Farm Plan Project

1
Farm Plan Project

• Review and Step Through

2
What You Need

• Your Data sheet.
• You find that in the file at http//pduffy.pageout
  .net for undergraduates.
• For graduate students, go to Blackboard to find
  your data.

3
First Thing to Do

• Make a workbook for your farm plan.
• Perhaps the easiest way to make a workbook is to
  download my file of enterprise budgets (because
  you'll need all those in the workbook) and then
  add sheets in front of the first budget.

4
Order of the Workbook

• Your data
• Balance Sheet
• Income Statement
• 1st LP
• Sensitivity report for 1st LP
• 2nd (modified) LP
• Whole-farm budget
• My set of enterprise budgets

5
Data Page

• You will need to complete a few calculations on
  the data page.
• You need total CROPLAND acreage (excludes pasture
  and farmstead/waste)
• You need total sales revenue from crops
• You need total sales revenue from livestock
  (includes CULL cows as well as sales of male and
  female calves).
• You need change in inventory for crops supplies
  (one item) and for livestock (another item)

6
Note the totals for revenue cropland, which you
will need later
You need total revenue for the income statement.
You need total cropland (625 acres) for the LP
RHS.
7
Inventory Changes, Crops Supplies
You need the ending value for the balance sheet
and the change in inventory for the income
statement.
8
Livestock Information
You needing ending inventory for the balance
sheet. The breeding animals are NONCURRENT
assets. You need total sales for the income
statement. Be sure to include the sales of the
culls into your total sales.
9
The Balance Sheet

• Once you make these changes to your data sheet,
  the1st sheet in the workbook, you can start the
  balance sheet, the second sheet in the workbook.
• Most of the information from your balance sheet
  comes from the data sheet, but you do have to
  estimate the non-current portion of deferred
  loans.

10
Balance Sheet Current Assets

• Cash and checking accounts are current assets
  (found in the data)
• Crops in inventory and fuel supplies in
  inventory (ending values you calculated) are
  current assets
• There are no calves (feeder livestock) left in
  inventory on any farm in my set, so there will be
  a 0 value for livestock current assets
• Accounts Receivable, Prepaid Expenses, and "Other
  Current Assets," (all found in the data) are
  current assets

11
Balance Sheet Noncurrent Assets

• Machines and equipment (on data sheet)
• Breeding livestock (ending inventory value you
  calculated)
• Buildings and improvements (on data sheet)
• Land (on data sheet)

12
Balance Sheet Current Liabilities

• Outstanding current loans
• Machinery loans due this year
• Mortgage principal due this year
• Accrued interest
• Other accrued expenses
• Accounts payable
• All found in data

13
Balance Sheet Noncurrent Liabilities

• Noncurrent portion of machinery loan (data)
• Noncurrent portion of real estate debt (data)
• Noncurrent portion - deferred taxes calculated as
  2 of total asset values (an estimate)

14
Ratios to Calculate

• Current Ratio
• Debt-to-Asset Ratio

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Income Statement Revenue Items

• Cash crop sales (total you calculated)
• Cash livestock sales (total you calculated)
• Inventory changes
• Crops, fuel, supplies (calculated earlier)
• Livestock (calculated earlier)
• Government program payments (in data)
• Change in accounts receivable (in data)
• Other farm income (in data)

16
Income Statement Expenses

• Variable production costs (data)
• Hourly labor costs (data)
• Fixed labor costs (data)
• Property taxes (data)
• Insurance (data)
• Land rent (data)
• Utilities (data)

17
Income Statements Adjustments to Expenses

• Change in accrued expenses (data)
• Change in accounts payable (data)
• Change in prepaid expenses (in data but enter
  it on the income statement with the OPPOSITE
  SIGN!!)

18
Income Statement Next Steps

• Depreciation on machinery calculate it as 10
  of the machinery value
• Depreciation on buildings calculate it as 5 of
  the building value
• Total your operating expenses so far

19
Income Statement Interest Paid

• Cash interest paid is the sum of variable
  interest and fixed interest from the data
• Change in interest payable is in the data
• Total these to find total interest expense
• Add interest expense to operating expense to get
  total expenses

20
Interest Statement Net Farm Income from
Operations

• Subtract total expenses from total revenue to get
  Net Farm Income From Operations
• There is no gain or loss on sales of capital
  items.
• Net Farm Income will thus equal Net Farm Income
  From Operations

21
Analyses Opportunity Costs of Labor and Mgmt

• Calculate the opportunity cost of labor and
  management by multiplying 30,000 times the
  number of OPERATORS on the farm.
• Operators do not draw a salary. Full-time hired
  labor does draw a salary (fixed labor costs).
• Hence, your opportunity cost only covers the
  operators. If you have one operator, your
  opportunity cost of labor mgmt is 30,000. If
  you have two operators, it is 60,000 and so on.

22
Analyses Opportunity Cost of Capital

• Calculate as total asset value (from Balance
  Sheet) times 5
• Also, copy in the total asset value and the net
  worth from the Balance Sheet because you will
  need these in calculations.

23
Income Statement -- Returns

• Calculate Adjusted Net Farm Income From
  Operations
• Calculate Return to Labor and Management
• Calculate Return to Capital and Rate of Return
  to Capital (aka Rate of Return on Assets)
• Calculate Return to Equity and Rate of Return on
  Equity

24
LP

• Set up a "basic" LP, which will have every
  possible crop and livestock enterprise in the
  budgets
• Use returns above variable costs from the
  enterprise budgets
• Technical coefficients will be the same on your
  LP as in my sample LP
• RHS values will differ from farm to farm

25
RHS values come from your data

• cropland how much cropland?
• pasture how much pasture?
• labor how many hours of labor per month from
  permanent employees (operators' labor plus
  year-round hired labor)?

26
LAND
The sample farm has 625 acres cropland and 411
acres of pasture. These will be RHS values in
the LP.
27
LABOR
This farm has 2.5 permanent employees, 1 operator
plus 1.5 year-round hired.
With about 4.33 weeks per month and 60 hours per
person per week, monthly labor available in hours
is 2.5x4.33x60 649.5. Your calculations will
vary depending on the number of permanent
employees (operators plus hired).
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SEASONS
If you plant soybeans or peanuts over the summer,
you can follow those crops with winter grazing.
For the most part, you can't do that with cotton
or corn. (Some people do, but it is more
complicated.) So corn and cotton take up land
all year. Soybeans or peanuts leave land
available for winter grazing.
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Technical Coefficients

• Each acre of each crop takes 1 acre of cropland
• Cotton and corn also take 1 acre of winter land
  this technical coefficient ensures an acre of
  these crops is not used for winter grazing
• each cow for cow-calf takes 2 acres of pasture
• each summer stocker takes .26 acres of pasture.
• each winter stocker takes .52 acres of winter
  land
• labor requirements are in a file on the website
  or use the information I entered in the example LP

30
Peanut Rotation Constraint

• Peanuts are almost always produced in rotation.
• I have included a simple rotation constraint to
  limit peanut acreage to less than or equal to the
  amount of cotton and corn acreage.
• This is a one-year rotation. Normally, there are
  two or more years of corn or cotton, followed by
  peanuts, but that is more complicated, so this
  will be acceptable.

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Tableau
Your first LP will look just like this one,
except you calculate your own RHS values. So
the RHS values will be different on each farm,
but the rest of the first LP will be the same.
32
Next Step in LP

• Run the LP and get your solution
• Generate a sensitivity report
• By looking at your LP solution and the
  sensitivity report, come up with a 2nd LP that
  will increase profit.
• You may allow labor to be hired and/or you may
  rent out (to others) unused cropland or pasture,
  if you have any.

33
Final LP

• Run the modified LP
• This final (second) LP forms the basis for the
  farm plan and the whole-farm budget

34
Whole-Farm Budget

• Round off to a whole number the answers from the
  2nd LP.
• The function round(B19,0) rounds the number in
  cell b19 (for example) to a whole number
• Use the solution from the LP plus the information
  in the enterprise budgets to make the Whole-Farm
  Budget.

35
Whole Farm Budget

• Enter the Gross Returns by Enterprise
• Calculate variable production costs for the
  entire farm (multiply the level of one enterprise
  times the variable costs for that enterprise,
  then do same for the next and next, and sum them
  all)
• Hourly labor costs is the amount of hours of
  labor you would hire (from LP) times the cost of
  labor per hour

36
Gross Margin, LP Activities

• Calculate the Gross Margin from LP activities.
• It should be similar to what you had in the 2nd
  LP.
• If not, you have made a mistake either in the
  budget or the LP. Check to be sure you used
  returns above variable cost in the LP objective
  function. Check to be sure you didn't make a
  simple error entering a cell in a formula in the
  budget.

37
Finish the Whole Farm Budget

• Finish the Whole Farm Budget by adding in the
  income from government payments and other sources
  (use same numbers as in the data).
• Subtract the fixed expenses (see example)
• Estimate projected Net Farm Income from
  Operations for next year.

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My Farm Plan Budget
pop-open to see the entire plan in workbook
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For More Details

• See the previous files on farm plans
• http//www.auburn.edu/academic/classes/agec/duffyp
  a/farm-plan-instructions-part1.doc
• http//www.auburn.edu/academic/classes/agec/duffyp
  a/farmplan-lp-2008.ppt
• http//www.auburn.edu/academic/classes/agec/duffyp
  a/wfb-farm-plan-2008.ppt