Whole Farm Planning—Ch.12

Key questions What are the steps in preparing

a whole farm budget? What is it used for? How do short-run and long-run

budgets differ?

Whole Farm Planning

“Successful farming is an individual, economic problem. The farm is a combination of enterprises, and its individual organization will determine in a large measure its profitableness.”

E.H. Thompson, U.S. Department of Agriculture, 1914.

Uses Project profitability of the whole

farming operation—total $ Compare profitability of

alternative farm plans Estimate requirements for labor,

capital, feed, etc.

Developing a Whole Farm Budget

1. Identify resources available (land, labor, livestock facilities)

2. Identify enterprises to carry out(part of the strategic plan)

3. Develop enterprise budgets ($ per acre, per head, etc)

4. Multiply gross revenue and variable costs by no. of units

Developing a Whole Farm Budget

5. Sum for all enterprises

6. Add other income, if any

7. Include fixed costs

8. Profit for the whole farm

Summary

Gross Revenue- variable and fixed costs= profit & return to management

Don’t subtract opportunity costs for– Operator labor– Equity capital

Equals Net Farm Income

Short-run versus Long-run Budgets

Short-run Long-run

Coming year “Typical” year

Current prices Average prices

Yields this year Average yields

Beginning inventories Ignore them

Operating loans Ignore them

Further Analysis

Sensitivity Analysis– Change the

value of key values, such as prices or yields

– Compare the effect on net farm income

Add Resources– Rent or buy

more land

– Hire more labor

– Buy feed

– Borrow money

Cautions!(for a new plan) Are performance

levels realistic? How much risk is involved? Do better alternatives exist? Will management requirements

change? What is the effect on cash flow?