Economics 230 Lab 4 Section 1 2 Due September 24 Fall 2010 WHOLE FARM BUDGET


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1 Economics 230 Name Lab 4 Section 1 2 Due September 24 Fall 2010 WHOLE FARM BUDGET The purpose of this lab is to (a) learn how to prepare a whole farm budget for a hypothetical farming situation, and use it to project profits and net farm income, (b) estimate requirements and availability of key resources such as land, labor and feed, and (c) learn how to use linear programming to find the profitmaximizing combination of enterprises. Part A Whole Farm Budget Step 1: Select Possible Enterprises Your farm is located in south central Kansas. The following dryland enterprises are available: Crops: Corn, grain sorghum, wheat, alfalfa hay and sunflowers Livestock: Beef cow/calf, ewe flock, dairy herd, broiler production Step 2: Resources and Constraints You have the following resources available: Land 2,400 acres that can be used for any of the crops listed in Step 1, and 500 acres that can be used for pasture, only. Buildings and Machinery You have machinery and buildings for any of the enterprises listed in Step 1 (not very realistic, but we are just practicing at this stage). Labor Feed You have a maximum of 9,000 hours of labor available, as a fixed resource (3 fulltime people). All corn 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 labo r requirements are as follows: Crops (per acre) Corn Sorghum Wheat Alfalfa Hay Sunflowers Yield 130 bu. 80 bu. 50 bu. 3.5 tons 1600 pounds Price $3.60 $4.25 $6.25 $110 $.17 Gross revenue $468 $340 $312 $385 $272 Variable costs (excluding labor) Gross margin per acre $203 $156 $152 $175 $102 Labor required (hours / acre)
2 2 Livestock Beef Cow 1 cow unit Ewe flock 1 ewe Dairy herd 1 cow Pounds to sell , Stocker steers 1 head Selling price $1.04 $1.00 $.15 $.80 Other revenue $100 $12 $500 $0 Gross revenue $620 $179 $3,200 $640 Variable costs (including feed and excluding labor) $470 $125 $2,400 $540 Labor required (hours) Feed required per unit: corn (bu.) hay (ton) pasture (acres) 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 2,400 acres of land and 9,000 hours of labor. Enterprise Number of Units Gross Revenue per unit Variable Costs per unit Labor Hours per Unit Corn acres $468 $ Sorghum acres $340 $ Wheat acres $312 $ Hay acres $385 $ Sunflowers acres $272 $ Beef cow/calf cows $620 $470 8 Ewe flock ewes $179 $125 5 Dairy cows $3,200 $2, Stocker steers head $640 $ Total Gross Revenue Total Variable Costs Total Hours of Labor Totals for whole farm acres (crops only) $ $ hr. (2,400 maximum) (9,000 max.) 2
3 Step 5: Feed available Estimate how much corn, silage, and hay will be available for livestock feed. Corn Hay Pasture Acres 500 Yield / acre x 130 bu. x 3.5 tons xx Total available = = 500 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. Pasture Units Corn (bu.) Hay (tons) (acres) Beef cow/calf cows Ewe flock ewes Dairy cows 0 Stocker steers head 0 0 Total feed required bu. tons acres Total feed available (from step 5) bu. tons 500 acres Surplus (available minus required) (cannot be negative) bu tons acres
4 Step 7: 4 Summary Find the expected Net Farm Income and Profit and Return to Management for your farm plan. Whole Farm Total gross revenue from all enterprises (from Step 4) Plus other farm income (custom farming) $16,500 Total gross revenue Variable costs for all enterprises (from step 4) $ Fixed costs Interest on longterm loans 65,000 Insurance, property taxes, etc 26,100 Cash rent 185,000 Wages and benefits 40,000 Depreciation 30,000 Total of variable costs and fixed costs Net Farm Income $ = $ Minus opportunity cost of labor used: ( hours used minus 3,000 hours $12 Minus opportunity cost of equity capital: 4% Profit and Return to Management = $ Step 8: Sensitivity Analysis Find the total gross revenue if it is 10 % lower than projected Minus total of variable and fixed costs (same as above) Equals Net Farm Income with 10% less revenue = Net farm income drops by what %? % What is the purpose of the sensitivity analysis in Step 8? 4
5 5 Part B. Linear Programming Exercise Excel contains an addin feature called Solver that can help you find the most profitable combination of enterprises for the example farm. Solver uses linear programming to find the set of activities that will maximize (or minimize) any specified objective, given one or more limited resources. Step 1. Open the Excel spreadsheet file called Lab4solver.xls that is posted on the class home page under Lab Exercises. Note: labor requirements have been divided into spring labor and fall labor. Step 2. Excel 2003: Click on the Tools tab above the window, then on Solver. If Solver does not appear on the drop down list, then click on Tools, AddIns, Solver AddIn, OK. Excel 2007: Click on the Data tab, then Solver. If Solver does not appear, do these steps: 1. Open Excel and click on the round Microsoft Office Button in the upper left corner 2. Click on Excel Options 3. Click Addins, then in the Manage box select Excel Addins and click on Go. 4. In the Addins Available box click on Solver Addin, then click OK 5. Solver should now show up on the righthand side when you click on the Data tab. Excel 2010: Click on the Data tab, then Solver. If Solver does not appear, do these steps: 1. Open Excel and click on the File tab 2. Click on Options. 3. Click Addins, then in the Manage box select Excel Addins and click on Go.. 4. In the Addins Available box click on Solver Addin, then click OK 5. Solver should now show up on the righthand side when you click on the Data tab. Step 3. Set the Target Cell to F18 and specify Max. This tells Solver that you want to maximize the value in F18, Net Farm Income. In the By Changing Cells window specify cells C3.C11. This tells Solver to vary the units of each enterprise in cells C3 to C11 to find the solution that maximizes net farm income. In the Subject to the constraints windows click on Add and specify cells C3.C11, >=, and 0. This tells Solver that the units of each enterprise cannot be negative. Then click on Add again and specify cells G14.L14, >=, 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. Answer the questions on the next page. Note: At least one positive value must appear in the cells C3 to C11 to get a solution. Otherwise you will get all zeroes. 5
6 6 1. How did the net farm income maximizing set of enterprises compare to the set you chose for the first part of this lab? 2. Suppose they could rent another 1,200 acres for $125 per acre. Increase the supply of land to 3600 acres in cell I13 and change the fixed costs in cell F17 to $496,100, and solve again. How did the optimal set of enterprises change? How did net farm income change? 3. Suppose they could hire another fulltime employee for $35,000 per year. Change the land supply in cell I13 back to 2,400 acres. Change the labor supply in Cells G13 and H13 to 6,000 hours each, and the fixed costs in cell F17 to $381,100. How did the optimal set of enterprises change? How did net farm income change? 6