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Fruit Production: Using Interactive Budgeting Tools to Assess Costs, Revenues and Risks
Jennie Popp, Ph.D.Hector G. Rodríguez, Ph.D.Curt Rom, Ph.D.
Heather Friedrich, M.S.Jason McAfee, M.S.
Missouri Organics Association Annual MeetingFebruary 6, 2014Springfield, MO
Center for Agricultural and Rural SustainabilityDivision of AgricultureUniversity of Arkansas
Fruit Production Budgets
• Tools used to assess costs and revenues associated with production
• Traditionally paper based
• Require large amount of information from producers to work
New CARS Decision Support Tools
• Interactive Budgeting:– Computer based; User specifies input, tool automatically
makes calculations
• User Friendly– Little computer knowledge required– Little data input needed
• True Decision Support– Assess costs, revenues AND risks
Fruit Production Decision Support Tools
Presentation Objective
• Describe the benefits of CARS Decision Support Tools
• Walk through an example for apple production
Traditional Budget Sections
Variable Costs Fixed Costs Total Costs
Yield Relevant Price Total Revenue
Total Revenue Total Cost Net Revenue
• Net Revenues may be calculated for one year
• Present value of net benefits– Calculates what the value of all net revenues
generated over time are worth today
Traditional Budget Sections
New Section: Breakeven Analysis
• Breakeven Point– Point at which costs and revenues are equal
• Can be calculated for– Breakeven Price– Breakeven Yield
Breakeven Price
• Given yields and costs, what price do I need (on average over time) to break even?
Total Cost Over Time
Expected Yield Over Time Breakeven Price
Breakeven Yield
• Given market prices and costs, what yield do I need (on average over time) to break even?
Total Cost Over Time
Expected Market Price
Over TimeBreakeven Yield
New Section: Sensitivity Analysis
• “What if?” analyses– How different values of an input impact final result
• What if:– My yields over time are actually higher/lower than
I predict? – The market price for the fresh/processing market
over time is higher/lower than I predict?
New Section: Risk Analysis
• A technique that calculates the probability of obtaining a net present value of returns greater than a specific dollar target
• What is the probability that I will earn a net present value greater than $90,000?
Importance of The Tool• Allows the user to make more informed decisions
by– Comparing costs/revenues of different production
practices– Estimating impacts of changes in yield/prices on the
solvency of the operation– Assess the economic risk associated with a particular
production system
• Assessments can be made hypothetically; without having to actually change practices
Decision Support Tool Example
Organic Apple Production
Quick Start Menu
HelpMenu
User’s Guide
Start
• Tool can be run two ways:– User input– Demo
Start
• Tool can be run two ways:– User input– Demo
By clicking on the Full Production Yield button, a new screen will appear that allows the user to change the expected yields for the fresh and processing markets for each production year.
Similarly, annual prices can be changed by clicking the Full Production Price button.
Run
Once data are entered (or demo is chosen) click run.
Summary• The tool will generate net returns for each
year of production
How to Change Levels of Activity or Prices
• Click on a gray button associated with one of the years
How to Change Levels of Activity or Prices
Here you can change- Quantities- Prices- Activities
Once changed, the tool will recalculate all costs and returns
How to Change Levels of Activity or Prices
Added- Poultry
Litter- 1 ton/acre- $12
Before
After
After
Economic Analyses
Click on the Gray Economics Button at the top of the Summary screen
Economic Analyses
Shows a Summary of the Current Situation and a Breakeven Analysis
CASE ONEFull Production - 45 lbs/tree; Fresh Market 80% ($1.0 lb.);
Processed Market 10% ($0.15/lb.)
CASE TWOChange - 5 lbs yield increase per tree each year
Full Production – 50 lbs/tree; Fresh Market 80% ($1.0/lb.); Processed Market 10% ($0.15/lb.)
CASE ONEFull Production - 45 lbs/treeFresh Market 80%Processed Market 10%Constant Price
CASE TWOFull Production – 50 lbs/treeFresh Market 80%Processed Market 10%Constant Price
Comparing Cases
Shows a Summary of the Current Situation and a Breakeven Analysis
CASE ONE CASE TWOTotal Costs $162,066 (18-yr)To breakeven - cover total costs• 23.13 lbs per tree each year or
209,942 lbs $162,066/209,942 lbs = $0.77/lb.
Cover total costs but no profits
However, producer is expecting: • $1.00/lb. fresh market and • $0.15/lb. processed market • 45 lb...... per tree/year
With those prices and yields, the orchard will breakeven after
7 years or when costs and revenues are each $67,902
After year 7, the orchard produces profit every year
Net Profit $96,756 (18-yr)
Total Costs $163,731 (18-yr)To breakeven - cover total costs• 23.11 lbs per tree each year or
209,725 lbs $163,731/209,725 lbs = $0.78/lb.
Cover total costs but no profits
However, producer is expecting: • $1.00/lb. fresh market and • $0.15/lb. processed market • 50 lb...... per tree/year
With those prices and yields, the orchard will breakeven after
6 years or when costs and revenues are each $58,024
After year 6, the orchard produces profit every year
Net Profit $127,457 (18-yr)
Risk AnalysisWe can also calculate the risks associated with this operation by answering some questions under risk analysis
Yield Usage Fresh Price
Processed Price Costs
Risk AnalysisWe can also calculate the risks associated with this operation by answering some questions under risk analysis
EXAMPLE: suppose we raise most likely yields in the first three years only by 5 lbs/ac
Risk AnalysisIf expected yield increases, we increase the likelihood of getting returns of $90,000 or more over the life of the orchard.
Before With Higher Yields
33.3% chance 46.5% chance
Risk AnalysisWe can calculate the risks associated with this operation by answering some questions under risk analysis
ANOTHER EXAMPLE: Suppose we raise our desired net returns to $100,000 over the life of the orchard?
Risk AnalysisIf expected returns increases, we decrease the likelihood of reaching that level
Expecting $90K Expecting $100K
46.5% chance 17.2% chance
Lots to this Tool!
• The capabilities of this tool are great
• But at the same time it can be used to answer very simple questions alone
• Built to be flexible, based on the needs of the user
Get Your Decision Support Tool for Apple Production Now!
• Take CD with you today
• Send an email to CARS ([email protected]) to request • CD copy of tool
• Web link to download the tool
• Electronic copy of this presentation
Tools for Blackberries, Raspberries and Blueberries in Development
• Blackberry and Raspberry tools coming late spring
• Blueberry tool coming end of year
• Watch CARS website for announcements of releases
Visit Our Website
Center for Agricultural and Rural Sustainabilitywww.uark.edu/ua/cars
Look under Food Industry Program pages for more information
Thank You
About the ToolHector Germán Rodríguez
About CARSJennie Popp
For More Information….
