Journal of the NACAA
ISSN 2158-9429
Volume 9, Issue 2 - December, 2016

Editor: Lee Stivers

Whole Farm Analysis with Crop Enterprise Budgets

Flanders, A. , Associate Professor and Extension Economist, Northeast Research and Extension Center, University of Arkansas System, Division of Agriculture

ABSTRACT

Crop enterprise budgets have proven an effective means for Extension programs to present costs and returns on a per acre basis for farm planning. Production practices are developed with information from Extension specialists who have knowledge of profit maximizing production methods. Whole farm analysis is an expanded application of enterprise budget methodology. Whole farm budgets represent net returns for all crops produced as a composite enterprise. Information for the complete enterprise entails total financing requirements for annual production inputs and long-term capital requirements for machinery and equipment. As a case study, whole farm budgets are a means for evaluating commodity programs and their efficacy in achieving public policy objectives.


INTRODUCTION

Enterprise budgets for agricultural production associate established methods of profit maximizing production with prevailing input costs and anticipated commodity prices in order to project costs and returns for planning. The University of Arkansas crop enterprise budgets (UA CES, 2016a) apply field activities established by the Arkansas Row Crop Research Verification Programs for corn and grain sorghum, cotton, rice, soybeans, and wheat (UA CES, 2016b). The Research Verification Programs implement research-based Extension recommendations in an actual field scale farming environment with the intent of optimizing profits. Currently, peanuts are not included in the program for row crop verification, but production inputs are based on the Arkansas Peanut Production Summary (Faske, 2016) and recommendations of county agents involved with peanut production.

 

Field activities in enterprise budgets include itemized field trips with equipment units and input application rates. Budget analyses are for generalized circumstances with a focus on consistent and coordinated application of production methods for all field crops. This approach results in meaningful costs and returns comparisons of alternative acreage allocations among field crops for decision making.  

 

Whole farm budget analysis is an expanded application of crop enterprise budget methodology. Expanding acreage for each crop enterprise budget results in total farm operating costs and an estimate of capital costs for fixed equipment and machinery. Capital costs of machinery are determined by the capital recovery method which determines the amount of money that should be set aside each year to replace the value of equipment used in production (Kay and Edwards, 1999). This measure differs from typical depreciation methods, as well as actual cash expenses for machinery. Amortization factors applied for capital recovery estimation coincide with prevailing long-term interest rates (Edwards, 2005).

 

The objective of this research is to expand crop enterprise budgets with per acre costs and returns to a whole farm analysis by applying county-level aggregate data to represent a case study farm. Expanding enterprise budgets on a per acre basis to a whole farm budget as a case study requires total farm acreage that corresponds to representative farm acreage for efficient utilization of equipment units. Equipment is purchased as whole units, but enterprise budget methods allocate capital costs on a per acre basis that is determined by field trip hours. Representative total acreage in this analysis is evaluated as a farm owning one combine with approximately 300 total annual hours of use.  

 

U.S. agricultural policy establishes commodity programs for field crops in an attempt to stabilize farm revenue during periodic cycles of decreased prices. Crop prices develop historical statistical distributions that determine expected payments for Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC) programs of the 2014 Farm Bill. PLC payment rates are triggered when annual national prices are less than a reference price that is fixed for the duration of the farm bill legislation. PLC payment rates are determined by farm payment yields for each crop that are established by historical farm yields. The county version of the ARC program (ARC-CO) sets payment rates in each county that are based on historical national prices and county yields. Payments are triggered when current revenue for a county, determined by national price and county yield, are below a moving benchmark revenue. The moving benchmark revenue is determined by five-year Olympic averages for county yield and national price. PLC and ARC-CO payment rates are applied to 85% of base acreage for each crop which is determined by historical farm planted acreage (USDA, ERS 2015). This research includes commodity programs as an extended analysis of whole farm budgets.     

 

METHODS

Data for developing crop enterprise budgets include input prices that are obtained from suppliers and other industry sources. Input costs for fertilizers and chemicals are estimated by applying prices to recommended input rates. Other input prices, custom hire rates, and fees are estimated with information from industry contacts. Methods of estimating these operating expenses presented in crop enterprise budgets on a per acre basis are identical to producers obtaining costs information for their specific farms.

 

Ownership costs and repair expenses for machinery are estimated by applying engineering formulas to representative prices of new equipment (Givan, 1991; Lazarus and Selly, 2002). Repair expenses in crop enterprise budgets should be regarded as value estimates of full service repairs. A portion of repairs and maintenance costs in crop enterprise budgets is actually performed by hired farm labor and will be realized as wages paid to employees. Machinery performance rates of field activities utilized for machinery costs are used to estimate time requirements of a field activity which is applied to an hourly wage rate for determining labor costs (USDA NASS, 2015). Labor costs in crop enterprise budgets represent time devoted to specified field activities. Interest rates for capital recovery and operating loans are obtained from commercial lenders. Prices for machinery and equipment are based on information from dealers.

 

Arkansas field crop production is characterized by varying soil types which determine crop suitability for profit maximization. Silt loam soils are suitable for corn, soybeans, and rice while clay soils are limited to soybean and rice production for optimal yields. Most Arkansas acreage in field crop production is rented. To achieve production scale efficiencies, total farm size has increased so that farm operations typically consist of tracts in a widespread geographical area. Thus, farms commonly have varying soil types that lead to crop combinations that are determined by agronomic conditions.

 

Gerlt et al. (2014) discuss applying county-level data as a substitute for farm-level data. Simulation experiments indicate that crop insurance premium estimates derived from county-level data are reasonably precise, suggesting that relationships between county-level data and farm-level data are a new tool for applied analysis. The findings are relevant for applied researchers assessing farm impacts, crop supply effects, and commodity programs, both existing and proposed.

 

The whole farm case study for this analysis has 700 acres of soybeans and 700 of corn at one location, and another location has 700 acres of soybeans and 700 acres of long-grain rice. Field activities for each of the crops are applied from 2016 crop enterprise budgets. With 2,800 total acres, a single combine has 326 annual hours of use. Total acres applied to the whole farm result in fixed costs estimates that represent whole machinery units. The representative farm size for the case study corresponds to an operation with one farmer\operator. The farm has hired labor, but does not have a hired farm manager.   

 

Yields for the case study farm are averages of Research Verification Program fields over 5 years. Irrigated yields per acre are corn (210 bu.), rice (180 bu.), and soybeans (55 bu.). Prices received for this analysis are determined by the July estimates from the USDA (USDA, 2016). Applied crop prices are $3.50/bu. for corn, $4.73/bu. for long-grain rice, and $9.50/bu. for soybeans. All land is assumed rented, and typical rental arrangements represented by the case study crop yields are 25% of crop revenue and an equal percentage of any revenue derived as payments from government programs.   

 

RESULTS AND DISCUSSION

Case study acreage, yields, and crop prices are applied to the Whole Farm Budget calculator of the University of Arkansas Cooperative Extension Service (2016a). Costs and returns for the farm are presented in Table 1. Inputs are composed of seed, chemicals, fuel, and custom applications. Production expenses are inputs, crop insurance, equipment repairs, and hired labor. This is the amount that would typically be represented by an annual production loan. Operating expenses are production expenses, interest paid on production loans, and post-harvest expenses. Returns to operating expenses of $161,595 is the amount available to pay capital recovery and to provide a return for farm management to the operator. With capital recovery of $234,548, farm income from operations is -$72,953. The $63,850 estimate for farm management is for Standard Occupational Classification (SOC) code 119013 and is derived as the average of Arkansas, Louisiana, Mississippi, and Missouri annual income (US DOL, 2015). Farm management includes value accrued to the operator for living expenses, as well as fees paid for management activities such as production consulting or financial services. Net returns for the farm are -136,803. 

 

Table 1. Farm with Corn ($3.50/bu.), Soybean ($9.50/bu.), and Rice ($4.73/bu.)
Crop Corn Soybean Rice Farm
Total Revenue   514,500     731,500    595,980    1,841,980
Grower Revenue   385,875     548,625    446,985    1,381,485
         
Input Costs   262,417    379,595    277,500       919,512
Production Expenses   292,649    425,418    304,869    1,022,937
Operating Expenses   365,750    458,429    395,711    1,219,890
         
Returns to Operating Expenses    20,125     90,196     51,274       161,595
Capital Recovery             234,548
Farm Income from Operations              -72,953
         
PLC, ARC Payments                 0
         
Management              63,850
         
Net Returns           -136,803

 

The 2014 Farm Bill provides Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC) when commodity prices are below threshold levels (USDA, ERS 2015). Most Arkansas long-grain rice acreage is enrolled in PLC while most corn and soybean acreages are enrolled in ARC-County. Farm payment yield for PLC (2008-2012) and county yields for ARC are estimated as aggregate averages for Mississippi County. Base acres for each crop are equal to planted acreage for the case study farm which corresponds to the farm following the same crop rotation as during 2009-2012. Applied ARC county yield for the analysis is estimated as the 2016 Mississippi County trend line yield.

 

PLC and ARC parameters are applied to the PLC, ARC, and LDP calculator of the University of Arkansas Cooperative Extension Service (2016a). Farm costs and crop revenue in Table 2 are identical to Table 1. PLC and ARC payments of $161,382 in Table 2 are composed of $97,329 of PLC payments and $64,053 of ARC payments. Net returns are $24,579 for the farm. To achieve these net returns, the case study farm has $1,022,937 of current operating debt and an additional $234,548 of long-term debt obligations for machinery and equipment. Total annual expenses are $1,454,438 and $63,850 for management to realize $24,579 in net returns. 

 

Table 2. Farm with Corn ($3.50/bu.), Soybean ($9.50/bu.), Rice ($4.73/bu.), and PLC/ARC Payments
Crop Corn Soybean Rice Farm
Total Revenue  514,500   731.500  595,980   1,841,980
Grower Revenue  385,875   548,625  446,985   1,381,485
         
Input Costs  262,417   379,595  277,500     919,512
Production Expenses  292,649   424,418  304,869   1,022,937
Operating Expenses  365,750   458,429  395,711   1,219,890
         
Returns to Operating Expenses   20,125    90,186   51,274      161,595
Capital Recovery            234,548
Farm Income from Operations             -72,983
         
PLC, ARC Payments            161,382
         
Management              63,850
         
Net Returns              24,579

 

Corn and soybeans are observed to have long-term prices clustered around three periodic means which have similar duration for each crop (Irwin and Good, 2013). The first periodic mean ends in 1972, and the second period is 1973-2005. The third period is 2006-2015 and includes an era to the present. These statistical results leads to approximately $4.50/bu. for corn and approximately $10.50/bu. for soybeans as current long-term expected prices. Applying the PLC reference price for long-grain rice of $6.30/bu. with long-term expected prices for corn and soybeans to the PLC, ARC, and LDP calculator represents market conditions in which there are no PLC and ARC payments. Net returns of $179,177 in Table 3 represent a situation in which all farm revenue is derived from market receipts. All costs in Table 3 are identical to costs in Table 1 and Table 2 except for soybean operating costs. Soybean check-off fee calculations include crop price, and the higher soybean price applied in Table 3 leads to greater operating expenses.    

 

Table 3. Farm with Corn ($4.50/bu.), Soybean ($10.50/bu.), and Rice (6.30/bu.)
Crop Corn Soybean Rice Farm
Total Revenue  661,500   808,500  793,800  2,263,800
Grower Revenue  496,125   606,375  595,350  1,697,850
         
Input Costs  262,417   379,595  277,500  919,512
Production Expenses  292,649   425,418  304,869  1,022,937
Operating Expenses  365,750   458,814  395,711  1,220,275
         
Returns to Operating Expenses  130,375   147,561  199,639  477,575
Capital Recovery        234,548
Farm Income from Operations        243,027
         
PLC, ARC Payments              0
         
Management          63,850
         
Net Returns         177,177

                     

Comparing net returns in Table 3 to net returns in Table 1 indicates the nature of profit margins for field crop production. Commodity prices in Table 3 represent expectations for prices that correspond to levels in which no commodity program payments are received. Commodity prices in Table 1 are at levels in which current agricultural policy triggers program payments. Changes in commodity prices between Table 3 and Table 1 are reductions of 22% for corn, 25% for rice, and 10% for soybeans. These price declines result in a net returns decrease of 176% to a level of -$136,803 for the farm without a safety net provided by commodity programs.  

 

SUMMARY

Analysis with whole farm budgets includes total costs and returns for a farm production unit. Producers have the capability to represent situations for complete operations and to include projections for commodity program payments during periods of low commodity prices. Production planning is enhanced by comparing crop alternatives with varying acreage combinations. Efficacy of agricultural policy may be evaluated with whole farm budgets. Results of this analysis indicate that current programs of Price Loss Coverage and Agricultural Risk Coverage are effective for enabling a representative farm to meet all financial obligations of production. Without these programs, production expenses are greater than revenue from market prices.

                              

LITERATURE CITED

Edwards, W. (2005). Estimating farm machinery costs. Iowa State University, University Extension. Ames, IA.

Faske, T. (2016). Arkansas peanut production summary. Cooperative Extension Service, University of Arkansas System Division of Agriculture. Little Rock, AR.

Gerlt, S.,Thompson, W. , and Miller,  D. (2014). Exploiting the relationship between farm-level yields and county-level yields for applied analysis. Journal of Agricultural and Resource Economics, 39(2014): 252-270.  

Givan, W. (1991). Using machinery costs to make decisions. AG ECON 91-003. Cooperative Extension Service, Extension Agricultural Economics, The University of Georgia. Athens, GA.

Irwin, S. and Good, D., (2013). The new era of crop prices, a five-year review." farmdoc daily, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 27.

Kay, R. D. and Edwards, W. M. (1999). Farm management, fourth edition. WCB/McGraw-Hill. Boston, MA.

Lazurus, W. F. and Selly, R. A. (2002). Suggested procedures for estimating farm machinery. Staff Paper P02-16. Department of Applied Economics, University of Minnesota. Minneapolis-St. Paul, MN.

U.S. Department of Agriculture, Economic Research Service (2015). Agricultural act of 2014: highlights and implications. Retrieved from: http://www.ers.usda.gov/agricultural-act-of-2014-highlights-and-implications.aspx

U.S. Department of Agriculture, National Agricultural Statistics Service (2015). Farm labor. Retrieved from: http://www.nass.usda.gov/Statistics_by_Subject/Economics_and_Prices/index.asp

U.S. Department of Agriculture, World Agricultural Supply and Demand Estimates (2016). WASDE-555. Washington, D.C., July 12, 2016. Retrieved from: http://www.usda.gov/oce/commodity/wasde/

U.S. Department of Labor, Bureau of Labor Statistics (2015). Occupational employment statistics. Retrieved from: http://data.bls.gov/oes/

University of Arkansas, Cooperative Extension Service (2016). Retrieved from: http://www.uaex.edu/farm-ranch/economics-marketing/farm-planning/budgets/

University of Arkansas, Cooperative Extension Service (2016). Retrieved from: http://www.uaex.edu/farm-ranch/crops-commercial-horticulture/verification.aspx