Transcript No Slide Title

Basics of Farm Management
for Vegetable Growers
Jayson K. Harper
Professor of agricultural economics
Department of Agricultural Economics and Rural Sociology
The Pennsylvania State University
Penn State is committed to affirmative action, equal opportunity, and the diversity of
its workforce
“Farm Management” is the art
and science of managing risk
on your farm
• Production
• Marketing
• Financial
• Legal
• Human resource
• Environmental
Risk Management Strategies:
1) Retain
2) Shift
3) Reduce
4) Self-insure
5) Avoid
Is Your Vegetable Crop Profitable?
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Who are your competitors?
What is your cost of production?
What is your production target?
What is your price target?
How sensitive are your net returns to
changes in prices and yields?
Enterprise Budgeting
An enterprise budget is a summary of the income,
expenses, and profitability of a single enterprise…
Why do an enterprise budget?
• Project revenues, costs, and profit
• Specify inputs required/production practices
• Provide the basis for crop selection and market planning
• Compare alternatives (crops or technologies) before committing
time and capital
• Project cost of production and borrowing needs
• Evaluate past performance
Schedule of Field Activities and Operations
Date/
Field
Times
Tractor or
Month
Activity or Operation
Over
Self-propelled unit
• Date/Time
• What were you doing?
• How many times?
• How long did it take?
• What equipment?
• Which inputs?
• How much?
• Who was involved?
Inputs
Implement
Used
Quantity
Keeping good records is
critical to making enterprise
budgets…
Enterprise budgets are
critical to making good farm
business decisions
Two types of costs:
• Variable-- vary with the level or
intensity of production
– Seed/plants
– Fertilizers and lime
– Pesticides
– Fuel and lubrication
– Labor
– Crop insurance
– Repairs and maintenance
(machinery and equipment)
– Grading/Packing
– Management
– Interest on Operating Capital
• Fixed -- stay the same
regardless of the level or
intensity of production
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Depreciation
Interest
Repairs (buildings)
Taxes
Insurance
Land costs?
Constructing an Enterprise Budget
• Revenues
– Multiple products?
• Variable Costs
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Seed, fertilizer, chemicals
Fuel, oil, lube
Machinery repairs
Labor
Crop insurance
Interest on operating
capital
• Fixed Costs
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Machinery depreciation
Interest on investment
Machinery housing
Other buildings
Taxes and Insurance
Land charges
Miscellaneous overhead
Evaluating Short-Run Production Decisions with
Enterprise Budgets
Am I covering my out-of-pocket costs of production?
1) Do I have a positive gross margin?
Gross margin = Total revenues – Total variable costs
2) Is the crop price greater than my average variable costs?
Average Variable Cost = Total Variable costs / yield
Evaluating Long-Run Production Decisions with
Enterprise Budgets
Can I replace my equipment?
Am I covering the cost of my land?
Am I earning anything for my management?
3) Am I generating a positive net return?
Net return = Total revenues – Total costs
4) What is my breakeven price (average total cost)?
Breakeven price = Total cost / yield
5) What is my breakeven yield?
Breakeven yield = Total cost / price
Enterprise Budget
Farm Name:
Enterprise:
Year:
1) Revenues
Product
unit
price/unit
quantity
total
amount
unit
cost/unit
quantity
total
amount
2) Total revenues
3) Variable costs
Item
4) Total variable costs
5) Gross margin/return over variable costs
(total revenues - total variable costs)
(OVER)
6) Fixed costs
Item
unit
cost
quantity
7) Total fixed costs
8) Net return (gross margin - fixed costs)
9) Production decision questions:
Is the output price greater than my average variable cost?
(total variable cost / yield)
yes
no
Is the output price greater than my breakeven price?
(total cost / yield)
yes
no
Is my yield greater the breakeven yield?
(total cost / price)
yes
no
Notes:
total
amount
Agricultural Alternatives
• fruits and vegetables
• livestock
• farm management
and marketing
• horticultural
management
• discuss marketing,
production, resource
requirements, and
cost of production
Titles in the
Agricultural Alternatives series
• Vegetables
– Sweet corn
– Broccoli
– Bell pepper
– Snap bean
– Tomato
– Pumpkin
– Onion
– Asparagus
– Cucumber
– Potato
– Garlic
http://agalternatives.aers.psu.edu
Yield Risk: Sources and Solutions
Sources:
– Adverse weather
– Pest damage
Solutions:
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Pest management practices
Site selection
Variety/hybrid selection
Rotation/diversification
Irrigation
Crop insurance
Diversification:
Idea that prices and yields of different enterprises do not
exhibit the same variability
Types of diversification:
multiple crops, crops and livestock, geographical, marketing
Advantages of
diversification:
Disadvantages of
diversification:
• spreads risk among additional
enterprises
• rotational benefits
• labor demands more spread
out
• specialized equipment may be
needed
• broader production and
marketing expertise needed
• more constant labor supply
required
Irrigation: Factors to consider
• Field
soil type, drainage, erosion potential, location of power sources,
topography, distance to water supply
• Water
availability, quality, cost to develop, crop water requirements
• Crop
yield potential, need for frost protection, cultural practices
• System
type of power supply required, labor requirements and
availability, initial capital and annual operating costs
How much yield increase do I need to
make irrigation worthwhile?
Breakeven yield = total cost of production
expected price
 yield required to cover all costs at the expected market
price
If irrigation is the only cost which changes:
Breakeven irrigated = annual cost of irrigation
yield increase
expected price
 additional yield required to cover irrigation costs at the
expected market price
Irrigated yield target = old yield + annual cost of irrigation
expected price
Irrigation for Fruit and Vegetable
Production
• Water sources and their
effect on irrigation costs
• Laws affecting irrigation
water use
• Choosing an irrigation
system for vegetables
• Choosing an irrigation
systems for tree fruit
• Scheduling irrigation
Drip Irrigation for
Vegetable Production
• Advantages of drip irrigation
• Disadvantages and limitations
of drip irrigation
• Drip irrigation system
components
– delivery systems
– filters
– pressure regulators
– valves and gauges
– water management
• Equipment use and
maintenance
Multi-Peril Crop Insurance (MPCI)
Causes of losses covered:
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drought
excess rain
excess wind
fire
freeze
hail
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tornado
earthquake
insects
disease
wildlife
failure of
irrigation supply
Crops covered by MPCI in Pennsylvania:
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apples (45)
barley (54)
processing beans (15)
cabbage (1)
corn (grain and silage) (66)
forage production (66)
forage seedling (66)
grain sorghum (57)
grapes (1)
green peas (10)
nursery (67)
oats (66)
pasture, rangeland, forage
(26)
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peaches (30)
pears (1)
potatoes (13)
soybeans (51)
fresh-mkt. sweet corn (66)
processing sweet corn (12)
tobacco (3)
fresh-market tomatoes (4)
processing tomatoes (16)
wheat (57)
Also:
– Whole farm coverage
(AGR/AGR-Lite)
– LGM Dairy
– LRP Lamb
Crop Insurance Program Basics:
1) Determine actual production history (APH) yield
minimum of 4 successive years of records
maximum of 10 successive years of records (5 years for fruit crops)
<4 years of records … T-yields
Transitional yields vary by county and production practices
0 years of records: 65% of county T-yield
1 year of records: 80% of county T-yield
2 years of records: 90% of county T-yield
3 years of records: 100% of county T-yield
Crop Insurance Program Basics:
2) Select desired coverage level
• 50, 55, 60, 65, 70, or 75% of APH yield
50% for catastrophic (CAT) coverage
3) Select desired price election
• Up to 100% of indemnity price
55% for catastrophic (CAT) coverage
Crop insurance calculations:
Yield guarantee = APH • coverage
level
Premium/acre = yield guarantee •
premium rate • price election
Notes:
– CAT program has a $300/crop/county administrative fee.
– MPCI has a $30/crop administrative fee.
Crop insurance calculations:
If actual yield is less than the yield guarantee:
Indemnity payment = (yield guarantee – actual
production) • price election
If actual yield is equal to or greater than the yield
guarantee:
Indemnity payment = 0
AGR-Lite
• Insures the revenue of the entire farm rather
than individual crops by guaranteeing a
percentage of average gross farm revenue.
• All farm raised crops, animals, and animal
products are eligible for coverage.
• Uses information from a producer's Schedule F
tax forms to calculate the policy revenue
guarantee.
• Limited to a maximum liability of $1 million
per farm.
Should I buy crop insurance?
• Yield variability
• Cash flow requirements
• Self insurance
• CAT coverage
• Premium discounts for higher
levels of coverage
Sales closing dates
JANUARY 31-- AGR insurance
MARCH 15-- spring seeded crops
MAY 31– nursery crops
JULY 31-- forage seedings
SEPTEMBER 30-- fall seeded crops
NOVEMBER 20-- fruit crops
NOVEMBER 30-- GRP insurance
For more information, visit the
Penn State Crop Insurance Education Web Site:
http://cropins.aers.psu.edu
Noninsured Crop Disaster
Assistance Program (NAP)
• Eligible Crops: Agricultural commodities
for which the CAT level of crop
insurance is not available, including
controlled environment crops
(mushrooms and floriculture), specialty
crops (maple syrup and honey), and
value loss crops (aquaculture,
Christmas trees, ginseng, ornamentals,
and turfgrass)
NAP Program (cont.)
• Eligible producers: a landowner, tenant, or
sharecropper who shares in the risk of
producing an eligible crop (<$2 million gross
revenue)
• Eligible natural disaster (before or during
harvest):
– Damaging weather (drought, excess moisture)
– Natural occurrence (earthquake, flood)
– Excessive heat, insect infestation
NAP Program (cont.)
• NAP assistance is available if a natural
disaster causes expected production to be
less than 50% or prevented more than 35%
of crop acreage from being planted planting
• NAP payments are paid based on a farmers
crop acreage, approved yield, and net
production at 55% of the average market
price established by the FSA state committee
NAP Program (cont.)
• Must apply to FSA for coverage by state
closing date and pay applicable service
fee ($250/crop/county) Note: Limitedresource farmers can request waiver of fees
• Coverage begins 30 days after
application or the date the crop is
planted
NAP Program (cont.)
• To remain eligible for NAP assistance
farmers must report crop acreage
information, production practices used,
and the disposition of the harvested
crop (ie., how much was marketable)
Supplemental Revenue
Assistance Payments (SURE)
• Provides benefits for farm revenue losses
due to natural disaster
• 2008 Farm Bill successor to ad hoc crop
disaster assistance (legislated through 2011)
• Available to producers on farms in counties
(and contiguous counties) covered by a
qualifying USDA secretarial natural disaster
declaration
SURE program eligibility
• Producer must obtain crop insurance or noninsurable crop disaster assistance (NAP)
coverage for all crops including hayed and
grazed land that is planted or intended to be
planted
• In counties with a disaster declaration (or
contiguous counties without one), any farm
with more than 50% overall farm loss
because of adverse weather is eligible
SURE payments
• Producers with qualifying losses are eligible
to receive 60% of the difference between the
SURE disaster program guarantee and actual
farm revenue
• Total SURE guarantee is calculated by
summing the CI or NAP guarantees for each
crop
• SURE calculator is available on-line at:
http://www.fsa.usda.gov/
Summary
• What are your sources of risk?
• Know your cost of production
– Breakeven price and yield
• Risk management options
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BMPs
Diversification
Irrigation
Crop insurance and NAP…SURE