Enterprise Budgeting
AAE 320
Paul D. Mitchell
Goal
1. Explain enterprise budgets: their purpose
and use
2. Illustrate enterprise budgets: their
different parts
3. Learn how to construct and use
enterprise budgets
Purpose of Enterprise Budgets

To estimate projected costs, revenue, and
net returns for a single enterprise to
assess feasibility or profitability of current
or potential enterprises
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How much will I make on corn and soybeans?
Planning tool to test out new ideas and
compare enterprises to identify best ones
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How profitable would wheat be?
How do snap beans compare to soybeans?
Purpose of Enterprise Budgets
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Estimate needs for inputs, facilities and storage,
and marketing
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For your crops
 How much fertilizer, seed, chemicals do you order?
 Do you need new/bigger equipment?
 How much grain storage and marketing do need?
For your livestock
 How much feed and bedding do you need?
 How much can you grow and how much buy?
 What about hired labor?
Enterprise Budgets
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Usually “Enterprise” = a crop or livestock
Corn, soybeans, wheat, alfalfa
Dairy, feeder beef, cow-calf, hogs
Specialty crops: sweet corn, trout, mink
Conventional vs no-till
Grazing vs. confinement
Enterprise Budgets
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Use a constant base unit
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Livestock = 1 head
Allows comparison across enterprises
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Crops = 1 acre
Compare wheat to corn and soybeans
Compare farrow-to-finish to finishing only
Each enterprise budget a “Lego”
Snap “Legos” together to make your farm
Parts of Enterprise Budget
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Revenues – Costs = Returns
No formal structure as for balance sheet or
income statement
Cost categories used
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Machinery costs
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Split into fixed and variable costs?
Lump together into own category?
Opportunity Costs
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Variable/Operating Costs
Fixed/Ownership/Overhead Costs
Which ones included, which ones ignored
Time line version: Planting Costs, Harvest Costs
Examples
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Illustrate diversity in enterprise budgets
All for Corn following Soybeans
Iowa: “Crop Production Cost Budgets”
www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf
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Illinois: “Crop Budgets”
http://www.farmdoc.uiuc.edu/manage/newsletters/fefo09_06/FEFO_09_06.pdf
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Wisconsin: “Crop Enterprise Budget”
http://www.cdp.wisc.edu/wk1/Corn%20after%20Soybeans%20Budget%20for%20Wisconsin.xls
http://www.aae.wisc.edu/mitchell/Corn%20Soybeans%20Small%20Grains.xls
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Main point: No “right” way to do enterprise budget
Enterprise Budgets and You
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Costs and returns to the same enterprise vary
greatly among producers
Lots of example enterprise budgets and returns
projections available
Do not accept someone else’s enterprise budget
for the cost and returns for growing corn,
soybeans, dairy, beef, etc. as your costs
You need to know your own costs, not someone
else’s estimate or the typical costs
Minnesota Data
for 1996
Corn
Soybeans
Source: Kent D. Olson and
Heman D. Lohano. 1997
“Will the Real Cost of
Production Please Stand
Up?” Minnesota Agricultural
Economists No. 687
http://www.extension.umn.edu/n
ewsletters/ageconomist/com
ponents/ag237previous.html
Illinois Data for 2006
Source: Gary Schnitkey “Crop Production Cost and Rotation Decisions”
http://www.farmdoc.uiuc.edu/IFES/2007/presentations/Farm Economic Summit - Schnitkey.pdf
Enterprise Budgets
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Concept not hard:
Revenues – Costs = Returns
Revenue easy to estimate: Price x Yield
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If you already grow it, you should know
For common crops and livestock, prices and typical
yields available from many places
Variable input costs easy too
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If you already grow it, you should know
Price x quantity use per acre
Internet or call around for prices, typical use rates
Enterprise Budgets
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Cost estimation difficult for machinery,
buildings, facilities, equipment, etc.
What does it cost to chisel plow a field?
What is the annual cost of a dairy barn?
What portion of tractor repair should be
allocated to soybean production?
Machinery Costs as an Example
Machinery Cost Concepts
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Substantial component of costs (25%-40%)
Difficult to measure/estimate: user specific
Variable Cost, Use-Related Cost, Operating Cost
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Fixed Cost, Time-Related Cost, Overhead Cost
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Costs due to using the machinery
Fuel, lube, maintenance, use-related repairs and labor
Costs paid whether you use the machinery or not
Interest, insurance, taxes, housing
Depreciation: both a variable and fixed cost
Machinery Costs
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Best method: keep accurate records of
machinery use (hours) for each enterprise,
expenses (fuel, repairs, maintenance), and
current market value and use them to determine
your Actual Machinery Costs for each enterprise
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Most farmers don’t do this
Estimate Machinery Costs if you do not have
records or you are looking at new options
 Economic Engineering Approach
 Adjust Custom Rates
Economic Engineering Approach
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Estimate machinery costs based on careful
engineering data collection
Use the machinery and carefully document
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repairs, maintenance, fuel/lubrication
speed, turning time, labor
Develop formulas to estimate fixed and variable
machinery costs
Market data and survey of used machinery
buyers/sellers to develop formula for machine
values as they age
UW Resources
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Ron Shuler (UWEX-BSE): Updated A3510
“Estimating Ag. Field Machinery Costs”
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Bulletin with worksheets
Spreadsheet
Official A-series publication
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http://www.aae.wisc.edu/aae320/Budgets/A3510.pdf
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http://www.aae.wisc.edu/aae320/Budgets/Machinery%20Costs%20A3510.xls
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Other Resources
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William Edwards (IA Extension-Econ):
“Estimating Farm Machinery Costs”
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Bulletin with worksheets
www.extension.iastate.edu/Publications/PM710.pdf
Lazarus and Selley (MN) “Farm Machinery
Economic Cost Estimates for 200Y”
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Bulletin with fixed and variable costs for different
machinery operations
Lots more on machinery management
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http://www.apec.umn.edu/faculty/wlazarus/documents/mf2008.pdf
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Main Idea
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Fixed Costs: depreciation, interest, taxes,
insurance, housing
Variable Costs: repairs and maintenance, fuel,
lubrication, labor, (timeliness)
Usually simple factors:
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For example: 1% of purchase price for cost of insurance
and housing
Fuel = 0.044 x PTO HP x hours of use x fuel price
Lubrication = 0.15 x Fuel Cost
Repairs and maintenance = % x new purchase
price, with % adjusted for age or total use hours
See the publications for more information
Machinery Cost Example
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What does it cost to run a chisel plow?
Lazarus and Selley 2005 (23 ft): $6.81/ac
Iowa 2005 Custom Rate $11.05/ac
Wisconsin 2004 Custom Rate : $13.30/ac
($14.70/ac in WI 2007 Custom Rate)
Indiana 2004 Custom Rate $11.78/ac
South Dakota (East)
Custom Rate: $10/ac
Missouri 2003 Custom Rate
$10/ac ($12.10/ac heavy soil)
SW Minnesota 2001: $10.83/ac
Why not just use Custom Rates?
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Custom rates not good estimates of typical
farmer costs—usually too low
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Run over more acres, spread fixed costs
Volume discounts or search for best price, so
lower purchase price
More efficient operators
Family/friends not charge enough
Discounted because not perfect timing
Adjusting Custom Rates
to Estimate your Cost
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Adjusting custom rates is an easy way to
estimate typical machinery costs
K. Dhuyvetter and T. Kastens at Kansas State
University developed a formula using KFMA cost
data and custom rates
www.agmanager.info/farmmgt/machinery/MF2583.pdf
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UWEX bulletin and Spreadsheet “Fast and Simple
Method to Estimate Machinery Costs"
www.aae.wisc.edu/mitchell/Fast and Simple Method.pdf
Scale Factor Calculation
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Scale Factor = 1.241 + (33.026/acres)
Acres is annual acres operated
Your Cost = Scale Factor x Custom Rate
If you operate 1500 acres, then Scale
Factor = 1.241 + (33.026/1500) = 1.263
Means your costs are 26.3% greater than
the custom rate for a machinery operation
1.55
1.50
Scale Factor
1.45
1.40
1.35
1.30
1.25
1.20
0
500
1000
1500
2000
2500
Acres of Cropland
1 – Scale Factor = % increase
(as decimal) that your costs
exceed the Custom Rate
Acres
100
200
300
400
500
600
700
800
900
1000
1100
3000
1200
1300
1400
1500
1600
1700
1800
1900
2000
Scale Factor
1.571
1.406
1.351
1.324
1.307
1.296
1.288
1.282
1.278
1.274
1.271
1.269
1.266
1.265
1.263
1.262
1.260
1.259
1.258
1.258
Caveats
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Custom rates have wide ranges—call around, use
Custom Rate Guides from Wisconsin and surrounding
states
http://www.aae.wisc.edu/aae320/Budgets/WI_custom_rates_2007.pdf
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Formula to adjust custom rates not perfect
Use these machinery costs as a
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Guide to estimate typical costs
Benchmark for comparison
Method is not your actual costs for machinery
Need good records to estimate actual costs
Think Break #19
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Estimate a typical cost to chisel plow a
field for a farm of your size using the Fast
and Simple Method
a) Local custom rate is $16/ac
b) You run 1800 acres of crop land
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Remember:
Scale Factor = 1.241 + (33.026/acres)
Typical Cost = Scale Factor x Custom Rate
Enterprise Budget Example: Corn
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Budget Template to implement this “Fast
and Simple Method”
Work through an example
Crop Budgets Special Cases
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Crops such as alfalfa and pasture
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Create separate budgets for establishment and nonestablishment years, then include pro-rated cost of
establishment on the non-establishment year budget
Establishment is $120/ac, non-establishment is
$25/ac for 3 more years, so add $120/4 = $30/ac
Orchards, vineyards, etc.: do net present value
analysis of the entire cost stream
Storage, transportation, marketing, etc.: some
crops large cost (vegetables, fruits) for these
expenses, with different prices by sale date
Livestock Enterprise Budgets
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Many exist, many different ways used
Unit: one cow, one hog, one ewe, etc., or
one sow-litter, cow-calf, ewe-lambs, etc.
Time period: hogs, flocks: more than one
per year, others longer than one year, so
adjust all costs to the same time period
Machinery, facilities, and equipment: fixed
and variable costs just as for crops
Livestock Enterprise Budgets
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Multiple Outputs: milk, cull cows, calves
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Adjust to one “cow unit” = 24,000 lbs milk,
0.39 cull cows, 0.52 calves, and 0.21
replacement heifers produced per year
Include death loss and < 100% calving
Examples
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Iowa State University
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http://www.extension.iastate.edu/agdm/livestock/html/b1-21.html
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Center for Dairy Profitability & Team Forage
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http://www.cdp.wisc.edu/Decision%20Making%20Tools.htm
http://www.uwex.edu/CES/crops/uwforage/dec_soft.htm
Livestock Enterprise Budgets
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Raised crop used for livestock feed
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Manure used as crop fertilizer
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Cost for livestock use should be its opportunity cost—
the cost if you had to buy the grain
Credits crop with the full value of its production
Cost to crop at its opportunity cost—the cost if you had
to buy the equivalent fertilizer
Credits livestock with full value of its production
Delivery/Hauling costs for grain and manure
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Charge all to one enterprise or split between?
Break-Even Yield and Price
What yield or price do you need to break
even on the enterprise?
Break-Even Yield: At a given price, the yield
needed to cover all costs
Break-Even Yield = Total Cost/Output Price
Break-Even Price: For a given average yield,
the price needed to cover all costs
Break-Even Price = Total Cost/Average Yield
Allocating Overhead Costs
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Farms overhead costs must be allocated
across all enterprises
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Workshop costs, membership dues, insurance,
legal fees, accounting costs, taxes, utilities,
office costs, etc.
These costs should be declared on Schedule
F, with depreciation tracked in farm records
Enterprise budgets often miss these or
similar costs
Whole Farm Budget
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Budgeting system based on Schedule F to
allocates ALL costs
3 year average of costs for each Schedule F
category to “avoid” accrual adjustments
Income Statement: better base to allocate costs
from, but not all farms have
Main idea: Allocate % of Schedule F cost to each
enterprise, all costs allocated
Examples Potatoes and Veggie Compass
Summary
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Defined & presented example Enterprise Budgets
Details on machinery costs: Economic
Engineering vs Custom Rates approach
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Fixed Costs: depreciation, interest, taxes, insurance,
housing
Variable Costs: repairs and maintenance, fuel,
lubrication, labor
Example Budget Template
Special Cases: Livestock, Perennial Crops
Allocating Overhead: Schedule F and Whole
Farm Budget
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Example Budget Template (Potatoes)