Budgets: Uses in Farm Management

Damona DoyeOSU Extension Economist

Types of Budgets

Whole-farm

Enterprise

Partial

Whole-Farm Budget Identify the resources available for use in

productionDetermine physical production data that

will be used in the input/output process Identify reliable prices (input/output)Calculate expected costs and returnsProvides a plan for maximizing the returns

to owned resources.

Enterprise BudgetsProvide an estimate of potential revenue,

expenses, and profit for a single enterpriseEach type of crop or livestock is an enterpriseThe base unit for crops is usually one acreThe base unit for livestock may be one head

or some other convenient size

Partial BudgetsFocus on costs and benefits of alternative

plans on a small part of the farmConsider only the costs and returns that

will change Isolate the impact of changeOrganize data to minimize the chances of

overlooking something or counting an item twice

Why Budget?

Why Budget?Planning

Evaluate options before you commit resourcesTest economic and financial feasibility of

alternatives (different enterprises, different production systems) Estimate profits Project cash flows

Estimate the size of farm needed to earn a specified return

Develop a production and marketing planUncover costs that you may not have considered

Why Budget? Implementation

Provide the documentation necessary to obtain/maintain creditworthiness

Estimate the amount of rent that can be paid for land or machinery

Identify production and financial risks and whether they may be managed

Monitor cash flows

Why Budget?Control

Think of the enterprise budget as an enterprise specific “income statement”

Compare projected to actual results

Constructing an Enterprise Budget Revenue

all cash and noncash revenue from production Operating or variable expenses

all costs that would be incurred only if the crop/livestock is produced

Ownership or fixed expenses costs that must be paid even if no crop/livestock is

produced Profit

return to all resources that were not charged in the budget (usually management)

Revenue Crop

Yield Price Government payments Crop insurance

proceeds Changes in inventory Other sources

Livestock Production: calves,

pigs, milk, etc. Price Breeding herd

replacements Changes in inventory

(Operating) Variable CostsCrop BudgetSeed, fertilizer, and

chemicalsFuel, oil, and

lubricantsRepairsLabor (operator and

hired) Interest on variable

expensesOther cash

expenses

Livestock BudgetFeedVeterinary and

healthRepairsLabor (operator

and hired) Interest on

variable expenses

Fixed CostsMachinery, equipment, building/facility

Depreciation Economic useful life

Interest Average investment (opportunity cost on funds) Interest rate

Taxes and insuranceLand charge?

Interpreting and Analyzing Enterprise BudgetsAn economic enterprise budget includes

information on opportunity costs of labor, capital, land and perhaps management.

The profit (or loss) is what remains after covering all expenses, including opportunity costs.

Interpreting and Analyzing Enterprise Budgets Returns Above Total Operating Costs

Production economically rational if total receipts minus total operating costs is greater than zero in the short run

Returns Above All Specified CostsReturn to management, risk, and land must be

positive to survive in the long run

Budget notesMany possible input levels and

combinations.Least cost input combinations should be

incorporated into budget.Fixed cost estimates are usually based on

an assumed farm size or level of input use.Unit of measurementTime periodMultiple products

Other budget notes Price and production assumptions

A budget to be used in next year’s plan should use an estimate of next year’s prices and production levels.

A budget that is used to make long range plans should use long-run estimates of prices and production levels.

Price received - ready markets or limited buyers? Use budgets to conduct sensitivity

Average, best case, worse case yields or performance Average, best case, worse case prices

Break-Even AnalysisWhat quantity of yield/price is required to

cover wheat production costs? Operating costs $157.73Fixed costs 31.37Total costs $189.10

To cover variable costs: $158 cost/33.4 bu = $4.72 break-even wheat price $158 cost/$6 wheat price = 26 bu break-even yield

To cover all costs : $189 cost/33.4 bu = $5.66 break-even wheat price $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

Corn Meat Goats Alfalfa

Corn Silage Stocker GoatsCotton Horticulture

Grain Sorghum BlueberriesOats 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 Organize projected income and expenses for a single enterprise. Economic budgets will include opportunity costs in addition to

cash costs and depreciation. 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 Calculate break-even price Develop marketing goals Identify appropriate risk management strategies. Costs vary from farm to farm and year to year.

Two steps in partial budgeting:

Identify the impacts of change

Quantify the impacts

GIGO = garbage in, garbage out

Partial Budget FormatPositive Effect

Additions to Income Added Receipts Reduced Expenses Total Additions

Negative Effect

Subtractions from Income Added Expenses Reduced Receipts Total Subtractions

Net change associated with the decision = ?

Should I harvest or graze-out wheat?

Positive Effect

Additions to Income Added Receipts Reduced Expenses Total Additions

Negative Effect

Subtractions from Income Added Expenses Reduced Receipts Total Subtractions

Net change associated with the decision = ?

Limitations of Partial Budgets Only useful in comparing the profitability

of two alternatives Won’t tell you if a proposed change is the

most efficient or profitable use of resources given all alternatives

Doesn’t account for time value of money Data may not be readily available Some things are hard to quantify

Sources of Budget Information Actual farm records Extension educators and specialists, educational

materials, and meetings Books on husbandry, industry Producer organizations Other producers Internet sites

Agecon.okstate.edu/budgets Budget Library in National Ag Risk Education Library:

http://www.agrisk.umn.edu/Budgets/CustomSearch.aspx Use third party sources with caution!

Budget Reminders Match to your operation

List all relevant factors Be reasonable in your estimates Can be incomplete or unrealistic if adequate records not

available Include cash and non-cash costs where appropriate

Is it feasible? Cash flow vs. profit Actual vs. planned - compare at regular intervals to

see if problems are occurring