Strawberry Enterprise Budgeting & AGR-Lite Crop Insurance May 25, 2007 Paul D. Mitchell University of Wisconsin-Madison Agricultural and Applied Economics (608)

Goal Today Overview ways to prepare an Enterprise Budget for your strawberry operation Overview ways to prepare an Enterprise Budget for your strawberry operation Provide a list of resources for you to use in this process Provide a list of resources for you to use in this process Brief overview of AGR-Lite with a list of additional resources Brief overview of AGR-Lite with a list of additional resources

Enterprise Budgeting Estimate projected costs, revenue, and net returns for a single enterprise (strawberries) Estimate projected costs, revenue, and net returns for a single enterprise (strawberries) Planning tool to test out new ideas Planning tool to test out new ideas Identify price or yield needed to break even Identify price or yield needed to break even Estimate input, facility, and marketing needs Estimate input, facility, and marketing needs Compare different enterprises to identify best Compare different enterprises to identify best Assess feasibility and profitability of current or potential enterprises Assess feasibility and profitability of current or potential enterprises

Enterprise Budgeting Most farms have multiple crop, livestock, and business enterprises Most farms have multiple crop, livestock, and business enterprises Enterprise budgets estimate costs, revenues and net returns for each farm enterprise Enterprise budgets estimate costs, revenues and net returns for each farm enterprise Each enterprise budget a “Lego” Each enterprise budget a “Lego” Snap “Legos” together to make your farm Snap “Legos” together to make your farm Try different mix of “Legos” to look at different farms you could operate Try different mix of “Legos” to look at different farms you could operate

Building an Enterprise Budget Revenues – Costs = Returns Revenues – Costs = Returns No formal structure for enterprise budget No formal structure for enterprise budget Cost categories used Cost categories used Variable or Operating Costs Variable or Operating Costs Fixed or Ownership or Overhead Costs Fixed or Ownership or Overhead Costs Machinery and Building Costs Machinery and Building Costs Split into fixed and variable costs? Split into fixed and variable costs? Put into their own category? Put into their own category? Time line version: Planting Costs, Harvest Costs Time line version: Planting Costs, Harvest Costs

Building an Enterprise Budget Concept not hard: Revenue easy to estimate, variable input costs easy too Concept not hard: Revenue easy to estimate, variable input costs easy too Cost estimation difficult for machinery, buildings, facilities, equipment, etc. Cost estimation difficult for machinery, buildings, facilities, equipment, etc. What does it cost to plow a field? What does it cost to plow a field? What is the annual cost of storage shed? What is the annual cost of storage shed? Cost allocation difficult Cost allocation difficult How much tractor repair cost allocate to strawberries? How much tractor repair cost allocate to strawberries? How much farm liability insurance allocate to strawberry production vs. strawberry pick-your-own? How much farm liability insurance allocate to strawberry production vs. strawberry pick-your-own?

Main Point Requires (boring?) work on your part Requires (boring?) work on your part Important: You can see where you are making money and where you are losing it Important: You can see where you are making money and where you are losing it Requires you to make lots of assumptions Requires you to make lots of assumptions Don’t trust someone else’s budget Don’t trust someone else’s budget Make assumptions you are comfortable with, as you bear the responsibility of your choices Make assumptions you are comfortable with, as you bear the responsibility of your choices You need to estimate your costs You need to estimate your costs

Cost Estimation Materials, Supplies, Hired Labor Materials, Supplies, Hired Labor Cost you write checks for Cost you write checks for Easy to calculate if you have records Easy to calculate if you have records Should have records if file taxes (Schedule F) Should have records if file taxes (Schedule F) Machinery/Facilities/Equipment Machinery/Facilities/Equipment Includes costs you don’t write checks for Includes costs you don’t write checks for Harder to estimate/measure, but can be a large component of your costs Harder to estimate/measure, but can be a large component of your costs Machinery for grain production: 25-40% costs Machinery for grain production: 25-40% costs

Machinery/Equipment/Facility Cost Concepts Variable Cost, Use-Related Cost, Operating Cost Variable Cost, Use-Related Cost, Operating Cost Costs from using the machine, equipment, or building Costs from using the machine, equipment, or building Maintenance, use-related repairs and labor, fuel, lube Maintenance, use-related repairs and labor, fuel, lube You write checks for these You write checks for these Fixed Cost, Time-Related Cost, Overhead Cost Fixed Cost, Time-Related Cost, Overhead Cost Costs paid whether use it or not Costs paid whether use it or not Interest, insurance, taxes, housing Interest, insurance, taxes, housing You write checks for these You write checks for these

Depreciation Both a variable and fixed cost Both a variable and fixed cost How much the machine/facility/equipment loses value from use and age How much the machine/facility/equipment loses value from use and age Vehicle loss in value due to mileage (variable cost) and age (fixed cost) Vehicle loss in value due to mileage (variable cost) and age (fixed cost) You do not write a check for this one You do not write a check for this one Various methods to estimate (straight line) Various methods to estimate (straight line) Tax depreciation too fast, no salvage value Tax depreciation too fast, no salvage value See various resources for more information See various resources for more information

Allocation Problem Some variable costs should be allocated across multiple years Some variable costs should be allocated across multiple years Tractor tires, engine overhaul, barn roof or painting Tractor tires, engine overhaul, barn roof or painting Pubs list average annual costs for many common types of machines and buildings Pubs list average annual costs for many common types of machines and buildings Problem: strawberry growers not “common” Problem: strawberry growers not “common” Many costs must be allocated to more than one enterprise Many costs must be allocated to more than one enterprise Farm truck, machine shed or shop, property taxes, farm liability insurance, etc. Farm truck, machine shed or shop, property taxes, farm liability insurance, etc. Use some basis: % revenue, % acres, % time, etc. Use some basis: % revenue, % acres, % time, etc.

Fast and Simple Method Complexities make estimating your actual machinery/equipment/facility costs difficult, time consuming, full of assumptions Complexities make estimating your actual machinery/equipment/facility costs difficult, time consuming, full of assumptions Custom or rental rates can be fast and simple basis to estimate annual costs for machinery/equipment/facilities Custom or rental rates can be fast and simple basis to estimate annual costs for machinery/equipment/facilities Worked out a method for grain producers, but not clear how applies to strawberries Worked out a method for grain producers, but not clear how applies to strawberries

Fast and Simple Method Typical grain farmer costs likely higher than observed custom rates Typical grain farmer costs likely higher than observed custom rates Custom operators Custom operators Run over more acres, spread fixed costs Run over more acres, spread fixed costs Lower purchase price by searching for best price or getting volume discounts Lower purchase price by searching for best price or getting volume discounts More efficient operators More efficient operators Family/friends not charge each other enough Family/friends not charge each other enough Custom rate discounted because not perfect timing Custom rate discounted because not perfect timing

Fast and Simple Method and Strawberries Special equipment/buildings so no custom or rental rate to use Special equipment/buildings so no custom or rental rate to use Fewer acres, so less land to spread fixed costs over—higher per acre costs Fewer acres, so less land to spread fixed costs over—higher per acre costs Older, smaller, cheaper, mostly depreciated machinery and equipment— lower per acre costs Older, smaller, cheaper, mostly depreciated machinery and equipment— lower per acre costs How do custom rates compare to typical costs? How do custom rates compare to typical costs?

Family Labor and Management Track/estimate hours of family labor and charge to enterprises as if paid fair wage Track/estimate hours of family labor and charge to enterprises as if paid fair wage Then the net return generated by the enterprise is the return to your management Then the net return generated by the enterprise is the return to your management Track/estimate management time and charge to enterprises as if paid fair wage Track/estimate management time and charge to enterprises as if paid fair wage Then the net return generated by the enterprise is the return to ownership/investment Then the net return generated by the enterprise is the return to ownership/investment

Building an Enterprise Budget Two Basic Approaches Start with an enterprise and list all inputs and activities and their cost Start with an enterprise and list all inputs and activities and their cost More intuitive approach More intuitive approach Often miss farm overhead costs Often miss farm overhead costs Start with all farm costs (Schedule F) and allocate each cost to each farm enterprise Start with all farm costs (Schedule F) and allocate each cost to each farm enterprise Forces you to allocate all farm costs Forces you to allocate all farm costs Need adjustments: inventories, depreciation, family labor, allocation of multi-year costs, etc. Need adjustments: inventories, depreciation, family labor, allocation of multi-year costs, etc.

First Approach Most common, many available Most common, many available Usually spreadsheet based Usually spreadsheet based See additional resources See additional resources Wide distribution in estimates Wide distribution in estimates Class assignment ($/ac) 3,500; 4,400; 7,200; 7,800; 8,100; 15,000; 26,000 Class assignment ($/ac) 3,500; 4,400; 7,200; 7,800; 8,100; 15,000; 26,000 Woods et al (2006): $4,739/ac Woods et al (2006): $4,739/ac

Second Approach Allocate all your Schedule F costs Allocate all your Schedule F costs Built system for Wisconsin potato growers that can be easily adapted to strawberries Built system for Wisconsin potato growers that can be easily adapted to strawberries Spreadsheet based system on internet Spreadsheet based system on internet See additional resources See additional resources

Multi-Year Crops How deal with establishment year versus later years for strawberries? How deal with establishment year versus later years for strawberries? Assume establish year 1, then 3 more years Assume establish year 1, then 3 more years 1 st approach: treat strawberry patch as an investment, calculate the net present value of its cash flow over 4 years and annualize it 1 st approach: treat strawberry patch as an investment, calculate the net present value of its cash flow over 4 years and annualize it See additional resources See additional resources 2 nd approach: average net return across life of patch, as though ¼ of patches of each age 2 nd approach: average net return across life of patch, as though ¼ of patches of each age

Conclusion Strawberry enterprise budget are useful Strawberry enterprise budget are useful Identify price or yield needed to break even Identify price or yield needed to break even Estimate input, facility, and marketing needs Estimate input, facility, and marketing needs Assess profitability of current operation Assess profitability of current operation Requires you to make lots of assumptions Requires you to make lots of assumptions Don’t trust someone else’s budget Don’t trust someone else’s budget Make assumptions you are comfortable with, as you bear the responsibility of your choices Make assumptions you are comfortable with, as you bear the responsibility of your choices You need to estimate your costs and it is WORK You need to estimate your costs and it is WORK