Strawberry Enterprise Strawberry Enterprise BudgetingBudgeting

&&AGR-Lite Crop InsuranceAGR-Lite Crop Insurance

May 25, 2007May 25, 2007

Paul D. MitchellPaul D. Mitchell

University of Wisconsin-MadisonUniversity of Wisconsin-Madison

Agricultural and Applied EconomicsAgricultural and Applied Economics

(608) 265-6514 (608) 265-6514 pdmitchell@wisc.edupdmitchell@wisc.edu

Goal TodayGoal Today

Overview ways to prepare an Overview ways to prepare an Enterprise Budget for your Enterprise Budget for your strawberry operationstrawberry operation

Provide a list of resources for you to Provide a list of resources for you to use in this processuse in this process

Brief overview of AGR-Lite with a list Brief overview of AGR-Lite with a list of additional resourcesof additional resources

Enterprise BudgetingEnterprise Budgeting

Estimate projected costs, revenue, and net Estimate projected costs, revenue, and net returns for a single enterprise (strawberries)returns for a single enterprise (strawberries)

Planning tool to test out new ideasPlanning tool to test out new ideas Identify price or yield needed to break evenIdentify price or yield needed to break even Estimate input, facility, and marketing needsEstimate input, facility, and marketing needs Compare different enterprises to identify bestCompare different enterprises to identify best Assess feasibility and profitability of current or Assess feasibility and profitability of current or

potential enterprisespotential enterprises

Enterprise BudgetingEnterprise Budgeting

Most farms have multiple crop, Most farms have multiple crop, livestock, and business enterpriseslivestock, and business enterprises Enterprise budgets estimate costs, revenues Enterprise budgets estimate costs, revenues

and net returns for each farm enterpriseand net returns for each farm enterprise Each enterprise budget a “Lego” Each enterprise budget a “Lego” Snap “Legos” together to make your Snap “Legos” together to make your

farmfarm Try different mix of “Legos” to look at Try different mix of “Legos” to look at

different farms you could operate different farms you could operate

Building an Enterprise Building an Enterprise BudgetBudget

Revenues – Costs = ReturnsRevenues – Costs = Returns No formal structure for enterprise budgetNo formal structure for enterprise budget Cost categories usedCost categories used

Variable or Operating CostsVariable or Operating Costs Fixed or Ownership or Overhead CostsFixed or Ownership or Overhead Costs

Machinery and Building CostsMachinery and Building Costs Split into fixed and variable costs?Split into fixed and variable costs? Put into their own category?Put into their own category?

Time line version: Planting Costs, Harvest Time line version: Planting Costs, Harvest CostsCosts

Building an Enterprise Building an Enterprise BudgetBudget

Concept not hard: Revenue easy to Concept not hard: Revenue easy to estimate, variable input costs easy tooestimate, variable input costs easy too

Cost estimation difficult for machinery, Cost estimation difficult for machinery, buildings, facilities, equipment, etc.buildings, facilities, equipment, etc. What does it cost to plow a field?What does it cost to plow a field? What is the annual cost of storage shed?What is the annual cost of storage shed?

Cost allocation difficultCost allocation difficult How much tractor repair cost allocate to How much tractor repair cost allocate to

strawberries?strawberries? How much farm liability insurance allocate to How much farm liability insurance allocate to

strawberry production vs. strawberry pick-your-strawberry production vs. strawberry pick-your-own?own?

Main PointMain Point

Requires (boring?) work on your partRequires (boring?) work on your part Important: You can see where you are Important: You can see where you are

making money and where you are losing itmaking money and where you are losing it Requires you to make lots of assumptionsRequires you to make lots of assumptions

Don’t trust someone else’s budgetDon’t trust someone else’s budget Make assumptions you are comfortable with, Make assumptions you are comfortable with,

as you bear the responsibility of your choicesas you bear the responsibility of your choices YouYou need to estimate need to estimate youryour costs costs

Cost EstimationCost Estimation Materials, Supplies, Hired LaborMaterials, Supplies, Hired Labor

Cost you write checks forCost you write checks for Easy to calculate if you have recordsEasy to calculate if you have records Should have records if file taxes (Schedule F)Should have records if file taxes (Schedule F)

Machinery/Facilities/EquipmentMachinery/Facilities/Equipment Includes costs you don’t write checks forIncludes costs you don’t write checks for Harder to estimate/measure, but can be a Harder to estimate/measure, but can be a

large component of your costslarge component of your costs Machinery for grain production: 25-40% costsMachinery for grain production: 25-40% costs

Machinery/Equipment/Facility Machinery/Equipment/Facility Cost ConceptsCost Concepts

Variable Cost, Use-Related Cost, Operating Variable Cost, Use-Related Cost, Operating CostCost Costs from using the machine, equipment, Costs from using the machine, equipment,

or buildingor building Maintenance, use-related repairs and labor, Maintenance, use-related repairs and labor,

fuel, lubefuel, lube You write checks for theseYou write checks for these

Fixed Cost, Time-Related Cost, Overhead CostFixed Cost, Time-Related Cost, Overhead Cost Costs paid whether use it or notCosts paid whether use it or not Interest, insurance, taxes, housingInterest, insurance, taxes, housing You write checks for theseYou write checks for these

DepreciationDepreciation

Both a variable and fixed costBoth a variable and fixed cost How much the machine/facility/equipment How much the machine/facility/equipment

loses value from use and ageloses value from use and age Vehicle loss in value due to mileage Vehicle loss in value due to mileage

(variable cost) and age (fixed cost)(variable cost) and age (fixed cost) You do not write a check for this oneYou do not write a check for this one

Various methods to estimate (straight Various methods to estimate (straight line)line) Tax depreciation too fast, no salvage valueTax depreciation too fast, no salvage value See various resources for more informationSee various resources for more information

Allocation ProblemAllocation Problem

Some variable costs should be allocated Some variable costs should be allocated across multiple yearsacross multiple years Tractor tires, engine overhaul, barn roof or Tractor tires, engine overhaul, barn roof or

paintingpainting Pubs list average annual costs for many common Pubs list average annual costs for many common

types of machines and buildingstypes of machines and buildings Problem: strawberry growers not “common”Problem: strawberry growers not “common”

Many costs must be allocated to more than Many costs must be allocated to more than one enterpriseone enterprise Farm truck, machine shed or shop, property Farm truck, machine shed or shop, property

taxes, farm liability insurance, etc.taxes, farm liability insurance, etc. Use some basis: % revenue, % acres, % time, etc.Use some basis: % revenue, % acres, % time, etc.

Fast and Simple MethodFast and Simple Method

Complexities make estimating your actual Complexities make estimating your actual machinery/equipment/facility costs machinery/equipment/facility costs difficult, time consuming, full of difficult, time consuming, full of assumptionsassumptions

Custom or rental rates can be fast and Custom or rental rates can be fast and simple basis to estimate annual costs for simple basis to estimate annual costs for machinery/equipment/facilitiesmachinery/equipment/facilities

Worked out a method for grain producers, Worked out a method for grain producers, but not clear how applies to strawberriesbut not clear how applies to strawberries

Fast and Simple MethodFast and Simple Method

Typical grain farmer costs likely higher than Typical grain farmer costs likely higher than observed custom ratesobserved custom rates Custom operatorsCustom operators

Run over more acres, spread fixed costsRun over more acres, spread fixed costs Lower purchase price by searching for best Lower purchase price by searching for best

price or getting volume discountsprice or getting volume discounts More efficient operatorsMore efficient operators

Family/friends not charge each other enoughFamily/friends not charge each other enough Custom rate discounted because not perfect Custom rate discounted because not perfect

timingtiming

Fast and Simple Method Fast and Simple Method and Strawberriesand Strawberries

Special equipment/buildings so no custom Special equipment/buildings so no custom or rental rate to useor rental rate to use

Fewer acres, so less land to spread fixed Fewer acres, so less land to spread fixed costs over—higher per acre costscosts over—higher per acre costs

Older, smaller, cheaper, mostly Older, smaller, cheaper, mostly depreciated machinery and equipment—depreciated machinery and equipment—lower per acre costslower per acre costs

How do custom rates compare to typical How do custom rates compare to typical costs?costs?

Family Labor and Family Labor and ManagementManagement

Track/estimate hours of family labor and Track/estimate hours of family labor and charge to enterprises as if paid fair wagecharge to enterprises as if paid fair wage

Then the net return generated by the Then the net return generated by the enterprise is the return to your managemententerprise is the return to your management

Track/estimate management time and Track/estimate management time and charge to enterprises as if paid fair wagecharge to enterprises as if paid fair wage

Then the net return generated by the Then the net return generated by the enterprise is the return to enterprise is the return to ownership/investmentownership/investment

Building an Enterprise BudgetBuilding an Enterprise Budget Two Basic Approaches Two Basic Approaches

Start with an enterprise and list all inputs Start with an enterprise and list all inputs and activities and their costand activities and their cost More intuitive approachMore intuitive approach Often miss farm overhead costsOften miss farm overhead costs

Start with all farm costs (Schedule F) and Start with all farm costs (Schedule F) and allocate each cost to each farm enterpriseallocate each cost to each farm enterprise Forces you to allocate all farm costsForces you to allocate all farm costs Need adjustments: inventories, depreciation, Need adjustments: inventories, depreciation,

family labor, allocation of multi-year costs, etc.family labor, allocation of multi-year costs, etc.

First ApproachFirst Approach

Most common, many available Most common, many available Usually spreadsheet basedUsually spreadsheet based See additional resourcesSee additional resources

Wide distribution in estimatesWide distribution in estimates Class assignment ($/ac) 3,500; 4,400; Class assignment ($/ac) 3,500; 4,400;

7,200; 7,800; 8,100; 15,000; 26,0007,200; 7,800; 8,100; 15,000; 26,000 Woods et al (2006): $4,739/acWoods et al (2006): $4,739/ac

Second ApproachSecond Approach

Allocate all your Schedule F costsAllocate all your Schedule F costs Built system for Wisconsin potato Built system for Wisconsin potato

growers that can be easily adapted growers that can be easily adapted to strawberriesto strawberries Spreadsheet based system on internetSpreadsheet based system on internet See additional resourcesSee additional resources

Multi-Year CropsMulti-Year Crops

How deal with establishment year versus later How deal with establishment year versus later years for strawberries?years for strawberries?

Assume establish year 1, then 3 more yearsAssume establish year 1, then 3 more years 11stst approach: treat strawberry patch as an approach: treat strawberry patch as an

investment, calculate the net present value of investment, calculate the net present value of its cash flow over 4 years and annualize itits cash flow over 4 years and annualize it See additional resourcesSee additional resources

22ndnd approach: average net return across life of approach: average net return across life of patch, as though ¼ of patches of each agepatch, as though ¼ of patches of each age

ConclusionConclusion

Strawberry enterprise budget are usefulStrawberry enterprise budget are useful Identify price or yield needed to break evenIdentify price or yield needed to break even Estimate input, facility, and marketing needsEstimate input, facility, and marketing needs Assess profitability of current operationAssess profitability of current operation

Requires you to make lots of assumptionsRequires you to make lots of assumptions Don’t trust someone else’s budgetDon’t trust someone else’s budget Make assumptions you are comfortable with, as Make assumptions you are comfortable with, as

you bear the responsibility of your choicesyou bear the responsibility of your choices YouYou need to estimate need to estimate youryour costs and it is costs and it is

WORKWORK