PARTIAL BUDGETING
Dr. Paul D. Mitchell
Agricultural and Applied Economics
University of Wisconsin, Madison WI
Goal of This Presentation
1. Explain purpose of partial budgets
2. Illustrate their structure and use
3. Give some examples
Partial Budget Purpose
• To estimate the net benefit from a small change to a
farm operation in order to guide a farm decision
• Fine tune your current operation: Hold all else fixed
and evaluate effect of a small change
• Partial Budget: focuses only on the things that
change
• Do not budget each enterprise completely, but
build on enterprise budgets
• Other names that are essentially the same: Marginal
Analysis or Incremental Analysis
Simple Examples
• Plant rootworm Bt corn or conventional corn with
a soil insecticide
• Plant a little more corn and a little 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
Partial Budget:
Answer these 4 questions and then do calculations
Net Benefit = Benefits – Costs
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: 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
• Look at buying a planter for 1000 acres of corn
and soybean versus using custom hiring of the
planting
• What will be the new or added revenues?
• Increased yields due to more timely planting
• What costs will be reduced or eliminated?
• No longer pay for custom planting
• What will be the new or added costs?
• Fixed and variable costs of owning a planter
• What revenues will be reduced or lost?
• 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
• Only focused on costs and revenues that change
• Purely made up numbers for illustration
• Estimate 3 more bu of corn and 1 more bu of
soybeans due to more timely planting
• 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: estimates from online WI Custom
Rate Guide
Planter Example: What if “real”
• Look at your records: How late was your custom
planter over the last several years?
• Estimate the average yield loss you suffered
• Several equations for corn and soybeans on web
• Cost to own and operate planter
• Used the Fast and Simple Method:
http://www.aae.wisc.edu/pdmitchell/Fast%20and%20Simple
%20Method.pdf
• Is $6,755 ($6.76/ac) enough to justify the added
hassle of owning and operating a planter?
Think Break
• 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: 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?
Another Example
• Add 50 beef cows to your cow-calf herd and
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?
Revenue Benefits
1) What will be the new or added revenues?
• Sell more steers, heifers, and cull cows
• 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
• 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
• Interest on cows and bulls = $2,500
• Bull depreciation = $300
• Variable costs
• 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
• 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
• Note that we 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
• Final comments on Partial Budgets
• Economies of Size
• Opportunity Costs
• Sensitivity Analysis
• Risk Changes
Economies of Size
• Analysis assumes proportional (linear) changes in
costs and revenue when make small changes
• Linear (proportional) approximation is fine for small
changes, but not for large – need more complete
budgeting for large changes
• Adding 20 cows to herd of 200 will increase labor
demand, but likely less than 10%
• Dropping 100 acres from 1000 acre grain farm will
decrease costs, but likely less than 10%
Opportunity Costs
• Should be included in the analysis
• Capital needs change: include costs (benefits)
for borrowing more (less) money or locking 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
• Assumptions used to construct partial budgets
not always known with certainty
• Yield benefit for more timely planting
• Crop yields and prices
• Machinery costs
• Run analysis with a range of assumptions
• Low, average, high, or worst and best case scenario
• Find break even price or yield and decide how likely
• Formally model the uncertainty: use probability
distributions, decision trees, or payoff matrices and do
risk analysis
Risk and Partial Budgeting
• Partial Budgeting ignores changes in risk
• Converting 100 acres from grain to forage and
adding 50 cows to cow-calf operation:
What are the risk implications?
• Without formal risk analysis tools, comparisons
usually ignore risk or add afterwards in ad hoc way
• How does the change affect the variability of my
income?
• What the probably that I will at least break even
on the change?
Aggregating Partial Budgets for
Impact Analysis
• Partial budget analysis focuses on a farm to help
guide farm decisions
• Aggregate over farms to estimate the net benefit
for many farms making small changes as a result
of a program
• Simple example for a hypothetical IPM program
for Wisconsin strawberry growers
• WI has less than 1,000 acres of strawberries
• Program encouraged switch from a scheduled
spray program to scouting-based applications
Hypothetical Example to Illustrate
• Based on meetings and small farmer survey of adopters
• Categorize impacts as either low and high benefit farms
• Low Benefit Farms: switch from 5 sprays to 3 sprays
• High Benefit Farms: switch from 4 sprays to 1 spray, got
•
•
•
•
price premium for “IPM Strawberries” for 10% of crop
Spray costs $10/acre for application and a.i.
Scouting cost $10/acre for the season
Average price = $2.50/lb, $2.65/lb for IPM strawberries
Average yield = 6,000 lbs/acre
Partial Budget: Hypothetical Strawberry IPM:
Low Benefit Farm
Benefits
Costs
Additional Revenues
None
Scouting costs = $10/A
Costs Reduced
Revenues Reduced
2 fewer sprays, saving 2 x
$10/A = $20/A
Total Benefits
Additional Costs
$20/A
None
Total Costs
$10/A
Net Benefit
$10/A
Partial Budget: Hypothetical Strawberry IPM:
High Benefit Farm
Benefits
Costs
Additional Revenues
Additional Costs
10% acres get $0.15/lb higher Scouting costs = $10/A
price, or 10% x $0.15/lb x
6,000 lbs/A = $90/A
Costs Reduced
Revenues Reduced
3 fewer sprays, saving 3 x
$10/A = $30/A
Total Benefits
$120/A
None
Total Costs
$10/A
Net Benefit
$110/A
Aggregating Partial Budgets for Impact
Analysis
• Survey shows IPM was adopted on 750 acres
• Low Benefit Farms: 200 acres
• Benefit = 200 A x $20/A = $4,000
• High Benefit Farms: 550 acres
• Benefit = 550 A x $110/A = $60,500
• Total Benefit = $64,500
Summary
• Explained and illustrated use of partial budgets
using some simple farm management examples
• Explained some weaknesses of partial budgets
(size economies, opportunity costs, sensitivity
analysis, risk)
• Presented simple IPM example and how to
aggregate impacts by multiplying per acre affects
by the total acres