Session 3 Fun with numbers!!!
Goals for tonight Start to develop an understanding of enterprise budgets Start with an understanding of capital expenses and depreciation Consider the size & type of equipment needed
Variable vs. Fixed Costs Variable a cost that varies with the level of output. Fixed - a cost that is constant no matter what the output is
Can I borrow your car? Gastonia to Concord Mills is 60 miles roundtrip. Car gets 30 miles/gallon 2 gallons x $2.20 = $4.40 Other Variable Costs Oil Change ($30/3000 miles) =.01 per mile Repairs ($400/10000 miles) =.04 per mile.05 x 60 miles = $3.00
Can I borrow your car? $7.40 in variable costs per 60 miles What about fixed costs? Insurance, taxes, tags = $1000 /year, 10,000 miles/year =.10 per mile or $6.00 for 60 miles Upfront capital cost? Car cost $21,000. Car s life is 12 years = $1,750 per year or.175 per mile. $10.50 for 60 miles Total cost to borrow the car? $23.90
Operating Costs (variable) Cost of goods or services that are used up in one production cycle Seed, fertilizer, fuel, wages, rent, repairs, feed, veterinary, etc.
Fixed Costs Costs of goods that last more than one production cycle Machinery Equipment Breeding livestock Land Buildings Capital Assets
Non-capital (fixed costs) Depreciation: loss in value due to wearout or obsolescence Interest on investment: cost of a loan or opportunity cost on your own capital Insurance: casualty, theft, etc. Taxes: property (on some items) Some repairs for buildings
Straight Line Depreciation Straight line depreciation relies on the concept of useful life, the number of years a piece of equipment is expected to perform its function. This time period is usually set at 10 to 20 years for farm equipment; while many pieces of farm machinery may be used longer, standard useful life values bring consistency to budget calculations. (Purchase price Salvage Value) / Years of Useful Life For example: a farm purchases a small used tractor for $20,000 to use for vegetable production. The tractor s useful life is estimated at 15 years, and its salvage value at the end of that time will be $5,000. What is the annual fixed cost of that tractor? ($20,000 Purchase Price - $5,000 Salvage Value) /15 years = $1,000 annual fixed cost
Per Unit Depreciation Assigning a depreciation value on a per hour or per unit basis $20,000 new tractor- $5000 salvage value at the end of 15 years = $15,000 $1000 per year depreciation Assume you are going to put 500 hours on the tractor each year $1000 per year / 500 hours per year = $2/ hour of use Assuming you are going to put 200 hours each year then $1000 per year / 200 hours = $5/ hour
Noncash Costs Opportunity Costs unpaid labor net worth capital feed produced on the farm
Setting up a Budget Enterprise budget: An estimate of the revenues and costs for the production of a certain product Revenue: The cash income received from an enterprise. Variable/ operating costs-costs that are directly tied to the operation of a farm enterprise. Feed, seed, fertilizer, animal health costs, hired labor and fuel are common farm operating costs.
Setting up a budget Decide on the enterprise Production model Organic, conventional Marketing model Research prices Research inputs & outputs- university budgets
Mushroom Costs
Mushroom Production Costs
Cow Capital Budget
Case Study Smith Farm Always wanted to raise cattle on 45 acres farm Has 20 acres of pasture and/or hay What are start up costs for cattle? Pasture capacity: 5-10 cows Cost of Cows $1200 to $1500 each, $6000 to $15,000 Fence repair 10 acres, cost not known Equipment needed: truck, 45-HP tractor, trailer, bush hog, sprayer, feeders, corral/cattle handling equipment
Capital (Fixed) Costs Fixed Cost Years Total Per Cow Pasture Equipment $1550 20 $77.5 $7.75 Water Infrastructure $5000 20 $250 $25 Fencing $20,659 20 $1033 $103 Truck $15,000 15 $1000 $100 Tractor $12,000 20 600 $60 Bush Hog $1200 20 60 $6 Mounted Sprayer $1000 20 50 $5 Trailer $5000 15 333 $33 Corrals $5000 20 250 $25 Total Fixed Costs $3654 $365
Variable Costs Pasture Management (20 acres) Variable Cost Total Per Cow $213 $4260 $426 Hay (17 round bales) 40 $680 $68 Bull $35 $350 $35 Replacement Heifers (2) $1500 $3000 $300 Electricity $50 $600 $60 Fence Repairs 1% of $20,659 $206 $21 Medication $10 $180 $18 Equipment Maintenance 1 $500 $50 Total Variable Costs $9776 $978
1 Minute Brainstorm Work with a partner to brainstorm a list of capital items you think you would need to start an egg (chicken) business with 60 hens. In other words, what capital assets would you need to buy? Share list with the whole group Compare to the next slide
Capital Expense Chicken 60 Hens Pens for raising chicks $200 Housing $1000 Fencing $400 Fence Charger $150 Feeders $60 Waterers $60 Nesting Boxes $50 Egg Collection $30 Other Equipment $550 Total $2500
Capital Fence Cost Example
Pasture Capital Expenses Well, waterlines, tanks Electric High tensile Non electric Woven wire Barbed wire Board
Perimeter= 14,500 ft Cross = 4,000ft 1800 1100 Total Acres= 116 28A 700 Waterline- 5000ft 5 tanks- $2100 ea 1 well- $2350 13A 900 28A 750 26A 21A 1800
Capital Costs Fencing 14,500 Ft Fence 4,000 Cross FT Fence Water lines 5,000 ft Water tanks 4 strand barbed wire $2.62/ft 4 strand high tensile $2.40/ft 3 strand high tensile interior Fence $2.25 Polywire Temp 0.10 /lb Water tanks $1,300, PAD $800 1.5 PVC waterline $2.07 Well pump $2,000 Well cover $350
Total Capital Costs Well $2,300 Water lines $10,350 Exterior Fence $34,800 Interior $9,000 Tanks $10,500 Total = $ 66,950
Questions???
Tractor and Equipment Decisions
Putting a value on equipment Go window shopping Ebay & Craigslist Websites- Machinery Pete, Equipment Dealer, Fastline, Tractorhouse Classifieds- Fastline Auctions- go and watch
It paid for itself in one year I m not so sure.. Farmers who have already made the purchase of a piece of equipment are vested in it, and its success. Do the Pencil Test
Tractor Features Important features: Three point hitch Power take off Wide front end for vegetable farm Low creeper gear Four wheel drive Live hydraulic Safety features Cab?
Thoughts to Consider When purchasing a used tractor: Hours of use Useful life around 12,000 hours Available parts and service Three ways to buy tractor: Auctions Dealerships Classified ads Fastline Tractorhouse Market Farm Implement
Used or Almost New Tractor Maintenance & Repair Cost 1961 80HP 10483 Hours $7,000 1981 Down time or missed planting, cultivating time 2015 55HP 34 hours $38,900
Horse Power Requirements
Tools for a 1.5 Acre Market Garden
Tools for 1-3 acres Organic Farmer Business Handbook Bare minimum: Shovel, rake, oscillating hoe wheel barrow, (wheel hoe), hoses, hand sprayer Earthway seeder Pick up truck Troybuilt rototiller (small greenhouse) Digital platform scale (20 lb) Scaling up: 35 50 hp 2WD tractor 3 PTH rototiller 3 PTH mini chisels 3 PTH cultivators Walk in cooler Wash and pack station
Tools for 3-9+ acres Shop tools, chainsaw, mowers, trimmers (welder) handtrucks, box stapler, labels 35 50 HP tractor: 2WD, or 4WD with loader 3 PTH rototiller Disks 5 8 wide 3 PTH Cultivator Better push seeder 3 PTH Mini chisel Flame weeder (for organic) Barrel washer/brush washer Walk in cooler 200 lb plus platform scale Wash station (packhouse) Bush Hog mower Irrigation system Manure spreader Spinner spreader Portable electric fencing Cultivating tractor (Allis G, Farmall Cub or A, IH 140, Kubota L245H) Basket weeder for above, shovels Tine weeder Bed lifter Bedformer 2 nd tractor 40-60HP Chain harrow, S tine harrow Multiple greenhouses 3PTH transplanter 3 PTH sprayer
Homework for Session 4 List all capital items you will need to start your farm: Buildings Equipment Fencing Irrigation Animals Tools In Ag Plan: Facilities (if haven t already done) Products Services Production System Customer Service Management Team Personnel Plan
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Questions???