Developing Enterprise Budgets

Session 4

Review Field Day

• Soils Class? •What capital assets farms have?

•Was equipment component right for size of operation?

•What would you have added or not bought?

Homework for Session 4

List all capital items you will need to start your farm

Buildings

Equipment

Fencing

Irrigation

Animals

Tools

In Ag Plan

Facilities

Capital request

Management Team

Personnel Plan

Review Homework

• How did you decide on Capital Assets you need

• Equipment

• Buildings

• Irrigation

• Fencing

• Were there any surprises?

Warm-upSmith’s Case Study

Bases on Smith’s inventory of farm resources and

capital costs eliminated

Hops, blueberries, sheep, goats, cow-calf and

pasture pork

Blackberries and agritourism

Still considering 12 enterprises

What were the considerations for

dropping these enterprises

Smith’s Farm Goal

We would like our farm to make $20,000 net profit in 2018.

Have $30,000 for start-up costs.

Mushroom Start Up

Cow/Calf Fix Cost Fix Costs Years Total Per Cow

Pasture 300 12

Pasture Equipment

1,550 20 77.5 3.10

Water Infrast. 5,000 20 250 10

Fencing 23,054 20 1,053 42

Tractor 12,000 20 300 * 12

Truck 15,000 15 500 20

Equipment 12,200 15 813 32

Corral 10,000 20 500 20

Total Fix Cost $78,804 $3,794 $151

Tractor

Purchasing a used tractor

Hours of use

Useful life around 12,000 hours

Available part and service

Three ways to buy tractor

Auctions

Dealerships

Classified ads

Fastline

Tractorhouse

Market Farm Implement

Tools for 1-3 acres Organic Farmer Business Handbook

Bare minimum:

Shovel, rake, oscillating hoe

wheel barrow, (wheel hoe), hoses,

hand sprayer

Earthway seeder

Pick up truck

Troybuilt rototiller

(small greenhouse)

Digital platform scale (20 lb)

Scaling up:35 – 50 hp 2WD tractor

3 PTH rototiller

3 PTH mini chisels

3 PTH cultivators

Walk in cooler

Wash and pack station

Grower to Grower

5 acre Farm

Developing the Cost of Production Numbers

Farmer Speaker4:20-5:10

Objectives for Session

•What are the differences between fixed and variable cost expense?

•How do we establish a farm revenue?

•How do we use capital cost estimates in enterprise budgets?

•How do we use enterprise budgets to establish breakeven prices?

Smith’s Farm GoalWe would like our farm to make $20,000 net profit in 2018.

▪ What information do we need to know?

▪ Gross sales

▪ Amount vegetables or animals sold

▪ Prices sold each sold

▪ What inputs needed for production

▪ Labor

▪ Equipment

▪ Fertilizer

▪ Seed

▪ What machinery and equipment needed?

Net Cash Income Per Acre

Farm Scale Range Average

<3 acres $1,854-$9,487 $5,664

3 to 6 acres $1,767-$8,547 $5,903

6-12 acres $1,331-$5,842 $3,550

>12 acres $1,103-$7,430 $3,757

Grower to grower: Creating a livelihood on a fresh market vegetable farm, p. 17(2005), John Hendrickson, CIAS Outreach Specialist

Terms

•Enterprise budget: An estimate of the revenues and costs for the production of a certain product

• Revenue: The cash income received from an enterprise.

•Variable/ operating costs-Costs that are directly tied to the operation of a farm enterprise. Feed, seed, fertilizer, animal health costs, hired labor and fuel are common farm operating costs.

•Capital/fixed/ overhead costs- Equipment, facilities and other purchases that will be used longer than one year for farm production.

Two Examples of Commercially Available

Individual Crop Cost Methods.

Profit = Income – Expenses

20

Defining Your Enterprises

Each enterprise is a “profit center.”

You define them to fit your needs!

Examples might help:

1. Fruit crops – berries,

2. Vegetables – tomatoes, peppers, okra

3. Corn maze w/ snack bar, hayrides

Crops Budgets**From: Organic Farmers Business Handbook

Richard Wiswall

Budgeting

•A way of estimating profit

•Organized into• Revenue Income• Variable costs• Fixed costs

• Estimates based on production, technology, and size

Units of Production

Sales Volume = Unit of Quantity

•Sheep

• lbs. of wool

• lbs. of meat

• cwt. at auction

• number of bread ewes

• units of milk

•Chickens

• dozen eggs

• lbs. of meat

• number of chicks

• number of hens/roosters

Units of

Production

SALES VOLUME X SALES PRICE = GROSS INCOME

Revenue

Cash received from an enterprise

Same product may be sold at different prices to different markets

May produce more than one kind of saleable product

500 pints @ $3.00 /pint = $1,500 or

200 pints upick berries @ $2.00 =$400

100 pints prepack berries @ 2.75 =$275

200 pints sold at farmers market $600

Total Revenue $1,275

Finding Probable Prices

• Price is one of most important factors in determining profitability

• What price or prices should I use to project revenue in a budget?

• Retail prices are obtained by selling farm products directly to customers

• Wholesale prices are usually less than retail because firms handle product between farmer sand customers

• Season average prices because prices make change with the season

• NC Farm School website pricing resources

Variable Cost

Used in the short run

•Cash expenditures used within the year

•General directly used/consumed with crop or animal production

Changes with small changes in production scale

•Relevant to size of the operation

•No additional capitol purchases required to increase in size

Fixed Cost

Used in the Long Run

•Capitol expenditures

•Generally not directly

consumed/used by crops or

animals

Changes with large changes

in production scale

•Relevant to size of the

operation

•Additional capitol purchases

required to increase in size

Fixed Costs

Important for making decisions, “are we making a profit yet?”

Important for items that have a useful life > than 1 year

Deprecation is the loss of value or obsolescence of an asset over time (not related to tax deprecation)

Focus on machinery, equipment, & buildings

Per Unit Depreciation• Assigning a depreciation value on a per hour or per unit

basis

• $20,000 new tractor- $5000 salvage value at the end of 15 years = $15,000

• $1000 per year depreciation

• Assume you are going to put 500 hours on the tractor each year

• $1000 per year / 500 hours per year = $2/ hour of use

• Assuming you are going to put 200 hours each year then• $1000 per year / 200 hours = $5/ hour

Tractor Costs

Tractor model JD 2240 Ford 4000 Cub

Original cost/useful life 7000/25 4400/25 1000/25

Annual cost, w/o interest 280.00 176.00 40.00

Average annual repairs 500.00 300.00 200.00

Annual fuel cost @ $3/gallon 480.00 480.00 80.00

Total annual cost 1260.00 956.00 320.00

Hours used annually 200 300 60

Tractor cost/hour 6.30 3.19 5.33

Tractor with driver: $/hour 18.85 15.74 17.88

Farmers Market Costs

Farmers’ Market Costs Cost Calculate for ONE marketLabor: load truck(s) 12.55 1 hr (2 people @0.5 hr each)

Labor: travel, set up 50.20 4 hr (2 people)

Labor: market vending 100.40 8 hr (2 people)

Labor: pack, travel, unpack,

tally sales 37.65 3 hrs (2 people)

Vehicle(s) cost at .40/mile 8.00 20 miles round trip per market

Rental fees 30.00

scales $1500, umbrellas $400, tables

$200, signs $200

Amortized FM equipment 7.67

$2300/15-year useful life/20 markets

per season = $7.67 per market

Subtotal, one market: 246.47

# of markets 6

Total costs for # markets 1478.82

Crop sales % x total market

costs 73.94

Ten Minute Break

Egg Budget Exercise

In-Class Example – Chicks vs Pullets

• Complete the Chicks vs. Pullets worksheet to help define your enterprise:

Chicks Pullets

Day old chick 3 20

Feed for 6 months

Mortality 5%

Feeder and Waters 0.93

3.93 20

High Tunnel Budgets

Construction Cost

Construction Cost 96’ by 30’

Companies 1 2 3

High Tunnel 7,972 6,060 8,860

Other items

Irrigation

Plastic Cover

Labor

Site Preparation

Backup heater

Water Service

Weed Matt

Delivery

Construction CostConstruction Cost Materials Labor

Site Preparation 60 48

Greenhouse layout 10 48

Frame 5,000 576

Lumber Hardware 800 384

Endwall finish 250 144

Irrigation 100 32

Backup heater 225

Water Service 50 12

Weed Matt 200

Harvest container 200

Construction CostConstruction Cost Materials Useful Life Annual cost

Site Preparation 60 15 4

Greenhouse layout 10 15 .66

Frame 5,000 15 333

Lumber Hardware 800 15 53

Endwall finish 250 10 25

Irrigation 100 10 10

Backup heater 225 5 45

Water Service 50 15 3

Weed Matt 200 5 40

Harvest container 200 5 40

Labor 1,244 15 83

Total 637

Total Revenue

Most budgets

include a

revenue section

What yields

What price

Retail Tomato Prices

Total Revenue

LBS/Plant PriceTomato 12 $2.00

480 plants per high tunnel$11,520

Enterprise Budgets

• Variable costs- vary with the yield

• Ex: Plants, fertilizer, fuel, repairs

• Fixed costs- costs you incur, whatever the level of production

• Ex: depreciation, taxes, insurance, interest and land

• Labor - Own vs. Hired

Variable Cost

Plants 700

Fertilizer 175

Irrigation supplies 10

Stakes, string, clips 200

Heater fuel 75

Bees for pollination 100

Poly Cover (prorated 4 yrs) 200

Mis supplies 150

Sub total 1,610

Labor Cost

Bed prep and fertilization 144

Transplanting, lay drip tape, weed matt 144

Site mowing and weeding 144

Pruning and trellising 576

Harvesting grading and packing 480

Clean up 120

Maintenance 96

Environmental management 360

Sub total 2,064

Total Cost

Total Per LB

Annualized Construction Cost

637 .11

Fixed cost (interest, taxes, land)

1,085 .188

Variable Cost 1,610 .279

Labor 2,064 .358

Total Cost 5,396 .935

Returns At Various Prices

$2.00/LB $1.50/LB $1.25/LB

Gross Returns $11,520 $8,640 $7,200

Variable Cost $3,674 $3,674 $3,674

Returns over Variable Cost

$7,846 $4,966 $3,526

Fixed Cost $1,085 $1,085 $1,085

Returns over Total Cost $6,761 $3,881 $2,441

Breakeven Analysis

• Variable cost and labor $3,674

• $3,674/yields of 5,760 LBS

• Per acre price needed to cover variable costs = $0.63

• Total costs: $3,674+$1,722=$5,396/High Tunnel

• Price needed to cover total costs =$.94/LBS

Breakeven Analysis

• What if yields were 10 pounds per plant• Breakeven price would be $1.12

• Yields of 14 pounds per plant• Breakeven price would be $0.80

Pasture Pork Budget

Setting up a Budget

• Decide on enterprise

• Production Model• Organic or convention

• Marketing model• Research prices

• Research input and output university budgets

The Pork Budget

Questions to answer …

• Number of pigs or sows?

• Raise feeder or buy

• Production system? Organic, pasture Conventional

• Production assumption LBS of gain per day

• Price per LBS

• Mortality rate

The Pork Budget

Questions to answer …

1. Housing Space, nest boxes needs

2. Pasture space needed, FencingEquipment Needs, Feeders and waters

3. Labor feeding, marketing?

4. Marketing costs, Where will you sell

Total Revenue

Pasture Pork

revenue

What yields

What price

Total Revenue

LBS/Animal Price

Whole pig 140 $5.00

Cuts 140 $8.18

29 Hogs Carcass 5,220 LBS

Dressed 3,567 LBS

Carcass $26,100

Cuts $29,178

Variable Cost

Variable Costs Pasture Pork

Feeder pigs 75 2,250

Feed 222 6,494

Pasture Seed 35 175

Electricity 20 120

Repairs Fencing 1% of $3,066 31

Meds 10 292

Production Labor 69 1,035

Kill Fee 50 1,462

Processing Fee 150 4,387

Marketing Booth 25 375

Marketing labor 200 1,600

Total Variable Cost $18,471

Breakeven Analysis

• Variable cost and labor $3,674• $3,674/yields of 5,760 LBS • Per acre price needed to cover variable

costs = $0.63• Total costs: $3,674+$1,722=$5,396/High

Tunnel• Price needed to cover total costs =$.94/LBS

Fixed CostFixed Cost Materials Quantity Years 6 month

dep

Waterer 450 2 10 45

Hog Feeder 1,549 1 5 155

Hog Structure

1,500 1 10 75

Fence Charger

200 1 10 10

Water system

5,000 1 20 125

Fencing 3066 1 20 77

Acres in Rotation

150 1 20 75

Acres out of rotation

150 1 20 75

Total 11,915 636

Total Cost

Total Per LB Dressed Per LB Carcass

Fixed Cost $636 .17 .12

Feed Cost $6,493 1.82 1.24

Variable Cost $4,153 1.16 .79

Marketing $7,825 1.49

Total Cost $19,107 3.15 $3.64

Pasture Pork Budget

Returns At Various Prices

$6.50/LB $7.5/LB $8.5/LB

Gross Returns $23,185 $26,752 $30,319

Variable Cost $18,471 $18,471 $18,471

Returns over Variable Cost

$4,714 $8,281 $11,848

Fixed Cost $636 $636 $636

Returns over Total Cost

$4,078 $7,645 $11,212

Breakeven Analysis

▪ Breakeven Price

▪ Live weight $2.61

▪ Carcass Weight $3.63

▪ Dressed Weight $4.91

Livestock Budgets Analysis

• What are expenses compared to total revenue?

• How many labor hours required?

• When is labor needed?

• What are machinery cost?

• What is breakeven price?

Homework Description

• What to DO: In your business plan in AgPlan

Operations Sections

Products

Services

Production systems

Customer service

Develop your enterprise budgets

Field Day

April 19, 2017

Evaluation