Partial Budgeting
AAE 320
Paul D. Mitchell
Goal
1. Explain purpose of partial budgets
2. Illustrate their structure and use
3. Give some examples
Partial Budget Purpose
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Analyze net return from small changes or
refinements to farm operation
Partial Budget: focus only on parts that
change, not budget each enterprise
completely, but build on enterprise budgets
Fine tune current operation: Hold all else
fixed to evaluate a small change
Marginal/incremental analysis: change input
use, shift between inputs or between outputs
Simple Examples
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Plant rootworm Bt corn or conventional
corn with soil insecticide
Plant more corn and less soybeans
Rent an additional 100 acres for corn
Buy combine or continue custom hiring
Sell current tractor and buy a bigger one
Soil test for N or just use credits/guess
Partial Budget Basic Idea
Benefits:
1) What will be the new or added revenues?
2) What costs will be reduced or eliminated?
Costs:
3) What will be the new or added costs?
4) What revenues will be reduced or lost?
Partial Budget:
Answer these 4 questions and then calculate
Net Benefit = Benefits – Costs
Partial Budget: Define the change analyzed
Benefits
Costs
Additional Revenues
Additional Costs
What will be the new or
added revenues?
Costs Reduced
What costs will be
reduced or eliminated?
Total Benefits
What will be the new or
added costs?
Revenues Reduced
What revenues will be
reduced or lost?
Total Costs
Net Benefit
Planter Example
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Look at buying a planter for 1000 acres of
corn and soybean versus custom hire
What will be the new or added revenues?
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What costs will be reduced or eliminated?
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No longer pay for custom planting
What will be the new or added costs?
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Increased yields due to more timely planting
Fixed and variable costs of owning planter
What revenues will be reduced or lost?
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I can’t think of any
Buy planter vs. custom hire for planting
1000 acres corn-soybeans (500 acres each)
Additional Revenues
Additional Costs
What will be the new or added
revenues?
What will be the new or added
costs?
Higher yields with more
timely planting
Fixed and variable costs of
owning a planter
Costs Reduced
Revenues Reduced
What costs will be reduced or
eliminated?
What revenues will be reduced
or lost?
No longer pay cost for
custom hire
Can’t think of any
Total Benefits
Total Costs
Net Benefit
Buy planter vs. custom hire for planting
1000 acres (500 each) corn-soybean
Additional Revenues
Additional Costs
3 bu corn x $4.00/bu x 500 ac
= $6,000
1 bu soybeans x $10/bu x 500 ac
= $5,000
corn $19.11/ac x 500 ac
= $9,555
soybeans $20.38/ac x 500 ac
= $10,190
Costs Reduced
Revenues Reduced
Custom corn planting = $15/ac x
500 ac
= $7,500
Custom soybean planting = $16/ac
x 500 ac = $8,000
Total Benefits
$26,500
none
Total Costs
$19,745
Net Benefit
$6,755
Planter Example
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Only focused on costs and revenues that change
Made up numbers for illustration
Estimate 3 more bu of corn and 1 more bu of
soybeans due to more timely planting
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Corn = 1% loss/day in WI after May 8
Soybeans: 0.25/bu/day in IA study
Estimate cost of owning and operating a planter:
Use fast and simple method for 100 acres to get
corn = $19.11/ac, soybeans = $20.38/ac
Custom rates: increased WI 2004 rates for
increased fuel costs
Planter Example: What if “real”
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Look at your records: How late was your custom
planter over the last several years?
Estimate the average yield loss you suffered
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Cost to own and operate planter
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Several equations for corn and soybeans on web
Used the fast and simple method
Lower cost if use economic engineering
Is $6,755 ($6.76/ac) enough to justify the added
hassle of owning and operating a planter?
Think Break #20
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Suppose you are a corn-soybean farmer
who currently custom hires all combining.
You are thinking of buying a combine.
Do a partial budget analysis of a Combine
Purchase vs. Custom Hire decision
Needed assumptions/information and
questions are given in the next slide
Think Break #20
Combine Purchase vs. Custom Hire
Corn acres = 2,000; Farm crop acres 4,000
 Custom Rate = $25/ac
 Scale Factor = 1.241 + (33.026/acres)
 1% yield increase with more timely harvest
 Average yield = 150 bu/ac; Price = $4/bu
1) What will be the new or added revenues?
2) What costs will be reduced or eliminated?
3) What will be the new or added costs?
4) What revenues will be reduced or lost?
5) What’s the net benefit?
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Another Example
Add 50 beef cows to your cow-calf herd
 Convert 100 acres from grain to forage
1) What will be the new or added revenues?
2) What costs will be reduced or eliminated?
3) What will be the new or added costs?
4) What revenues will be reduced or lost?
5) What’s the net benefit?
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Revenue Benefits
1) What will be the new or added revenues?
 Sell more steers, heifers, and cull cows
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46 calves (92% efficiency)
Save 5 heifers as replacements (10% cull rate)
23 steer calves: 500 lbs x $0.85/lb = $9,775
18 heifer calves: 460 lbs x $0.80/lb = $6,624
5 cull cows $500 each = $2,500
Total = $18,899
Cost Benefits
2) What costs will be reduced or eliminated?
 Variable inputs used for grain production
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Fertilizer, seed, pesticides, etc.: $5,350
Labor: $1,500
Variable machinery costs: $1,000
Interest on variable costs @ 6% = $470
Total = $8,320
Cost Costs
3) What will be the new or added costs?
 Fixed costs
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Variable costs
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Interest on cows and bulls = $2,500
Bull depreciation = $300
Labor = $600, Vet and health = $500
Feed/Hay = $2,000, Pasture fertilizer = $1,500
Hauling and Miscellaneous = $500
Interest on variable costs @ 6% = $300
Total = $8,200
Revenue Costs
4) What revenues will be reduced or lost?
 Grain production from 100 acres
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Corn: 110 bu/ac x $2.00/bu x 100 ac = $22,000
Soybeans: 30 bu/ac x $5.00/bu x 100 ac = $15,000
Use half of each, since 2 year rotation
Total = ½ ($22,000 + $15,000) = $18,500
Partial Budget: Add 50 cows to cow-calf
operation and convert 100 acres to forage
Benefits
Costs
Additional Revenues
Additional Costs
23 Steer calves, 18 heifer
calves and 5 cull cows =
$18,899
Fixed and variable costs for
50 more cows and needed
bulls = $8,200
Costs Reduced
Revenues Reduced
Variable inputs for grain
production = $8,320
Revenue from corn-soybean
production = $18,500
Total Benefits
$27,219
Total Costs
$26,700
Net Benefit
$519
Comments on Analysis
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Needed more complete enterprise budgets
for cow-calf and grain operations
Fixed cost added for cows and bulls, but
no fixed cost change for crop conversion
from grain to forage. Why?
Labor for cow-calf less than for grain
($600 vs. $1,500), an added benefit—
What will you do with the extra time?
Comments on Partial Budgeting
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Final comments on Partial Budgets
Economies of Size
 Opportunity Costs
 Sensitivity Analysis
 Risk Changes
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Economies of Size
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Cause non-proportional changes in cost and
revenue when make changes
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Adding 20 cows to herd of 200 will increase
labor demand, but less than 10%
Dropping 100 acres from 1000 acre grain farm
will decrease costs, but less than 10%
Main Point: Linear (proportional) approximation
is fine for small changes, but not for large—
need more complete budgeting if large change
Opportunity Costs
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Should be included in the analysis
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Capital needs change: include costs (benefits)
for borrowing more (less) money or tying up
more (less) of your capital in farm assets
Labor and Management changes: include the
costs/benefits of your and your family's time
commitment changes
Change farm operation due to changes in
credit or labor resources or desires
Sensitivity Analysis
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Assumptions used to construct partial budgets
not always known with certainty
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Yield benefit for more timely planting
Crop yields and prices
Machinery costs
Run analysis with a range of assumptions
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Low, average, high, worst or best case scenario
Find break even price or yield and decide how likely
Formally model the uncertainty: use probability
distributions, decision trees, or pay off matrices and
do risk analysis
Risk and Partial Budgeting
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Partial Budgeting ignores changes in risk
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Converting 100 acres from grain to forage and
adding 50 cows to cow-calf operation:
What are the risk implications?
Without formal “tools” comparisons ignore
risk, or bring it in afterwards in ad hoc way
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“The financial risk of owning a planter is too
great to justify the $1,380 net benefit”
“The risk of not finding a custom combiner is
too great to justify the $6,900 net benefit”
More Information
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Partial Budgeting a common tool in ag,
use Google
Extension Services in many states have
bulletins or fact sheets
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U of Maryland (posted)
Penn State (posted)
Colorado State, Virginia, Vermont, etc.
Summary
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Explained and illustrated the purpose of
partial budgets
Did examples, including Think Break #18
Explained some issues/weaknesses of
partial budgets (size economies,
opportunity costs, sensitivity analysis, risk)
For problem set and exam: be able to
make simple partial budget using given
information and interpret findings