Transcript What is Your Cost of Production?

WHAT IS YOUR
COST OF
PRODUCTION?
Gayle Willett
Pacific Northwest Risk Management Education Project
College of Agriculture and Home Economics
Cooperative Extension
Department of Agricultural Economics
Washington State University
INTRODUCTION
 Determining your Cost of Production…A Difficult but
Rewarding Task.
Difficulty:
 Allocating costs to individual enterprises.
 Additional time and expense.
Rewards:
 Determine which enterprises are making or
losing money.
 Identify candidates for cost reduction (don’t
measure...can’t control).
 Cost information serves as a basis for more
informed marketing.
 Objectives of Discussion
1. Understand Cost of Production Concepts
2. Learn How to Determine Your Cost of Production
 Allocating whole-farm costs to an enterprise.
 Cost allocation criteria
 Computing depreciation on machinery
 Developing a schedule of field operations and
associated costs.
 Using MACHCOST computer program to
estimate the cost of field operations
3. Learn How to Base Your Marketing Objectives on
Production Costs
4. Whole-Farm Cash Flow budgeting and Your Marketing
Plan.
5. Review Grain Storage Enterprise Economics.
6. Use Case Farm to Illustrate Concepts.
Meet Profit Farms
(see accompanying “Profit Farms - A Case Farm” for a complete description)

1,500-acre dryland grain operation.

Operated by Max and Marlene Profit.

Sole proprietorship, calendar year, cash tax reporting.

1,200 acres owned and 300 acres leased on a 1/3-landowner, 2/3operator agreement. The Profits get 2/3’s of crop and pay 2/3’s of
fertilizer, crop insurance and all remaining expenses (except land taxes).

Rotation is summer fallow - winter wheat - spring barley.

Winter wheat yields have ranged between 37 and 82 bushels per acre
over past 10 years and averaged 62 bushels.

Barley yields have varied between 2.1 and .75 tons per acre and
averaged 1.25 tons over past 10 years.

Market value of assets is $1.33 million, $408 thousand of debt - a
debt/asset position of 32%.
UNDERSTANDING PRODUCTION COSTS
 Alternative Definitions of Production Costs:
1. Economic Costs
Cost attributed to all resources, including purchased inputs,
equity capital, and operator/family labor and management.
2. Financial Costs
Cost attributed to all resources, except equity capital and
operator/family labor and management.
3. Cash Expenditures
Only cash expenditures are considered, including principal
and interest on term debt and personal withdrawals.
Depreciation and interest on equity are excluded.
Table 1. Costs of producing winter wheat on owned land, selected cost concepts,
Profit Farms.*
Item
Variable Costs:
Fertilizer & chemicals
Seed
Custom
Crop insurance (MPCI, 65%, $3.65)
Mach. repairs, fuel & lubr
Hired labor
Misc. (legal, accnt., dues, util. etc.)
Interest on operating capital
Total Variable Costs
*Includes one acre of summer fallow.
Economic
45.28
8.34
0.00
3.46
26.66
5.20
5.36
6.02
100.32
Financial
$ Per Acre
45.28
8.34
0.00
3.46
26.66
5.20
5.36
5.18
99.48
Cash
45.28
8.34
0.00
3.46
26.66
5.20
5.36
5.18
99.48
Table 1. Costs of producing winter wheat on owned land, selected cost concepts,
Profit Farms* cont.
Item
Fixed Costs:
Personal property taxes & insurance
Land tax (2 acres)
Interest on term debt (land & mach.)
Depreciation
Total Fixed Costs
Opportunity Costs:
Interest on equity in land (2 acres @ 4%) &, mach. bldgs. (10%)
Operator/family labor
Operator mngmt. (65 bu. x $3.25 x 0.07)
Other:
Principal on term debt (land, mach., bldgs.)
Personal withdrawals
TOTAL: Per Acre
Per Bushel @ 65 Bu. (most likely)
Per Bushel @ 75 Bu. (optimistic)
Per Bushel @ 55 Bu. (pessimistic)
* Includes one acre of summer fallow
Economic Financial
5.47
6.48
30.20
34.99
77.14
5.47
6.48
30.20
34.99
77.14
Cash
5.47
6.48
30.20
42.15
52.27
26.00
14.79
270.52
4.16
3.61
4.92
176.62
2.72
2.35
3.21
30.08
46.8
218.51
3.36
2.91
3.97
UNDERSTANDING PRODUCTION COSTS, CONT.
INTERPRETATION:
1. Economic Costs




$4.16 is breakeven price..... the price needed to cover
all resource costs, including operator/family labor,
management, and equity capital.
Price above $4.16 implies a return to risk taking.
Price below $4.16 implies a return to operator/family
labor, management, and equity that is below
alternative, similar risk uses of those resources.
Longer run concept than financial and cash breakeven
prices.
2.
Financial Costs




$2.72 is breakeven price ..... the price needed to cover all costs as
defined according to financial accounting (tax and financial
statement reporting) standards. Implies zero return to operator/family
labor, management, and equity capital.
Price above $2.72 implies a return to operator/family labor,
management, and equity capital (defined as net income, according to
accounting standards).
Net Worth = Retained earnings + Contributed capital + Personal net
worth + Valuation equity.
Change in retained earnings = Net income (before taxes) minus
Taxes minus Personal withdrawals.
If market price minus financial breakeven price is greater than taxes
plus personal withdrawals, then retained earnings are positive.
Price below financial breakeven implies reduction in retained
earnings.
Longer run concept than cash breakeven price.
3. Cash Expenditures




$3.36 is breakeven price..... the price needed to
cover all cash expenditures.
If price exceeds $3.36, cash position is
strengthened.
If price is below $3.36, cash position is weakened
(reduced cash on hand, reduced savings,
liquidation of inventories, reduced living standard,
liquidation of capital assets, etc.).
Is a short-run (this year) concept. Business
continuity is dependent on meeting cash
obligations in a timely manner.
COST OF PRODUCTION EXERCISE
Assume you have the following data from your dryland grain operation. The data reflects
items allocated to the farm’s winter wheat enterprise (including summer fallow) and are
reported on a per-acre basis for the YrX1 crop year. You own the land.
1.
2.
3.
4.
5.
6.
7.
8.
Item
Seed, fertilizer, and chemicals
Hired labor
Crop insurance
Value of your/family labor and mngmt
Machinery & vehicle fuel, lubr., & repairs
Machinery & vehicle depreciation
Principal payments on machinery & land debt
Down payment on new drill
$/Acre
50
5
4
23
24
16
20
10
Economic
Cost
Cash
Expenditure
COST OF PRODUCTION EXERCISE cont..
Item
9.
10.
11.
12.
13.
14.
15.
Property taxes (real estate & personal
property)
Interest on operating capital (all debt)
Interest on equity in machinery & land
Interest on machinery & land debt
Personal withdrawals (family living & personal
investments)
Misc. (accnt., dues, legal, ins., etc.)
Repayment of operating capital loan
TOTAL
$/Acre
Economic
Cost
Cash
Expenditure
8
6
44
15
33
5
62
325
Question: Assuming a yield of 50 bushels per acre, what is the economic cost
and cash expenditure per bushel for the YrX1 winter wheat crop?
$________ Per bushel economic cost
$________ Per bushel cash expenditures
DETERMINING YOUR COST OF PRODUCTION
TWO APPROACHES:
1. Allocate whole-farm costs to an enterprise (see
Profit Farms, Tables 2-5)
 Cost allocation criteria.
If full cost of production is desired, it is
necessary to allocate costs associated
with inputs used in more than one
enterprise.
Allocation criteria must be consistent
with effort management wants to devote
to enterprise budgeting/accounting.
Suggested Allocation Criteria
Cost Item
Seed, fertilizer, chemicals, crop
insurance.............................................
Management.......................................
Land:
Rented..............................................
Owned: Property taxes...................
Interest on equity..............
Interest on debt.................
Criteria
Direct
% of gross revenue
Direct (cash rent or share of crop)
Direct, based on agr. land value
Direct, based on agr. land value
Spread evenly over indebted acres (or
all owned acres if don’t want to
separate owned land with debt from
owned land without debt)
Net rent............................. Direct
Labor (hired and unpaid)................. % of time, or % of field operations (see
following example)
Machinery (operating and
Hourly use (tractors), or % field
ownership)....................................... operations (see following example)
% Field Operations: A Good Cost Allocation Criteria
Example (Profit Farms):
Crop
W. Wheat
S. Fallow
S. Barley
TOTAL
No. of Field
Operations x Acres =
Total
7
500
3,500
5
500
2,500
11
500
5,500
23
1,500
11,500
% of
Total
30.43
21.74
47.83
100.00
Thus, labor and machinery costs (depr., interest, p.
taxes, insurance, fuel, oil, and repairs) could be
allocated to individual enterprises according to the %
of total field operations (last column above).
Table 2. Summary of projected economic costs per acre for winter wheat and
summer fallow, owned and leased land, Profit Farms.
Item
Variable Costs:
Seed
Fertilizers:
Herbicides:
(60 Lbs. @ 13.9¢)
Nitrogen, Aqua (70 Lbs. @ 31.1¢)
Nitrogen, Sol. 32 (10 Lbs. @ 47.2¢)
Phosphorous, 10-34-0 (10 Lbs. @ 46.6¢)
Sulfur, 12-0-0-26 (10 Lbs. @ 24.6¢)
Roundup (s.f.) (12 oz. @ 42¢)
Harmony Extra (1/3 oz. @ $16.05)
MCPA (_ pt. @ $2.55)
Crop insurance
Fuel & lubrication ($10,205 whole farm x .52 allocation ÷ 500 ac.)
Repairs ($15,430 whole farm x .52 allocation ÷ 500 ac.)
Hired labor ($5,000 whole farm x .52 allocation ÷ 500 ac.)
Operator labor (2,500 hrs. x $10 x .52 allocation ÷ 500 ac.)
Miscellaneous ($5,150 whole farm x .52 allocation ÷ 500 ac.)
Interest on operating capital (Total v.c. ÷ 2 x 10%)
Total Variable Costs
Cost Per Acre
Owned Leased
$
$
8.34
8.34
21.77
14.59
4.72
3.16
4.66
3.12
2.46
1.65
5.04
5.04
5.35
5.35
1.28
1.28
3.46
2.32
10.61
10.61
16.05
16.05
5.20
5.20
26.00
26.00
5.36
5.36
6.02
5.41
126.32 113.48
Table 2. Summary of projected economic costs per acre for winter wheat
and summer fallow, owned and leased land, Profit Farms. cont.
Item
Fixed Costs:
Depreciation ($33,643 w hole f arm x .52 allocation Ö 500 ac.)
Cost Per Acre
Ow ned
Leased
$
$
34.99
34.99
Personal prop. taxes & insur., machinery ($5,255 w hole f arm x .52 allocation Ö
500 ac.)
Real estate taxes ($3.24 per acre x 2 acres)
Interest on debt:
Machinery ($7,367 total interest x .52 allocation Ö 500 ac.)
Land ($13,525 total interest Ö 1,200 ac. x 2 ac.)
5.47
6.48
7.66
22.54
5.47
0.00
7.66
0.00
Machinery ($213,500 mkt. $116,651 debt x 10% interest x
.52 allocation Ö 500 ac.)
10.07
10.07
42.20
14.79
144.20
0.00
14.79
72.98
270.52
4.16
186.46
4.31
Interest on equity:
Land ($937,500 mkt.r.e. $150,000 bldgs. $154,575 debt
x 4% interest Ö 1,200 ac. x 2 ac.)
Management (65 bu x $3.25 mkt. x 7 %)
Total Fixed Costs
TOTAL ECONOMIC COSTS:
Per Acre
Per Bushel @ 65 Bu. Ow ned/43.3 Bu. Leased
Table 3. Summary of projected cash expenditures per acre for winter
wheat and summer fallow, owned and leased land, Profit Farms.
Item
Variable Costs:
Seed
Fertilizer
Herbicides
Crop insurance
Fuel & lubrication ($10,205 w hole farm x .52 allocation Ö 500 ac.)
Repairs ($15,430 w hole farm x .52 allocation Ö 500 ac.)
Hired labor ($5,000 w hole f arm x .52 allocation Ö 500 ac.)
Miscellaneous ($5,150 w hole f arm x .52 allocation Ö 500 ac.)
Interest on operating capital loan
Total V ariable Costs
$ Per Acre
Ow ned
Leased
$
$
8.34
8.34
33.61
22.52
11.67
11.67
3.46
2.32
10.61
10.61
16.05
16.05
5.20
5.20
5.36
5.36
5.18
4.71
99.48
86.78
Table 3 cont.
Item
Fixed Costs:
Personal property taxes & i nsur., m ach. ($5,255 whol e farm x .52
all ocati on Ö 500 ac.)
Real estate taxes
Interest on mach. & l and debt
T otal Fixed Costs
Other Expenditures:
Pri nci pal on term debt:
Mach. ($24,858 whole farm x .52 all oc. Ö 500 ac.)
Land ($2,537 Ö 1200 ac. x 2 ac.)
Personal withdrawals ($45,000 whole farm x .52 all ocati on Ö 500 ac.)*/
T otal Other Expendi tures
T OT AL CASH EXPENDIT URES:
Per Acre
Per Bushel @ 65 owned/43.3 leased
* Does not include incom e and social security taxes.
$ Per Acre
Owned
Leased
$
$
5.47
6.48
30.20
42.15
5.47
0.00
7.66
13.13
25.85
4.23
46.80
76.88
218.51
3.36
25.85
0.00
46.80
72.65
172.56
3.99
Table 4. Summary of projected economic costs per acre for
spring barley, owned and leased land, Profit Farms.
Item
Vari abl e Costs:
Seed (70 Lbs. @ 17¢)
Ferti li zer:
Nitrogen, Aqua (70 Lbs. @ 31.1¢)
Nitrogen, Sol. 32 (8 Lbs. @ 47.2¢)
Phosphorous, 10-34-0 (8 Lbs. @ 46.6¢)
Sulfur, 12-0-0-26 (17 Lbs. @ 24.6¢)
Herbicides: Buctri l (1/3 pt. @ $8.52)
MCPA (_ pt. @ $2.55)
Fargo (1 1/4 qt. x $10.81 + $1.75 applic. x 3 ac.)
Crop i nsurance
Fuel & lubricati on ($10,205 whol e farm x .48 al location Ö 500 ac.)
Repai rs ($15,430 whole farm x .48 all ocati on Ö 500 ac.)
Hired labor ($5,000 whol e farm x .48 al location Ö 500 ac.)
Operator labor (2,500 hrs. x $10 x .48 allocation Ö 500 ac.)
Mi scellaneous ($5,150 whol e farm x .48 al location Ö 500 ac.)
Interest on operating capital (T otal v.c. Ö 2 x 10%)
T otal Variable Costs
Cost Per Acre
Owned
Leased
$
$
$11.90
$11.90
21.77
14.59
3.78
2.52
3.73
2.49
4.18
2.79
2.84
2.84
1.28
1.28
4.58
4.58
1.52
1.01
9.80
9.80
14.81
14.81
4.80
4.80
24.00
24.00
4.91
4.94
5.70
5.12
$119.63
$107.47
Table 4. cont.
It em
Fixed Costs:
Depreciation ($33,643 whole f arm x .48 allocat ion Ö 500 ac.)
Personal prop. t axes & insur., machinery ($5,255 whole f arm x . 48 allocat ion
Ö 500 ac.)
Real est at e taxes
Interest on debt :
Machinery ($7,367 total int erest x .48 allocat ion Ö
500 ac.)
Land ($13, 525 t ot al interest Ö 1,200 ac.)
Interest on equity :
Machinery ($213, 500 mkt. $116, 651 debt x 10%
interest x .48 allocation Ö 500 ac. )
Land ($937, 500 mkt.r.e. $150, 000 bldgs.
$154,575 debt x 4% int erest Ö 1,200 ac.)
Management (1. 5 tons x $75 mkt. x 7 %)
Tot al Fixed Costs
TOTAL ECONOMIC COSTS:
Per Acre
Per Ton @ 1.5 T. Owned/1 T. Leased
Cost Per Acre
Owned
Leased
$32.30
$32.30
5.04
3.24
5.04
-
7.07
11. 27
7.07
-
9.30
9.30
21. 10
$7. 88
$97.20
$216.83
$144.55
$7. 88
$61.59
$169.06
$169.06
Table 5. Summary of projected cash expenditures per acre for spring
barley, owned and leased land, Profit Farms.
Item
Variable Costs
Seed
Fertilizer
Herbicides
Crop insurance
Fuel & lubrication ($10,205 w hole f arm x .48 allocation Ö 500 ac.)
Repairs ($15,430 w hole f arm x .48 allocation Ö 500 ac.)
Hired labor ($5,000 w hole f arm x .48 allocation Ö 500 ac.)
Miscellaneous ($5,150 w hole f arm x .48 allocation Ö 500 ac.)
Interest on operating capital loan
Total Variable Costs
$ Per Acre
Ow ned
Leased
$11.90
33.46
8.70
1.52
9.80
14.81
4.80
4.94
4.79
$94.72
$11.90
22.39
8.70
1.01
9.80
14.81
4.80
4.94
4.35
$82.70
Table 5 cont.
Item
Fixed Costs:
Personal property taxes & insur., mach. ($5,255 w hole f arm x .48 allocation
Ö 500 ac.)
Real estate taxes
Interest on mach. & land debt
Total Fixed Costs
Other Expenditures:
Principal on term debt: Mach. ($24,858 w hole f arm x .48 alloc. Ö 500 ac.)
Land ($2,537 Ö 1200 ac.)
Personal w ithdraw als ($45,000 w hole f arm x .48 allocation Ö 500 ac.)*/
Total Other Expenditures
TOTAL CASH EXPENDITURES:
Per Acre
Per Ton @ 1 _ Ow ned / 1 Leased
*/
Does not include income and social security taxes.
$ Per Acre
Ow ned Leased
$
5.04
3.24
18.34
$ 26.62
$
5.04
7.07
$ 12.11
$ 23.86
2.11
43.20
$ 69.17
$ 190.51
$ 127.01
$ 23.86
43.20
$ 67.06
$ 161.87
$ 161.87
Estimating Machinery Depreciation
 Definition of Depreciation:
Expense that reflects the amount of
capital “used up” during the year.
 Two concepts:
1. Income Tax Depreciation

May use either accelerated (150% DB/SL 7 yrs.) or straight line (10 years)
depreciation, plus expensing option for
IRS-defined depreciation.

Generally, accelerated depreciation exceeds actual
depreciation in early years.

Also, IRS recovery periods (7-10 years) used to compute
tax depreciation are generally shorter than producer use
periods.

Tax-defined depreciation good choice for financial
statement preparation, since need consistent, verifiable
approach.

Generally, tax defined depreciation does not accurately
reflect economic (true) depreciation.
2. Economic Depreciation… Several Alternatives for Computing
A. Based on original cost (boot & trade-in)
Original Cost  Salvage Value
Annual Depr. 
Years in Bu sin ess
Wheel Tractor Example:
$100,000-$30,000
Annual Depreciation =
10
= $7,000
Given inflation and improved productivity of machinery,
understates true depreciation.
B. Based on current market price of machinery
Annual Depr. 
Current Market Pr ice  Salvage Value
Re maining Years in Bu sin ess
Wheel Tractor Example:
Annual Depreciation =
$45,000-$30,000
5
= $3,000

Shortcut approach is to place market price on entire machinery
complement (from balance sheet), assume no salvage value, and
convert remaining years to an annual percent, e.g.,
Annual Depr. For
Current Market x 10%
=
Entire Complement
(= 10 years)
Example:
Annual Depreciation = $250,000 x .10
= $ 25,000



Easy to calculate.
Understates annual funds needed to replace machinery, assuming
current market is less than eventual replacement cost.
Often necessary to know depreciation for individual machines or
fraction of complement, which requires additional analysis.
C. Based on current replacement cost (current purchase price
of machine that would be purchased to replace old
machine… may be new or used machine, depending on
purchase policy).
Annual Depr. 
Current Purchase Pr ice  Salvage Value
Years in Bu sin ess
Wheel Tractor Example:
Annual Depreciation =
$125,000-$37,500
10
= $8,750

Accurate estimate of annual funds needed to replace
machine when it wears out.

Must be recalculated when machinery prices
change.
DETERMINING YOUR COST OF PRODUCTION
TWO APPROACHES, CONT.
1. Allocate Whole-Farm Costs to an Enterprise
(discussed earlier).
2. Develop a Schedule of Field Operations and
Associated Costs.
 Estimate the per acre cost of each field
operation used to produce an individual crop.
 See Profit Farms, wheat on owned land
(Table 6).
 Requires detailed information - especially
machinery costs.
 Sources of Machinery Cost Information
1. PNW Farm Machinery Costs: 1997 (PNW 346)
Order from:
Bulletins Office
WSU
P.O. Box 645912
Pullman, WA 99164-5912
1-800-723-1763
$6.25
See Also: http://farm.mngt.wsu.edu
 Sources of Machinery Cost Information cont.
2. MACHCOST-Software that calculates and
displays the fixed and variable costs of farm
machinery.
Hardware Requirements:
IBM or IBM compatible
PC Dos 2.1 or higher
Available from:
Department of Agr. Econ. & Rural Sociology
University of Idaho
Moscow, ID 83843
$20.00
 Using MACHCOST to Estimate the Cost
of Field Operations
Example:
Cost of Seeding Wheat (see Table 6, p.19).
310 HP WT
40’ Drills, conventional
See printout of analysis on pages 25-26
of handout.
BASING MARKETING OBJECTIVES ON
PRODUCTION COSTS
 Knowing Your Production Costs Improves Marketing By:
1. Providing a pricing objective through the discovery of
earnings and cash flow breakeven prices.
2. Determining the portion of the crop that must be sold at a
particular price to insure meeting earnings goal and cash
commitments.
3. Determining the portion of the crop that can be left unpriced
(“gambled on”) once a minimum earnings and cash flow
commitments have been realized.
4. Understanding the earnings and cash flow implications of
selling the crop at a particular price (see stairstep approach).
5. Reducing the role of hope and emotion in the marketing
decision.
Basing Your Marketing Objectives on Production Costs:
A Stairstep Approach
Profit Farms, Wheat/Summer fallow, Owned land (65 bu.)
Economic Costs (from Table 2)
Accum. $/Bu.
Item
___?___Profit (return to risk)…….................………….
4.16 Return on Equity (4% land, 10% mach., & bldgs.)..
3.35 Depreciation……………………………..……….….
2.81 Operator/Family Labor & Mngmt……………………..
2.18 Interest on Term Debt (land, mach., & bldgs.)…....….….
1.72 Personal and Real Property Taxes, Insurance……….……..
1.54 Variable Costs (except operator & family labor)……….…....
$/Bu.
?
0.81
0.54
0.63
0.46
0.18
1.54
Basing Your Marketing Objectives on Production Costs:
A Stairstep Approach
Profit Farms, Wheat/Summer fallow, Owned land (65 bu.)
Cash Expenditures (from Table 3)
Accum. $/Bu.
Item
__?__Increase in Cash Position………………………
3.36 Personal Withdrawals……………………………
2.63 Principal on Term Debt (land, mach., & bldgs.)…
2.17 Interest on Term Debt (land, mach., & bldgs.)…….
1.71 Personal and Real Property Taxes, Insurance……….
1.53 Variable costs………………………………………….
$/Bu.
?
0.73
0.46
0.46
0.18
1.53
SUMMARY
Your Marketing Objectives and Production Costs
Price Based on Enterprise Budget
Marketing Objectives
1.
2.
3.
4.
5.
6.
Realize a prof it (return to risk)
Realize target return on equity and cover
all other costs
Cover all cas h obligations, including
variable and cash fixed costs, principal on
term debt, and personal w ithdraw als
Cover variable and f ixed costs, op./fam.
Labor and mngmt., and earn "0" return to
depreciation, equity, and risk
Cover variable and cash f ixed costs,
op./f am. Labor and mngmt., and earn "0"
return to depreciation, equity, and risk
Cover variable expenses only (don't
produce if less than)
Prof it Fams Wheat
($/bu.)
>4.16
4.16
3.36
3.35
2.81
1.54
Your Enterprise
 Using Your Whole Farm Cash Flow Budget as the Basis
for a Marketing Plan
 Useful to know what various prices for a particular
commodity imply relative to recovery of costs and
expenditures for that commodity (as per previous
discussion).
 Also useful to know what commodity production and
prices imply relative to projected whole farm cash flow.
 Profit Farms projected whole farm cash budget for year
ending 12/31/X3 and its basis for a marketing plan (pages
36, 38-40).
WHOLE FARM CASH FLOW BUDGETING
 Shows cash inflows and outflows, usually on
a monthly basis, during the year.
 Two types:
1. Projected - Cash Flow Budget
2. Actual - Cash Flow Statement (not
same as SCF
 Focus on projected monthly cash flow.
CASH FLOW BUDGET FORMAT
Total Jan.
CASH INFLOWS(receipts)
1. Operating income
2. Capital sales
3. Other receipts
CASH OUTFLOWS(expenditures)
1. Operating expenses
2. Capital purchases
3. Other expenditures
FINANCIAL SUMM ARY
1. Money to borrow
2. Loan payments
3. Loan balances
…… Dec.
 Uses of Cash Flow Budget
1. Focus on plans for the future.
Must plan for:
 Production
 Marketing
 Capital asset purchases and sales
 Financing
2. Project timing and magnitude of cash inflows
and outflows.
3. Project operating capital needs.
4. Manage cash deficit and surplus.
5. Control.
 Projected vs. actual cash flow comparisons as year
unfolds.
CASH FLOW BUDGET
Profit Farms
Year Ending 12/31/X3
1
2
3
4
5
6
7
8
Item
Beginning cash balance
Operating Receipts:
Crops
Government payments
Other
Capital Receipts: Mach, R.E.
Non-farm Income: Off-farm Wages
Int. & Dividends
TOTAL CASH AVAILABLE (add
lines 1-7)
Actual Projected
X2
'X3
Jan. Feb.
9610
21664 21664 5000
190812
21135
3500
15780
770
241607
147769 25315
19000
3500
15777
1317
1753
152
1753
165
209027 48884
6918
CASH FLOW BUDGET cont.
Item
Operating Expenses:
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Chemicals
Custom
Fertilizer
Gas, fuel, oil
Insurance
Labor hired
Marketing & transportation
Rents & leases
Repairs
Seed
Storage
Supplies
Taxes (r.e. & pers. prop.)
Misc.
Total Cash Operating Exp. (add lines 9-22)
Actual
X2
Projected
X3
Jan
Feb
10185
10185
31329
10205
4337
5000
2106
31329
10205
4337
5000
2106
15430
10120
15430
10120
2500
2500
850
3888
2194
95644
850
3888
2194
95644
150
50
183
3803
183
2983
250
250
720
CASH FLOW BUDGET Cont.
Item
23 Total Cash Operating Exp. (add lines 9-22 )
Actual Projected
X2
X3
95644
24 Capital Expenditures: Mach. & equip.
25
Bldg. & Improv.
26 Other Expenditures:
27
28
Family living
Investments
Inc. Tax & Soc. Sec.
95644
Feb.
3803
2983
3583
3583
2000
20163
15000
42596
2000
4394
43000
2000
20163
24027
23155
27395
20892
31 TOTAL CASH REQUIRED (add lines 23-30 ) 191816
224094
CASH AVAILABLE less CASH REQUIRED
32 (lines 8-31)
-15067
29 Term debt payments: Principal
30
Interest
Jan.
49791
3965
1312
7386
34006
41498 -27088
CASH FLOW BUDGET Cont.
Item
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
Inflows from savings
Cash position before borrowing
Money to be borrowed:
Operating loans
Term debt
Operating loan payments: Principal
Interest
Outflows to savings
Ending cash balance
Loan Balances (at end of period):
Current year's operating loan
Previous year's operating loan
Term debt loans
Total loans
Consistency check:
Total inflows (8+33+35+36)
Total outflows (31+37+38+39+40)
Budgeting error (45-46)
Actual
X2
Projected
X3
0
15482
49791
415
122783
10000
119148
4895
4155
21664
5000
Jan
41498
32070
273
4155
5000
35705
32070
249558
281628
232163
267868
Feb
15000
-12088
17088
5000
17088
249558
249558
245593
262681
48884
48884
0
39006
39006
0
CASH FLOW BUDGET EXERCISE
PROFIT FARMS
1 How much cash is projected to be generated by the farm
and off-farm activities in X3?
2 How much cash will be needed to get through X3?
3 How do the Profits plan to finance the projected cash
flow shortfall?
4 How much operating capital must be borrowed in X3?
5 Will the Profit's be able to pay off X3 operating loan by
the end of X3?
6 What is the peak operating loan outstanding during X3?
7 Will total debt increase or decrease during X3?
8 When are capital purchases made and how are they
financed?
9 What does the cash flow projection indicate about the
Profits 12/31/X3 cash flow position relative to 12/31/X2?
$________
$________
________
$________
________
$________
________
________
________
WHOLE FARM CASH FLOW ANALYSIS OF MARKETING PLAN: Profit Farms
CROP 1:
W. Wheat
1. Quantity of crop in bg. Inventory
2. Expected crop production
3. Crop not available for sale (fed &/or
CROP 2:
S. Barley
FARM
TOTAL
5,020 Bu. (A)
50 Tons
(B)
30,355 Bu. (A)
584 Tons
(B)
0
(A)
0
(B)
ending inventory)
4. Crop available for sale (line 1+2-3)
35,375 Bu. (A)
634 Tons
5. Total annual cash requirement (from cash flow budget)...Line 31 + 38 - 24
(B)
$
213,989
WHOLE FARM CASH FLOW ANALYSIS OF MARKETING PLAN: Profit Farms, cont.
6.
7.
8.
Crop sales price ($ per unit)
$
CROP 1:
W. Wheat
CROP 2:
S. Barley
3.25
$ 75.00 (B)
(A)
Total annual cash receipts (line 4 x 6)
$ 114,969 (A) + $ 47,550 (B) =
Other cash sources (accnts. rec., gov't. pmt., cap. sales, nonfarm, cash on
hand, savings, etc)
9. Total annual cash available from all sources (line 7+8)
10. CASH SURPLUS (Deficit) (line 9-5)
FARM
TOTAL
$162,519
$60,000
$222,519
$8,530
WHOLE FARM CASH FLOW ANALYSIS OF MARKETING PLAN: Pr ofit Far m s , cont.
CROP 1:
W. Wheat
11. Crop 1: W. Wheat Analysis:
A.
B.
C.
D.
Cash receipts f rom other crops (line 7B+7C+8)
Net annual cash requirement (line 5 - 11A)
Quantity of crop 1 sales to breakeven (line 11B Ö 6A)
Quantity of crop 1 available f or sale
above breakeven sales (line 4A - 11C)
E. Breakeven price on total available crop 1 (line 11B Ö 4A)
$
$
107,550
106,439
32,750 Bu.
2,625 Bu.
$
3.01
WHOLE FARM CASH FLOW ANALYSIS OF MARKETING PLAN: Prof it Farms, cont.
CROP 2: S. Barley
12. Crop 2: S. Barley Analysis:
A.
B.
C.
D.
Cash receipts f rom other crops (line 7A + 7C+8)
Net annual cash requirement (line 5 - 12A)
Quantity of crop 2 sales to breakeven (line 12B Ö 6B)
Quantity of crop 2 available f or sale above breakeven
sales (line 4B - 12C)
E. Breakeven price on total available crop 2 (line 12B Ö 4B)
$174,969
$39,020
520 Tons
114 Tons
$61.55
Major Conclusions from Worksheet Analysis Assuming:

Total annual cash requirement of $213,989 (line 5)

35,375 bushels of wheat available for sale (line 4A) at $3.25
(line 6A)

634 tons of barley available for sale (line 4B) at $75 (line 6B)

$60,000 from other sources:
$9,000 Accounts receivable (barley)
19,000 Gov’t payments
3,500 Capital sales
15,777 Nonfarm income (wages)
1,317 Nonfarm interest & dividends
11,406 Decrease in cash & savings
$60,000
Conclude:





Expect cash surplus of $8,530 (line 10).
Will have 2,625 bushels of wheat available for sale at
price different from $3.25 (line 11D).
Breakeven cash flow price for sale of all wheat is $3.01
(line 11E), assuming all 634 tons of barley sold at $75
per ton.
Will have 114 tons of barley available for sale at price
different from $75 (line 12D).
Breakeven cash flow price for sale of all barley is
$61.55 (line 12E), assuming all 35,325 bushels of wheat
are sold at $3.25.
WHEAT STORAGE ENTERPRISE ECONOMICS
(Commercial Storage)
Revenue:
Sale of 10,000 bu. @ $3.85 net market on 11/15/X1
Expenses:
Transfer of 10,000 bu. @ $3.50 net market on 8/15/X1
Holding expenses:
Storage (1½¢/bu./mo. x 10,000 bu. x 3 mo.)
Handling (2¢/bu. loaded in and out)
Interest (10,000 bu. x $3.68 avg. net market x
.10 int. x ¼ yr.)
TOTAL EXPENSES
Profit (loss) from storage
$38,500
$35,000
450
400
920
$36,770
$1,730
Storage Breakeven Analysis
(Wheat Example)
 B/E Price (3 mo.)
 $36,770 Total Expenses 10,000 Bu.
 $3.68
 B/E Price Increase Per Month Before in Storage
 [$0.04 Handling + $0.015 Storage + ($3.50 Price x
0.10 Interest x 1/2)]
 $0.084
 B/E Price Increase Per Month After in Storage
 [$0.015 + ($3.50 Price x 0.10 Interest x 1/12)
 $0.044
REFERENCES
AAEA Task Force on Commodity Costs and Returns.
“Commodity Costs and Returns Estimation Handbook.”
AAEA Business Office, Ames, IA. 1998.
Ahearn, Mary C., and Uptal Vasavada, Ed. “Costs and Returns
for Agricultural Commodities.” Westview Press, Boulder,
Co. 1992.
Cross, T., and Bart Eleveld. “Understanding and Using
Enterprise Budgets.” EM 8354. Oregon State University
Extension Service. March, 1989.
Eleveld, B., and R. Carkner. “Analyzing and Selecting
Enterprises.” Business Management in Agriculture, Vol. II.
Agricultural and Resource Economics, Oregon State
University. 1988.
Fedie, D. “How to Farm for Profit Practical Enterprise
Analysis.” Iowa State University Press, Ames, IA. 1997.
References cont.
Kay, R., and W. Edwards. Farm Management, Fourth
Edition. Wm. C. Brown/McGraw-Hill. 1998.
Klonsky, K. “Enterprise Budgeting.” Farm Management
How to Achieve Your Business Goals. Yearbook of
Agriculture. USDA, U.S. Government Printing Office.
1989.
Smathers, R., and G. Willett. “Pacific Northwest Farm
Machinery Costs: 1997." PNW 346. University of
Idaho. Agricultural Publications, Moscow, ID. 1997.
Stodick, L., and R. Smathers. “MACHCOST - A
Machinery Cost Analysis Program.” Microcomputer
Users Guide No. 42. Department of Agricultural
Economics and Rural Sociology. University of Idaho,
Moscow, ID., 1989.
References cont.
WWW Sites for PNW Crop Enterprise Budgets:
University of Idaho:
http://www.uidaho.edu/ag/agecon/budgetavea.html
Oregon State University:
http://eesc.orst.edu/tango/pubsearch/0132.qry?function=sear
ch
Washington State University:
http://farm.mngt.wsu.edu/pub.htm
Other Western States:
http://agecon.uwyo.edu/wfmec/bulletins.html