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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 returns
 Provides 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 enterprise
 The base unit for crops is usually one acre
 The 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 change
 Organize data to minimize the chances of
overlooking something or counting an item
twice
Why Budget?
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
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
Why Budget?
 Control
Think 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 Costs
Crop Budget
Seed, fertilizer, and
chemicals
Fuel, oil, and
lubricants
Repairs
Labor (operator and
hired)
Interest on variable
expenses
Other cash
expenses
Livestock Budget
Feed
Veterinary and
health
Repairs
Labor (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
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.
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
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
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 Analysis
 What 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