December 30, 2022
During the winter months, most farm and ranch managers are working to complete accounting tasks and closing the books for the prior year. Many are well into making production and management decisions for the upcoming season.
Good records can help in planning ahead. Preparing enterprise budgets for the next production season can guide decision-making.
Enterprise budgeting, especially related to projecting crop cost of production, has changed considerably in the past couple of years with the development of the Agricultural Budget Calculator program from the Center for Agricultural Profitability at the University of Nebraska-Lincoln.
The ABC program is designed to guide producers and ag managers in developing economic and cash enterprise budgets, along with analysis features that can be useful in decision-making.
Creating crop budgets
The Nebraska crop budgets are prepared each fall and made available online in several formats, including being pre-loaded into the ABC program. Users of the free online ABC budgeting tool can download and modify the various budgets into the program that may fit their individual farms or fields, or they can create their crop budgets in ABC starting from scratch.
One of the challenges with past Nebraska crop budgets developed using a spreadsheet program was in making modifications to address an individual farm’s power and machinery operating costs. In the ABC program, users can enter information on their power units and implements along with vehicles, trucks and facilities. Formulas programmed in ABC assist in calculating ownership and operating costs such as depreciation, return on investment, repairs, fuel consumption and labor.
With cost of production higher in 2022 and 2023, producers have increased financial risk exposure. It is important to develop cost of production baseline information to utilize market opportunities, consider input decisions and make timely risk management decisions. Knowing projected enterprise costs can provide confidence in decision-making.
Here is a list of management questions that can be addressed from enterprise budgets, and explanations on how ABC features can be useful:
1. What price do I need to receive for my crop to cover operating costs? To cover cash costs? To cover total costs of production? After specifying the crop, ABC provides prompts in identifying field operations and the machinery or equipment and operating inputs used in each field operation. Labor, fuel, depreciation, investment charges, land, real estate taxes, etc., are identified so that all operating and ownership costs are accounted for.
An economic report (includes opportunity costs such as owner labor and investment) and a cash report can be printed. Each includes the breakeven cost of operation that must be obtained to cover operating, ownership and total costs of production. These breakeven numbers are an indication of marketing targets that can be established.
2. How does the ABC whole-farm module assist with allocating overhead costs to various enterprises to assist with a more accurate breakeven figure? It is easy to overlook farm overhead expenses when determining breakeven costs on an enterprise basis because of the time involved in compiling them and the often perplexing job of allocating those costs by enterprise.
ABC allows the user to simply estimate a cost per acre for each enterprise or to identify each overhead cost (accounting, legal, office, utilities, etc.). Any proportion of each overhead expense can be automatically allocated effortlessly to individual enterprises based on number of acres or percentage of total revenue created by each enterprise. Alternatively, the user can allocate each overhead category to their enterprise budgets however they choose, with ABC keeping track of the dollars remaining to be allocated.
3. Is purchasing equipment and paying the operating costs to perform a farming operation more feasible than having it done by a custom operator? ABC prompts the user to input relevant data (e.g., price and salvage value of the machinery and equipment, labor, fuel use, field efficiency, cost of capital, etc.) and then calculates the cost of operations on a per-acre basis.
ABC uses agricultural engineering formulas to estimate many of the input values if the user does not have some data readily at hand. The total cost per acre can then be compared with a custom rate to see which decision will save the most money. Bonus: The user can easily print the operating and ownership costs per acre for each piece of machinery and equipment used in their enterprise budgets.
4. How much will expected returns vary with changes in projected yield or price? As part of the built-in sensitivity analysis in ABC, a table is provided indicating expected net returns as commodity yield or price increases or decreases, in 5% increments, up to a 25% change.
5. How does the ABC program help in considering alternative enterprises? In the report-analysis section of ABC, a comparison using a base crop with up to four alternative crop enterprises is available to see what crop yield or commodity price is required to equate the net income of each alternative crop enterprise with the base crop.
6. After crop inputs and materials are entered for crop enterprises in ABC, how does the program help with a list of total inputs needed to purchase for the upcoming production season? After enterprise budgets have been created in ABC, a list of all inputs and quantities required for the next production season and the projected total cost of each input can be printed.
7. How can the ABC program help in planning monthly labor requirements and costs? Using data from the enterprise budgets created in ABC, a monthly labor requirement table by farming operation is available to print. The table includes each employee providing the labor for various operations, the projected number of hours worked each month on each enterprise, and the cost of that labor.
8. How does the program help with analysis of financial risks associated with potential lower prices or a crop loss disaster for crop enterprises? A risk analysis module is built into the ABC program that provides an opportunity to view yield or price risk exposure values for corn and soybean production in Nebraska, in combination with crop insurance coverage levels, including historical data provided by crop reporting district. Additional crops will be added as data becomes available.
As an example, if an enterprise budget for corn is prepared using a 180-bushel yield with returns showing a positive per acre net return of $200, the risk module will allow “what ifs” to be entered, varying the yield or price along with various crop insurance levels.
If only 90 bushels are raised with a selected 75% crop insurance coverage level, with additional marketing estimates added in, ABC provides an evaluation of the change in per-acre and total projected net revenue for the crop enterprise. This feature also provides a look at how various crop insurance levels can cover a percentage of revenue losses based on price risk for corn or soybeans for the budget year.
9. What features does ABC include to assist in projecting profitability or in creating a cash-flow statement to help determine borrowing needs and to provide cash-needs information as a marketing plan is developed? In the whole farm module of the program, a cash or economic report can be created combining all enterprises budgeted for the year. This report can serve as a proforma profit and loss statement if all revenue and expenses are entered for each enterprise. In addition, a cash-needs report is available based on when inputs are used in the production cycle.
After adjusting the cash-needs report to when those inputs will be purchased or identifying if they are already in inventory, and then adjusting when cash is expected to be received and spent, a cash-flow statement can be created in ABC. As the livestock enterprise budgeting module becomes available in the program, an all-inclusive projected profit and loss statement and cash-flow statement can be created for those with diversified crop and livestock operations.
Commodity prices have risen, but so have input expenses. When crop prices rise, profits do not always follow. Using enterprise budgets to stay current with cost of production and breakeven estimates provides useful information for making management decisions.
The ABC program is designed to be a dynamic, user-friendly enterprise budgeting tool with reports and analysis features built in. More information is available, along with a list of ABC program training sessions, at cap.unl.edu/abc.
McClure is a Nebraska Extension educator and farm and ranch management analyst.
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