1. Budgets: Uses in Farm Management
Damona Doye
OSU Extension Economist

2. Types of Budgets
Whole-farm
Enterprise
Partial

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

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

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

6. Why Budget?

7. Why Budget? Planning Evaluate options before you commit resources
Test 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 plan
Uncover costs that you may not have considered

8. 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

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

10. 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)
Allows for consistent evaluation of alternative enterprises

11. Revenue Crop Livestock 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

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

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

14. I typically go through the exercise 2 to have them develop what they think is a realistic budget for the local area. Discussion of pasture requirements for instance generally points out some of the variety of systems of producers in the course. Also, you’ll see that there are different ideas about what are realistic pregnancy percentages, etc. Can refer back to SPA data and your experience to keep suggestions grounded in reality.
Blue labels are links to other sheets (can also use tabs at bottom) where details can be specified.

15. I typically go through the exercise 2 to have them develop what they think is a realistic budget for the local area. Discussion of pasture requirements for instance generally points out some of the variety of systems of producers in the course. Also, you’ll see that there are different ideas about what are realistic pregnancy percentages, etc. Can refer back to SPA data and your experience to keep suggestions grounded in reality.
Blue labels are links to other sheets (can also use tabs at bottom) where details can be specified.

16. Interpreting and Analyzing Enterprise Budgets
An 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.

17. 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 Costs
Return to management, risk, and land must be positive to survive in the long run

18. Budget notes Many 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 measurement
Time period
Multiple products

19. 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

20. Break-Even Analysis
What quantity of yield/price is required to cover wheat production costs?
Operating costs $157.73
Fixed costs
Total 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

21. Sensitivity Analysis

22. OSU Enterprise Budgets
Crops
Livestock
Hay & Pasture
Barley
Cow/Calf
Perennial Forages
Canola
Stocker Cattle
Annual Forages
Corn
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!

23. 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.
If it won’t work on paper, it won’t often work in practice! When you determine break-even price, may want to forward contract, use other marketing strategies to lock in a price. Every person’s situation is different. Every year is different. 40% of farms have no debt—they can essentially self-insure, perhaps take more risks. No one size fits all in farming, hence need for everyone to develop customized budgets.

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

25. Subtractions from Income
Partial Budget Format
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 = ?

26. 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 = ?

27. 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

28. 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:
Use third party sources with caution!

29. 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