1. Enterprise Budgeting AAE 320 Paul D. Mitchell

2. 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

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

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

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

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

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

8. Examples Illustrate diversity in enterprise budgets Illustrate diversity in enterprise budgets All for Corn following Soybeans Iowa: “Crop Production Cost Budgets” Iowa: “Crop Production Cost Budgets” www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf Illinois: “Crop Budgets” Illinois: “Crop Budgets” http://www.farmdoc.uiuc.edu/manage/newsletters/fefo09_06/FEFO_09_06.pdf Wisconsin: “Crop Enterprise Budget” Wisconsin: “Crop Enterprise Budget” http://www.cdp.wisc.edu/wk1/Corn%20after%20Soybeans%20Budget%20for%20Wisconsin.xls http://www.aae.wisc.edu/mitchell/Corn%20Soybeans%20Small%20Grains.xls Main point: No “right” way to do enterprise budget Main point: No “right” way to do enterprise budget

9. Enterprise Budgets and You Costs and returns to the same enterprise vary greatly among producers Costs and returns to the same enterprise vary greatly among producers Lots of example enterprise budgets and returns projections available 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 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 You need to know your own costs, not someone else’s estimate or the typical costs

10. Minnesota Data for 1996 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/ag237previous.html http://www.extension.umn.edu/n ewsletters/ageconomist/com ponents/ag237previous.html Corn Soybeans

11. 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 http://www.farmdoc.uiuc.edu/IFES/2007/presentations/Farm Economic Summit - Schnitkey.pdf

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

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

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

15. Machinery Costs 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 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 Most farmers don’t do this Most farmers don’t do this Estimate Machinery Costs if you do not have records or you are looking at new options Estimate Machinery Costs if you do not have records or you are looking at new options Economic Engineering Approach Economic Engineering Approach Adjust Custom Rates Adjust Custom Rates

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

17. UW Resources Ron Shuler (UWEX-BSE): Updated A3510 “Estimating Ag. Field Machinery Costs” Ron Shuler (UWEX-BSE): Updated A3510 “Estimating Ag. Field Machinery Costs” Bulletin with worksheets Bulletin with worksheets Spreadsheet Spreadsheet Official A-series publication Official A-series publication http://www.aae.wisc.edu/aae320/Budgets/A3510.pdf http://www.aae.wisc.edu/aae320/Budgets/A3510.pdf http://www.aae.wisc.edu/aae320/Budgets/A3510.pdf http://www.aae.wisc.edu/aae320/Budgets/Machinery%20Costs%20A3510.xls http://www.aae.wisc.edu/aae320/Budgets/Machinery%20Costs%20A3510.xls http://www.aae.wisc.edu/aae320/Budgets/Machinery%20Costs%20A3510.xls

18. Other Resources William Edwards (IA Extension-Econ): “Estimating Farm Machinery Costs” William Edwards (IA Extension-Econ): “Estimating Farm Machinery Costs” Bulletin with worksheets Bulletin with worksheets www.extension.iastate.edu/Publications/PM710.pdf www.extension.iastate.edu/Publications/PM710.pdf www.extension.iastate.edu/Publications/PM710.pdf Lazarus and Selley (MN) “Farm Machinery Economic Cost Estimates for 200Y” Lazarus and Selley (MN) “Farm Machinery Economic Cost Estimates for 200Y” Bulletin with fixed and variable costs for different machinery operations Bulletin with fixed and variable costs for different machinery operations Lots more on machinery management Lots more on machinery management http://www.apec.umn.edu/faculty/wlazarus/documents/mf2008.pdf http://www.apec.umn.edu/faculty/wlazarus/documents/mf2008.pdf http://www.apec.umn.edu/faculty/wlazarus/documents/mf2008.pdf

19. Main Idea Fixed Costs: depreciation, interest, taxes, insurance, housing Fixed Costs: depreciation, interest, taxes, insurance, housing Variable Costs: repairs and maintenance, fuel, lubrication, labor, (timeliness) Variable Costs: repairs and maintenance, fuel, lubrication, labor, (timeliness) Usually simple factors: Usually simple factors: For example: 1% of purchase price for cost of insurance and housing 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 Fuel = 0.044 x PTO HP x hours of use x fuel price Lubrication = 0.15 x Fuel Cost Lubrication = 0.15 x Fuel Cost Repairs and maintenance = % x new purchase price, with % adjusted for age or total use hours Repairs and maintenance = % x new purchase price, with % adjusted for age or total use hours See the publications for more information See the publications for more information

20. Machinery Cost Example What does it cost to run a chisel plow? What does it cost to run a chisel plow? Lazarus and Selley 2005 (23 ft): $6.81/ac Lazarus and Selley 2005 (23 ft): $6.81/ac Iowa 2005 Custom Rate $11.05/ac Iowa 2005 Custom Rate $11.05/ac Wisconsin 2004 Custom Rate : $13.30/ac Wisconsin 2004 Custom Rate : $13.30/ac ($14.70/ac in WI 2007 Custom Rate) Indiana 2004 Custom Rate $11.78/ac Indiana 2004 Custom Rate $11.78/ac South Dakota (East) South Dakota (East) Custom Rate: $10/ac Custom Rate: $10/ac Missouri 2003 Custom Rate Missouri 2003 Custom Rate $10/ac ($12.10/ac heavy soil) SW Minnesota 2001: $10.83/ac SW Minnesota 2001: $10.83/ac

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

22. Adjusting Custom Rates to Estimate your Cost Adjusting custom rates is an easy way to estimate typical machinery costs 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 K. Dhuyvetter and T. Kastens at Kansas State University developed a formula using KFMA cost data and custom rates www.agmanager.info/farmmgt/machinery/MF2583.pdf UWEX bulletin and Spreadsheet “Fast and Simple Method to Estimate Machinery Costs" UWEX bulletin and Spreadsheet “Fast and Simple Method to Estimate Machinery Costs" www.aae.wisc.edu/mitchell/Fast and Simple Method.pdf www.aae.wisc.edu/mitchell/Fast and Simple Method.pdf

23. Scale Factor Calculation Scale Factor = 1.241 + (33.026/acres) Scale Factor = 1.241 + (33.026/acres) Acres is annual acres operated Acres is annual acres operated Your Cost = Scale Factor x Custom Rate Your Cost = Scale Factor x Custom Rate If you operate 1500 acres, then Scale Factor = 1.241 + (33.026/1500) = 1.263 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 Means your costs are 26.3% greater than the custom rate for a machinery operation

24. 1 – Scale Factor = % increase (as decimal) that your costs exceed the Custom Rate AcresScale Factor 1001.571 2001.406 3001.351 4001.324 5001.307 6001.296 7001.288 8001.282 9001.278 10001.274 11001.271 12001.269 13001.266 14001.265 15001.263 16001.262 17001.260 18001.259 19001.258 20001.258 1.20 1.25 1.30 1.35 1.40 1.45 1.50 1.55 050010001500200025003000 Acres of Cropland Scale Factor

25. Caveats Custom rates have wide ranges—call around, use Custom Rate Guides from Wisconsin and surrounding states Custom rates have wide ranges—call around, use Custom Rate Guides from Wisconsin and surrounding states http://www.aae.wisc.edu/aae320/Budgets/WI_custom_rates_2007.pdf http://www.aae.wisc.edu/aae320/Budgets/WI_custom_rates_2007.pdfhttp://www.aae.wisc.edu/aae320/Budgets/WI_custom_rates_2007.pdf Formula to adjust custom rates not perfect Formula to adjust custom rates not perfect Use these machinery costs as a Use these machinery costs as a Guide to estimate typical costs Guide to estimate typical costs Benchmark for comparison Benchmark for comparison Method is not your actual costs for machinery Method is not your actual costs for machinery Need good records to estimate actual costs Need good records to estimate actual costs

26. Think Break #19 Estimate a typical cost to chisel plow a field for a farm of your size using the Fast and Simple Method 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 Remember: Remember: Scale Factor = 1.241 + (33.026/acres) Typical Cost = Scale Factor x Custom Rate

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

28. Crop Budgets Special Cases Crops such as alfalfa and pasture Crops such as alfalfa and pasture Create separate budgets for establishment and non- establishment years, then include pro-rated cost of establishment on the non-establishment year budget Create separate budgets for establishment and non- establishment 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 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 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 Storage, transportation, marketing, etc.: some crops large cost (vegetables, fruits) for these expenses, with different prices by sale date

29. Livestock Enterprise Budgets Many exist, many different ways used Many exist, many different ways used Unit: one cow, one hog, one ewe, etc., or one sow-litter, cow-calf, ewe-lambs, etc. 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 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 Machinery, facilities, and equipment: fixed and variable costs just as for crops

30. Livestock Enterprise Budgets Multiple Outputs: milk, cull cows, calves 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 Adjust to one “cow unit” = 24,000 lbs milk, 0.39 cull cows, 0.52 calves, and 0.21 replacement heifers produced per year Include death loss and < 100% calving Include death loss and < 100% calving Examples Examples Iowa State University Iowa State University http://www.extension.iastate.edu/agdm/livestock/html/b1-21.html http://www.extension.iastate.edu/agdm/livestock/html/b1-21.html Center for Dairy Profitability & Team Forage Center for Dairy Profitability & Team Forage http://www.cdp.wisc.edu/Decision%20Making%20Tools.htm http://www.cdp.wisc.edu/Decision%20Making%20Tools.htm http://www.uwex.edu/CES/crops/uwforage/dec_soft.htm http://www.uwex.edu/CES/crops/uwforage/dec_soft.htm

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

32. 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

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

34. Whole Farm Budget Budgeting system based on Schedule F to allocates ALL costs Budgeting system based on Schedule F to allocates ALL costs 3 year average of costs for each Schedule F category to “avoid” accrual adjustments 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 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 Main idea: Allocate % of Schedule F cost to each enterprise, all costs allocated Examples Potatoes and Veggie Compass Examples Potatoes and Veggie Compass

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