Agricultural Microeconomics Lesson 3: Cost Considerations

Presentation Title

This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

“Cattle at Sunset” by Andrew S. Gray Photography, Creative Commons CC BY-NC-SAhttp://www.andrewsgray.com/2012/07/cattle-at-sunset/

Agricultural MicroeconomicsLesson 3: Cost Considerations

This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

What are the costs of running a small farm?

• Operating (Variable) Expenses

• Fixed Expenses

• Capital Expenditures

• Opportunity Costs

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

How much does a car cost?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

How much does a car cost?

• Purchase price• Interest Expense• Fuel Expense• Maintenance and Repair Expense• Insurance Expense• Taxes and Registration Fees• Depreciation Expense

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

An Depreciation Example

Depreciation Expense = (Purchase Price – Residual Value)

(Useful life of the equipment)

($20,000 - $4,000)10

Depreciation Expense = $1,600

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

A Closer Look at Piedmont Farm

• What types of expenses does the farm have?

• What are the farm’s variable costs?• What are the farm’s fixed costs?• What types of capital expenditures

might they have in the future?• Are there any opportunity costs not

included in the farm’s revenue and expense statement?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Question #1

Market price sensitivity – What happens to the retail price of beef if Piedmont Farm increases the price per pound sold to grocery stores? How might customers react to the change in price?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Question #2

Changes in Supply - If more grass-fed beef is available from other farms, what happens to Piedmont Farm’s revenue? What might the owners do to reduce the impact to Piedmont farm?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Question #3

Competition - How do Piedmont Farm’s prices compare with what you can find in a conventional grocery store? If the farm’s prices increase, will it still have the same amount of revenue (in other words, would it still sell the same amount of beef?). Why or why not?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Question #4

Type of Operation – What might happen if the farm went back to traditional grain-fed beef in the winter months? What would this do to the farm’s revenue from the sale of beef? What would happen to costs?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Question #5

Scale of Operation – What happens to the farm’s operating costs if it increases the number of cattle on the ranch? How much more acreage does it need? How much more hay? How much more labor?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Question #6

Fixed Costs – What happens if the farm’s sales (revenue) decrease? Which expenses can it change?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Question #7

Owner’s Salary – Is the net farm income enough to cover the owner’s salary? Why or why not? How would you make changes?

Photos by: Nancy Ranney, Ranney Ranch. Used with permission

Discussion Question #8

New Equipment – What would happen if the farm needed to replace a piece of farm equipment? What would you do to cover the costs of this new expense?

Presentation Title

This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License

“Cattle at Sunset” by Andrew S. Gray Photography, Creative Commons CC BY-NC-SAhttp://www.andrewsgray.com/2012/07/cattle-at-sunset/

Next Class: Subsidies and Incentives

This course developed by The Environmental Finance Center at UNC Chapel Hill for The North Carolina School of Science and Math and NCDPI is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License