price n Develop marketing goals n Identify appropriate risk management strategies. Costs vary from farm to farm and year to year.

Two steps in partial budgeting: n Identify the impacts of change n Quantify the impacts GIGO = garbage in, garbage out

Partial Budget Format Positive Effect Additions to Income n Added Receipts n Reduced Expenses n Total Additions Negative Effect Subtractions from Income n Added Expenses n Reduced Receipts n Total Subtractions Net change associated with the decision = ?

Should I harvest or graze-out wheat? Positive Effect Additions to Income n Added Receipts n Reduced Expenses n Total Additions Negative Effect Subtractions from Income n Added Expenses n Reduced Receipts n Total Subtractions Net change associated with the decision = ?

Limitations of Partial Budgets n Only useful in comparing the profitability of two alternatives n Won’t tell you if a proposed change is the most efficient or profitable use of resources given all alternatives n Doesn’t account for time value of money n Data may not be readily available n Some things are hard to quantify

Sources of Budget Information n Actual farm records n Extension educators and specialists, educational materials, and meetings n Books on husbandry, industry n Producer organizations n Other producers n Internet sites q Agecon. okstate. edu/budgets q Budget Library in National Ag Risk Education Library: http: //www. agrisk. umn. edu/Budgets/Custom. Search. aspx n Use third party sources with caution!

Budget Reminders n Match to your operation q List all relevant factors q Be reasonable in your estimates q Can be incomplete or unrealistic if adequate records not available q Include cash and non-cash costs where appropriate n Is it feasible? Cash flow vs. profit n Actual vs. planned - compare at regular intervals to see if problems are occurring