Budgets: Uses in Farm Management
Damona Doye
OSU Extension Economist
Types of Budgets
Whole-farm
Enterprise
Partial
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 returnsProvides a plan for maximizing the returns
to owned resources.
Enterprise Budgets
Provide an estimate of potential revenue, expenses, and profit for a single enterprise
Each 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 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 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?
ImplementationProvide the documentation necessary to
obtain/maintain creditworthinessEstimate the amount of rent that can be paid
for land or machinery Identify production and financial risks and
whether they may be managedMonitor cash flows
Why Budget?
ControlThink 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 Costs
Machinery, equipment, building/facility Depreciation
Economic useful life
Interest Average investment (opportunity cost on funds) Interest rate
Taxes and insurance
Land 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 $157.73
Fixed costs 31.37
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
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 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!
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 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 = ?
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