Enterprise Budgeting AAE 320 Paul D Mitchell

Enterprise Budgeting AAE 320 Paul D. Mitchell

Goal 1. Explain enterprise budgets: their purpose and use 2. Illustrate enterprise budgets: their different parts 3. Learn how to construct and use enterprise budgets

Purpose of Enterprise Budgets n To estimate projected costs, revenue, and net returns for a single enterprise to assess feasibility or profitability of current or potential enterprises n n How much will I make on corn and soybeans? Planning tool to test out new ideas and compare enterprises to identify best ones How profitable would wheat be? n How do snap beans compare to soybeans? n

Purpose of Enterprise Budgets n Estimate needs for inputs, facilities and storage, and marketing n n For your crops n How much fertilizer, seed, chemicals do you order? n Do you need new/bigger equipment? n How much grain storage and marketing do need? For your livestock n How much feed and bedding do you need? n How much can you grow and how much buy? n What about hired labor?

Enterprise Budgets n n n Usually “Enterprise” = a crop or livestock Corn, soybeans, wheat, alfalfa Dairy, feeder beef, cow-calf, hogs Specialty crops: sweet corn, trout, mink Conventional vs no-till Grazing vs. confinement

Enterprise Budgets n Use a constant base unit n n Crops = 1 acre Livestock = 1 head Allows comparison across enterprises Compare wheat to corn and soybeans n Compare farrow-to-finish to finishing only n n n Each enterprise budget a “Lego” Snap “Legos” together to make your farm

Parts of Enterprise Budget n n n Revenues – Costs = Returns No formal structure as for balance sheet or income statement Cost categories used n n n Machinery costs n n n Split into fixed and variable costs? Lump together into own category? Opportunity Costs n n Variable/Operating Costs Fixed/Ownership/Overhead Costs Which ones included, which ones ignored Time line version: Planting Costs, Harvest Costs

Examples n n Illustrate diversity in enterprise budgets All for Corn following Soybeans Iowa: “Crop Production Cost Budgets” www. extension. iastate. edu/agdm/crops/pdf/a 1 -20. pdf n Illinois: “Crop Budgets” http: //www. farmdoc. uiuc. edu/manage/newsletters/fefo 09_06/FEFO_09_06. pdf n Wisconsin: “Crop Enterprise Budget” http: //www. cdp. wisc. edu/wk 1/Corn%20 after%20 Soybeans%20 Budget%20 for%20 Wisconsin. xls http: //www. aae. wisc. edu/mitchell/Corn%20 Soybeans%20 Small%20 Grains. xls n Main point: No “right” way to do enterprise budget

Enterprise Budgets and You n n Costs and returns to the same enterprise vary greatly among producers Lots of example enterprise budgets and returns projections available Do not accept someone else’s enterprise budget for the cost and returns for growing corn, soybeans, dairy, beef, etc. as your costs You need to know your own costs, not someone else’s estimate or the typical costs

Minnesota Data for 1996 Corn Soybeans Source: Kent D. Olson and Heman D. Lohano. 1997 “Will the Real Cost of Production Please Stand Up? ” Minnesota Agricultural Economists No. 687 http: //www. extension. umn. edu/n ewsletters/ageconomist/com ponents/ag 237 previous. html

Illinois Data for 2006 Source: Gary Schnitkey “Crop Production Cost and Rotation Decisions” http: //www. farmdoc. uiuc. edu/IFES/2007/presentations/Farm Economic Summit - Schnitkey. pdf

Enterprise Budgets n n Concept not hard: Revenues – Costs = Returns Revenue easy to estimate: Price x Yield n n n If you already grow it, you should know For common crops and livestock, prices and typical yields available from many places Variable input costs easy too n n n If you already grow it, you should know Price x quantity use per acre Internet or call around for prices, typical use rates

Enterprise Budgets n n n Cost estimation difficult for machinery, buildings, facilities, equipment, etc. What does it cost to chisel plow a field? What is the annual cost of a dairy barn? What portion of tractor repair should be allocated to soybean production? Machinery Costs as an Example

Machinery Cost Concepts n n n Substantial component of costs (25%-40%) Difficult to measure/estimate: user specific Variable Cost, Use-Related Cost, Operating Cost n n n Fixed Cost, Time-Related Cost, Overhead Cost n n n Costs due to using the machinery Fuel, lube, maintenance, use-related repairs and labor Costs paid whether you use the machinery or not Interest, insurance, taxes, housing Depreciation: both a variable and fixed cost

Machinery Costs n Best method: keep accurate records of machinery use (hours) for each enterprise, expenses (fuel, repairs, maintenance), and current market value and use them to determine your Actual Machinery Costs for each enterprise n n Most farmers don’t do this Estimate Machinery Costs if you do not have records or you are looking at new options n Economic Engineering Approach n Adjust Custom Rates

Economic Engineering Approach n n Estimate machinery costs based on careful engineering data collection Use the machinery and carefully document n n repairs, maintenance, fuel/lubrication speed, turning time, labor Develop formulas to estimate fixed and variable machinery costs Market data and survey of used machinery buyers/sellers to develop formula for machine values as they age

UW Resources n Ron Shuler (UWEX-BSE): Updated A 3510 “Estimating Ag. Field Machinery Costs” Bulletin with worksheets n Spreadsheet n Official A-series publication n n http: //www. aae. wisc. edu/aae 320/Budgets/A 3510. pdf n http: //www. aae. wisc. edu/aae 320/Budgets/Machinery%20 Costs%20 A 3510. xls

Other Resources n William Edwards (IA Extension-Econ): “Estimating Farm Machinery Costs” n n n Bulletin with worksheets www. extension. iastate. edu/Publications/PM 710. pdf Lazarus and Selley (MN) “Farm Machinery Economic Cost Estimates for 200 Y” n Bulletin with fixed and variable costs for different machinery operations Lots more on machinery management n http: //www. apec. umn. edu/faculty/wlazarus/documents/mf 2008. pdf n

Main Idea n n n Fixed Costs: depreciation, interest, taxes, insurance, housing Variable Costs: repairs and maintenance, fuel, lubrication, labor, (timeliness) Usually simple factors: n n n For example: 1% of purchase price for cost of insurance and housing Fuel = 0. 044 x PTO HP x hours of use x fuel price Lubrication = 0. 15 x Fuel Cost Repairs and maintenance = % x new purchase price, with % adjusted for age or total use hours See the publications for more information

Machinery Cost Example n n n n What does it cost to run a chisel plow? Lazarus and Selley 2005 (23 ft): $6. 81/ac Iowa 2005 Custom Rate $11. 05/ac Wisconsin 2004 Custom Rate : $13. 30/ac ($14. 70/ac in WI 2007 Custom Rate) Indiana 2004 Custom Rate $11. 78/ac South Dakota (East) Custom Rate: $10/ac Missouri 2003 Custom Rate $10/ac ($12. 10/ac heavy soil) SW Minnesota 2001: $10. 83/ac

Why not just use Custom Rates? n Custom rates not good estimates of typical farmer costs—usually too low Run over more acres, spread fixed costs n Volume discounts or search for best price, so lower purchase price n More efficient operators n Family/friends not charge enough n Discounted because not perfect timing n

Adjusting Custom Rates to Estimate your Cost n n Adjusting custom rates is an easy way to estimate typical machinery costs K. Dhuyvetter and T. Kastens at Kansas State University developed a formula using KFMA cost data and custom rates www. agmanager. info/farmmgt/machinery/MF 2583. pdf n UWEX bulletin and Spreadsheet “Fast and Simple Method to Estimate Machinery Costs" www. aae. wisc. edu/mitchell/Fast and Simple Method. pdf

Scale Factor Calculation n n Scale Factor = 1. 241 + (33. 026/acres) Acres is annual acres operated Your Cost = Scale Factor x Custom Rate If you operate 1500 acres, then Scale Factor = 1. 241 + (33. 026/1500) = 1. 263 Means your costs are 26. 3% greater than the custom rate for a machinery operation

1. 55 1. 50 Scale Factor 1. 45 1. 40 1. 35 1. 30 1. 25 1. 20 0 500 1000 1500 2000 2500 Acres of Cropland 1 – Scale Factor = % increase (as decimal) that your costs exceed the Custom Rate Acres 100 200 300 400 500 600 700 800 900 1000 1100 3000 1200 1300 1400 1500 1600 1700 1800 1900 2000 Scale Factor 1. 571 1. 406 1. 351 1. 324 1. 307 1. 296 1. 288 1. 282 1. 278 1. 274 1. 271 1. 269 1. 266 1. 265 1. 263 1. 262 1. 260 1. 259 1. 258

Caveats n Custom rates have wide ranges—call around, use Custom Rate Guides from Wisconsin and surrounding states http: //www. aae. wisc. edu/aae 320/Budgets/WI_custom_rates_2007. pdf n n Formula to adjust custom rates not perfect Use these machinery costs as a n n Guide to estimate typical costs Benchmark for comparison Method is not your actual costs for machinery Need good records to estimate actual costs

Think Break #19 n Estimate a typical cost to chisel plow a field for a farm of your size using the Fast and Simple Method a) Local custom rate is $16/ac b) You run 1800 acres of crop land n Remember: Scale Factor = 1. 241 + (33. 026/acres) Typical Cost = Scale Factor x Custom Rate

Enterprise Budget Example: Corn n n Budget Template to implement this “Fast and Simple Method” Work through an example

Crop Budgets Special Cases n Crops such as alfalfa and pasture n n Create separate budgets for establishment and nonestablishment years, then include pro-rated cost of establishment on the non-establishment year budget Establishment is $120/ac, non-establishment is $25/ac for 3 more years, so add $120/4 = $30/ac Orchards, vineyards, etc. : do net present value analysis of the entire cost stream Storage, transportation, marketing, etc. : some crops large cost (vegetables, fruits) for these expenses, with different prices by sale date

Livestock Enterprise Budgets n n Many exist, many different ways used Unit: one cow, one hog, one ewe, etc. , or one sow-litter, cow-calf, ewe-lambs, etc. Time period: hogs, flocks: more than one per year, others longer than one year, so adjust all costs to the same time period Machinery, facilities, and equipment: fixed and variable costs just as for crops

Livestock Enterprise Budgets n Multiple Outputs: milk, cull cows, calves Adjust to one “cow unit” = 24, 000 lbs milk, 0. 39 cull cows, 0. 52 calves, and 0. 21 replacement heifers produced per year n Include death loss and < 100% calving n n Examples n Iowa State University n http: //www. extension. iastate. edu/agdm/livestock/html/b 1 -21. html n Center for Dairy Profitability & Team Forage n n http: //www. cdp. wisc. edu/Decision%20 Making%20 Tools. htm http: //www. uwex. edu/CES/crops/uwforage/dec_soft. htm

Livestock Enterprise Budgets n Raised crop used for livestock feed n n n Manure used as crop fertilizer n n n Cost for livestock use should be its opportunity cost— the cost if you had to buy the grain Credits crop with the full value of its production Cost to crop at its opportunity cost—the cost if you had to buy the equivalent fertilizer Credits livestock with full value of its production Delivery/Hauling costs for grain and manure n Charge all to one enterprise or split between?

Break-Even Yield and Price What yield or price do you need to break even on the enterprise? Break-Even Yield: At a given price, the yield needed to cover all costs Break-Even Yield = Total Cost/Output Price Break-Even Price: For a given average yield, the price needed to cover all costs Break-Even Price = Total Cost/Average Yield

Allocating Overhead Costs n Farms overhead costs must be allocated across all enterprises n n n Workshop costs, membership dues, insurance, legal fees, accounting costs, taxes, utilities, office costs, etc. These costs should be declared on Schedule F, with depreciation tracked in farm records Enterprise budgets often miss these or similar costs

Whole Farm Budget n n n Budgeting system based on Schedule F to allocates ALL costs 3 year average of costs for each Schedule F category to “avoid” accrual adjustments Income Statement: better base to allocate costs from, but not all farms have Main idea: Allocate % of Schedule F cost to each enterprise, all costs allocated Examples Potatoes and Veggie Compass

Summary n n Defined & presented example Enterprise Budgets Details on machinery costs: Economic Engineering vs Custom Rates approach n n n Fixed Costs: depreciation, interest, taxes, insurance, housing Variable Costs: repairs and maintenance, fuel, lubrication, labor Example Budget Template Special Cases: Livestock, Perennial Crops Allocating Overhead: Schedule F and Whole Farm Budget n Example Budget Template (Potatoes)