Whole Farm Budget

Economics 330Name______

Lab 4

Fall 2008

WHOLE FARM BUDGET

The purpose of this lab is to learn how to prepare a whole farm budget for a hypothetical farming situation, and use it to (a) project profits and net farm income, and (b) estimate requirements and availability of key resources such as land, labor and feed.

Part A

Step 1: SelectPossible Enterprises

The following enterprises are available:

Crops:Corn, corn silage, wheat, soybeans, alfalfa hay

Livestock: Beef cow/calf, ewe flock, dairy herd, feeder pig production

Step 2:Resources and Constraints

You have the following resources available:

Land1,200 acres that can be used for any of the crops listed in Step 1, and 200 acres that can be used for pasture, only.

Buildings and MachineryYou have machinery and buildings for any of the enterprises listed in Step 1 (not very realistic, but we are just practicing at this stage).

LaborYou have a maximum of 5,500 hours of labor available, as a fixed resource

(2 full-time people).

FeedAll corn, corn silage and hay fed to livestock must be produced on the farm.

Step 3:Enterprise Budgets

Your enterprise budgets show that the estimated gross margins and labor requirements are as follows:

Crops (per acre) / Corn / Soybeans / Wheat / Corn Silage / Alfalfa Hay
Yield / 170 bu. / 50 bu. / 60 bu. / 20 tons / 5 tons
Price / $3.00 / $7.50 / $4.00 / $25 / $75
Gross revenue / $510 / $375 / $240 / $500 / $375
Variable costs (excluding labor) / 250 / 130 / 75 / 300 / 150
Labor required (hours / acre) / 3 / 2.5 / 2 / 5 / 5
Feed production / 170 bu. / xx / xx / 20 tons / 5 tons
Livestock / Beef Cow
1 cow unit / Eweflock
1 ewe / Dairy herd
1 cow / Feeder pig fin.
1 pig
Pounds to sell / 500 / 167 / 24,000 / 260
Selling price / $1.10 / $.90 / $.16 / $.50
Gross revenue / $550 / $150 / $3,840 / $130
Variable costs (including feed and excluding labor) / 370 / 110 / 1,700 / 125
Labor required (hours) / 8 / 5 / 70 / 0.2
Feed required per unit:
-corn (bu.) / 4 / 10 / 113 / 9
-silage (ton) / xx / xx / 8 / xx
-hay (ton) / 2.1 / 0.4 / 6 / xx
-pasture (acres) / 2.5 / 0.2 / xx / xx

Step 4: Sum all enterprises

Indicate below how many units of each enterprise you want to produce, then multiply by the gross margin per unit to get the total gross margin for each enterprise. Include at least three crops and one livestock enterprise. Remember, you have only 1,200 acres of land and 5,500 hours of labor.

Hint: since labor is probably your most limiting resource, you may want to look at the enterprises that give the highest gross margin per hour first.

Enterprise / Number
of Units / Gross
Revenue
per unit / Variable Costs per unit / Labor Hours
per Unit / Total Gross Revenue / Total Variable Costs / Total Hours
of Labor
Corn / _____acres / $510 / $200 / 3 / ______
______/ ______/ ______
_____
Soybeans / _____acres / $375 / $150 / 2.5 / ______/ ______/ ______
Wheat / _____acres / $240 / $75 / 2 / ______/ ______/ ______
Corn Silage / _____acres / $500 / $220 / 5 / ______/ ______/ ______
Hay / _____acres / $375 / $200 / 5 / ______/ ______/ ______
Beef cow/calf / _____cows / $ 500 / $170 / 8 / ______/ ______/ ______
Ewe flock / _____ewes / $180 / $80 / 5 / ______/ ______/ ______
Dairy / _____cows / $3,840 / $1,500 / 70 / ______/ ______/ ______
Feeder pigs / _____litters / $500 / $160 / 0.2 / ______/ ______/ ______

Totals for whole farm _____ acres (crops only) $______$______hr.

(1,200 maximum) (5,500 max.)

Step 5:Feed available

Estimate how much corn, silage, and hay will be available for livestock feed.

Corn / Corn Silage / Hay / Pasture
Acres / _____ / _____ / _____ / 200
Yield / acre / 170 bu. / 20 tons / 5 tons / xx
Total available / ______/ ______/ ______/ 200 acres

Step 6: Feed requirements

Now multiply the units of each livestock enterprise by its feed requirements per unit (from Step 3) to find the total feed requirements.

Units / Corn (bu.) / Silage
(tons) / Hay (tons) / Pasture
(acres)
Beef cow/calf / _____cows / _____ / xx / _____ / _____
Ewe flock / _____ewes / _____ / xx / _____ / _____
Dairy / _____cows / _____ / ______/ _____ / xx
Feeder pigs / _____pigs / _____ / xx / xx / xx
Total feed required / _____ bu. / _____ tons / _____ tons / _____ ac.
Total feed available (from step 5) / _____ bu. / _____ tons / _____ tons / 200 ac.
Should be equal to or greater than feed required. If you don’t have enough feed, go back and adjust your crop acres or units of livestock.
Step 7: / Summary
Find the expected Net Farm Income and Profit and Return to Management for your farm plan.
Total gross revenue for all enterprises (from Step 4)
Plus other farm income (USDA payments, etc.) / Whole Farm
______
$16,500
Total revenue / $______
Variable costs for all enterprises (from step 4) / ______
Fixedcosts / Interest on long-term loans / 25,000
Insurance, property taxes, etc / 26,100
Cash rent / 170,000
Depreciation / 30,000
Total of variable costs and fixed costs / $______
Net Farm Income / = $______
Minus opportunity cost of labor used: ______hours @ $11
Minus opportunity cost of equity capital: $600,000 @ 4%
Profit and Return to Management / ______
______
= $______
Step 8: /

Sensitivity Analysis

Find the projected Profit and Return to Management if Total Revenue is 10 percent lower than projected
(subtract 10 % of Total Revenue) / ______
Profit and Return to Mgt. with 10 % lower total revenue / = ______

Which resource was most limiting in your plan, land or labor?

What is the purpose of thesensitivity analysis in Step 8?

Part B.Linear Programming Exercise

Step 1.

Open the Excel spreadsheet file called Lab4solver.xls that is posted on the class home page under Lab Exercises.

Step 2.

Click on the Tools (Excel 2003) or Data (Excel 2007) tab above the window, then on Solver. If Solver does not appear on the drop down list, then click on Tools, Add-Ins, Solver Add-In, OK.

Step 3.

Set the Target Cell to E18 and specify Max. This tells Solver that you want to maximize the value in E18, Net Farm Income.

In the By Changing Cells window specify cells B3.B11. This tells Solver to vary the units of each enterprise to find the solution that maximizes net farm income.

In the Subject to the constraints windows click on Add and specify cells B3.B11, >=, and 0. This tells Solver that the units of each enterprise cannot be negative.

Then click on Add again and specify cells F14.J14, >=, and 0. This tells Solver that the supply of each resource (land, labor, corn, hay and pasture) minus the amount used must not be negative.

Step 4.

Click on Solve. This will show you the levels of each enterprise that will maximize net farm income. Print the solution and attach it to this lab.

How did the net farm income maximizing set of enterprises compare to the set you chose for the first part of this lab?

Delete the values in cells B3 through B11, then double the supply of land to 4,400 acres in cell G13 and solve again. How did the solution change?

Delete the values in cells B3 through B11 again and change the land supply back to 2,200 acres. Change the labor supply in Cell F13 to 11,000 hours. How did this change the solution?