What is in this article?:
- Enterprise budgets aid farm management decisions
- Remember drying costs
• Farm business managers who can detail their per unit fixed and variable costs for each crop and maybe down to the field-level have a decided advantage over managers who rely on commonly accepted ways of managing.
An enterprise budget is a simple concept for most farmers; listing out receipts (sales of products), variable costs (cost that change with production level e.g., fertilizer) and fixed costs (costs that do not vary with production, e.g., costs of owing machinery or a structure).
Yet many of us forget that these budgets are the foundation for most of the day-to-day management decisions.
Farm business managers who can detail their per unit fixed and variable costs for each crop and maybe down to the field-level have a decided advantage over managers who rely on commonly accepted ways of managing.
The advantage is not that they know the costs, but that they can use this information to make break-even yield, price, and acreage decisions and estimate the net returns of alternative technology, input price changes, a decision to lease an additional farm, and so on.
Budgeting: The purpose of a budget is to list the annual quantities and prices of inputs involved in the production of a crop. The sum of the income items less total expense leaves an estimate of net income or returns to land/capital, management, and risk.
The sales price is often the most variable factor and to some extent, is less under the control of management. Thus, budgets concentrate on the cost of inputs like fertilizer and seed (quantities applied are directly under management control).
The breakdown of major budget categories and explanations are listed in Table 1.
Gross Receipts: Gross receipts are the sale price (value) times the units produced. In the planning stage, yield should indicate long-term average yields, not just the best of the last 10 years.
Prices should be long-term averages and as you apply price protection and the season progresses you can fine-tune your estimates. Note: it’s good to be an optimist in life, just not when you are estimating next year’s crop yields or profits.
Example Abbreviated Budget for 1 Acre
1. Gross Receipts = quality sold * price
Bushel harvested * $/bu (120 bus * $5.00/bus = $600)
2. Pre-Harvest Variable Costs
Units of inputs * $/unit (150 lbs of N * $0.75/lb)
3. Harvest Variable Costs
Fuel, Lubrication, and Repairs in $ per acre ($30/ac) and Drying, Hauling, and Storage in per bus ($1.00/bu)
4.Total Variable Costs – sum lines 2-3
Sum of all costs
5. Machinery Fixed Costs
Ownership costs per ac – prorated to over the typical life of the equipment (depreciation taxes, insurance, interest on investment)
6. Other Costs
General Overhead Costs
7. Total Costs – sum lines 4, 5, & 6
8. Projected Net Returns – line 1- line 7
Pre-harvest Variable Costs: Of the items, in an enterprise budget these are the ones farmers are most knowledgeable about the units applied (e.g., units of inputs like fertilizer, lime, herbicides, fuel, labor, and so on) and priced paid.
Also consider that most inputs are purchased using a line- of-credit to finance the needed cash flow 6-8 months before crops are sold in the summer and/or fall. So make sure these pre-harvest costs carry an interest charged based on your line of credit.
Harvest Variable Costs: Harvest costs are a function of the fuel, repairs, maintenance, and labor related to harvesting the crop and transporting it to a market or back to the farmstead for drying and storage.
Combining harvest costs and pre-harvest costs yields the total variable costs and per acre, per bushel, or per bale costs depending on what units you used to measure production.
Comparing these costs to the estimated price per unit quickly gives you an estimated of the margin you’ll have to cover all remaining costs.