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
Returns to land/capital, management, and risk

 

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.

Remember drying costs

Remember to estimate drying costs (most elevators will have drying costs posted at harvest to use if you have not calculated your farm costs) and if you plan to store grain in your on-farm storage you’ll need to charge monthly interest (line-of-credit interest rate) for each month it sits in storage.

Machinery Fixed Costs: The nature of fixed costs make them the most important costs on a grain farm (in my opinion). Fixed costs can vary greatly based on the machinery and equipment selected, e.g., 12-row planter and a 250-HP tractor, or a 6-row planter and a 150 –HP tractor, and so on.

Matching machinery and the implied field capacity to the size (acreage) of the farm is critical to achieving a profitable trade-off between speed and efficiency in the field and high fixed costs and the debt that often comes with machinery.

Not correctly matching machinery complement (too much machinery) to the size of farm will aid in rapidly planting and harvesting, yet the farm may have excessive debt and reduce ability to meet debt payments as they come due.

Conversely, under-sized machinery (an unwillingness to invest in machinery) may result in lower debts and payments, but missed planting and harvesting windows which reduces yields and quality.

An excellent source of information to guide you through this process is from William Edward at Iowa State titled “Farm Machinery Selection -- A3-28,” this publication along with many others on machinery can be found at http://www.extension.iastate.edu/agdm/cdmachinery.html.

Other costs: Overhead costs are an important catchall that accounts for costs that are not easily tied to an enterprise, for example, office expenses, phone and internet costs, software in the office and on field equipment, farm vehicles expenses for getting parts, delivering fuel and supplies during planting and harvest, accounting and legal fees, and so on.

Some farm accounting software can help you determine or allocate overhead to each enterprise. Without this support you can assume 8 percent of total cost (fixed and variable cost) will account for all unallocated costs.

The sum of variable, fixed, other costs yields total costs for that enterprise and subtracting from gross receipts provides an estimate of net returns to land, risk, and management.

What does returns to land, risk, and management mean? In short, what you’ll have left over to provide returns to the owned land and other capital owned by the farm business; returns to management to cover the costs of managing the farm business (in lots of cases, a million-plus dollar business); and risk — the costs of or the additional returns that need to be set aside to cover the year-to-year yield and price risk.

What’s left over goes to meet family living. The funds that pay health, life, and disability insurance, housing, college education, retirement, food, state and federal taxes, entertainment, and so on.

Another way to look at family living and how it relates to an enterprise budget is to estimate your family living costs and divide by the total acres farmed.

A North Dakota study reported that farm family living expenses (a family of four) were $57,000 in 2010. So if you farmed 1,200 acres you’d need around $50 per acre over and above all these total costs to reach that level of family living expenses.

So as you evaluate each enterprise and your choice of crops, recognize the bottom line (returns to land/capital, management, and risk) is the best measurement of which enterprise will support the farm business and the dependent families.

Virginia Cooperative Extension has enterprise budgets as guides to get you started on estimating which of your enterprises are most profitable at http://pubs.ext.vt.edu/category/enterprise- budgets.html.