Farm Management

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Title:
Farm Management
Physical Description:
Fact sheet
Creator:
Clouser, Rodney L.
Publisher:
University of Florida Cooperative Extension Service, Institute of Food and Agriculture Sciences, EDIS
Place of Publication:
Gainesville, Fla.
Publication Date:

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Collected for University of Florida's Institutional Repository by the UFIR Self-Submittal tool. Submitted by Melanie Mercer.
Publication Status:
Published
General Note:
"December 1992"
General Note:
"RF-AA101"

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University of Florida Institutional Repository
Holding Location:
University of Florida
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All rights reserved by the submitter.
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IR00004406:00001


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FarmManagement1 TheInstituteofFoodandAgriculturalSciencesisanEqualOpportunity/AffirmativeActionEmployerauthorizedtoprovideresearch,educational informationandotherservicesonlytoindividualsandinstitutionsthatfunctionwithoutregardtorace,color,sex,ornationalorigin. FloridaCooperativeExtensionService/InstituteofFoodandAgriculturalSciences/UniversityofFlorida/JohnT.Woeste,Dean TheInstituteofFoodandAgriculturalSciencesisanEqualOpportunity/AffirmativeActionEmployerauthorizedtoprovideresearch,educational informationandotherservicesonlytoindividualsandinstitutionsthatfunctionwithoutregardtorace,color,sex,ornationalorigin. FloridaCooperativeExtensionService/InstituteofFoodandAgriculturalSciences/UniversityofFlorida/JohnT.Woeste,Dean TheInstituteofFoodandAgriculturalSciencesisanEqualOpportunity/AffirmativeActionEmployerauthorizedtoprovideresearch,educational informationandotherservicesonlytoindividualsandinstitutionsthatfunctionwithoutregardtorace,color,sex,ornationalorigin. FloridaCooperativeExtensionService/InstituteofFoodandAgriculturalSciences/UniversityofFlorida/JohnT.Woeste,Dean TheInstituteofFoodandAgriculturalSciencesisanEqualOpportunity/AffirmativeActionEmployerauthorizedtoprovideresearch,educational informationandotherservicesonlytoindividualsandinstitutionsthatfunctionwithoutregardtorace,color,sex,ornationalorigin. FloridaCooperativeExtensionService/InstituteofFoodandAgriculturalSciences/UniversityofFlorida/JohnT.Woeste,DeanRodneyL.ClouserandJohnHolt2Doinganykindofextensionfarmmanagement workrequiressomebasicinformation.Extension farmmanagementeconomiststrytoprovideagents withreasonablycurrentestimatesofexpectedannual costsandreturnsfordifferentcropandlivestock enterprises.SomestudiesarepublishedasExtension Circulars,butmostofthebudgetsarefoundinFood andResourceEconomicsReports.Ifyouwonder whetherthebudgetsyouhavearethelatestavailable, callorwriteyourareafarmmanagementeconomist (locatedattheResearchandEducationCentersat Quincy,Marianna,LakeAlfred,Bradenton,Ft. Lauderdale,andBelleGlade)ortheFoodand ResourceEconomicsDepartmentatGainesville.WHATABUDGETREPRESENTSOurenterprisebudgetsreflecttopmanagement. Wetrytoillustratewhatcanbedonebybetter producers,notjustanaverageofallproducersofa commodity.Potentialinvestorsorgrowersofanew cropareinterestedinwhatthebettermanager'scosts andreturnsare;lendersareprovidedanideaofthe profitobtainable;theresultsmayprovideanincentive fortheaveragegrowertoadoptimprovedpractices; budgetsrepresentingtopmanagementprovide "ballparkfigures"whichstaycurrentlongerthanifwe usedaverages. Thenumbersinabudgetarenotallavailablein anyoneplace.ThereforewefrequentlyaskAgentsto workwithusinlocatingandinterviewingtopfarmers toobtaininformationfromthem.Research informationmayprovidesomeofthedatasuchas fertilizerratesandyields.Extensionspecialistsinthe physicalsciencesfurnishinformationaboutsuch thingsasrecommendedspraypractices,materialsand rates.Abudget"roughedout"insuchamanneris alwayscheckedwithafewtopfarmerstoassurethat itisfeasible.Finallyitispublishedandsentto Agentsandotherusersofsuchinformation.USINGBUDGETSTable1containsabudgetforNorthFloridacorn productionwhichistypicalofthebudgetsyoushould haveonfile.YoumaybeinCentralFlorida,sowhat doesitdoforyou?Regardlessofyourlocation,it providesastartingplace.Tomakethebudgetfit yourconditions,findoutfromExtensionagronomists whatsortofyieldsyoucanexpect,whatfertilizerrates torecommendandthelike.Afteryoulocalizethe practicesinabudget,thereisanotherstep.Your growersmaybeabletogetfertilizercheaper,orinput pricesmaybedifferentandproductpricesmayhave changedsincethebudgetwaspublished.Youcan makewhateverchangesarenecessarytolocalizethe budgetforyourarea,updatethepriceinformation andyouhaveacurrentbudgetforcornproductionin yourarea.Thesameprocessisfollowedforany enterprise. CAUTION: Asfastaseconomicconditions changenowadays,regardlessofthepublicationdate, alwaysexamineanyeconomicinformationcarefullyto besurethatpricesarecurrent.Localpricesforyour areaaretheoneswhichshouldbepluggedintoany budgettomakeitfityoursituation.Welistallitems separately,alongwiththeiramountsandprices,so thatthiscanbedoneeasily. 1.ThisdocumentwaspublishedDecember1992asRF-AA101,FloridaCooperativeExtensionService.Formoreinformation,contactyour countyCooperativeExtensionServiceoffice. 2.CooperativeExtensionService,InstituteofFoodandAgriculturalSciences,UniversityofFlorida,Gainesville.

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FarmManagement Page2 Table1. EstimatedCostsofProducingOneAcreofDrylandCorn,NorthFlorida,1992. Item Unit Quant. Price Value YourCost Cashexpenses: Seed lb. 12.00 1.25 15.00 Fertilizer: Nitrogen(N) lb.130.00 .28 36.40 Phosphate(P2O5) lb. 45.00 .26 11.70 Potash(K2O) lb. 65.00 1.6 10.40 Lime(spread) ton1/3 24.00 8.00 Herbicide acre 1.00 17.70 17.70 Insecticide lb. 15.00 1.45 21.75 Tractor(135hp) hr. 1.35 8.75 11.81 Truck,pickup mi. 20 .14 2.80 Combine hr. .33 12.65 4.17 Othermachinery hr. 1.35 2.10 2.84 Hiredlabor hr. 1.50 4.50 6.75 Landrent acre 1.00 15.00 15.00 Interestoncash expenses1$164.32 .055 9.04 Totalcashexpenses 173.36 Fixedcosts: Tractor(135hp) hr. 1.35 11.70 15.80 Truck,pickup mi. 20 .17 3.40 Combine hr. .33 53.30 17.59 Othermachinery hr. 1.35 4.10 5.54 Totalfixedcosts 42.33 Totalcosts 215.69 111%for6months. Supposesomeoneaskedyouwhetherornothe reallyneededtoapplythe$21.75worthofinsecticide indicatedinTable1.Yourreply?"Well,ifcornis goingtosellfor$2.50perbushel,itwilltake8.7 bushels($21.75$2.50)ofextrayieldtopayforit." Thusyounarrowtheeconomicquestiontoonewhich canbeansweredinphysicalterms.Thenyoushould know,orbeabletofindoutfromyourentomologists oragronomists,ifinsectswillcausethatmuchyield lossiftheyarenottreated. Theinsecticideexamplemakesageneralpoint. Economicanswerstoaquestionarealways conditional.Theydependon:(a)theexpectedyield fromarecommendedpractice,(b)thepriceofthe producttobesold,and(c)thecostoftheinput.If cornwouldonlybring$1perbushel,itwouldtake 21.75bushelstopayfortheinsecticide.Orwith$3 corn,onlyabout7.25bushelsextrayieldwouldpay forthetreatment.Anyrecommendationsinvolving economicsshouldbemadewithcurrentlocalized pricesforproductioninputsandproductssold. Onthematterofrecommendedpractices,one Agentlistsallthematerialsthatwillcontrolacertain insectandtheirapplicationrates.Thenwhen sprayingtimecomes,hegetslocalpricequotesonall availablematerials,determineswhetherornotthey willpayforthemselvesinaddedyield,andinamatter ofminutescanadvisehisgrowersonwhetherornot tosprayandwhichisthemosteconomicalmaterial. Followingasimilarapproachwouldpermitthebest

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FarmManagement Page3 recommendationsforfertilizeroranyotherinput. Table2. Break-evenCornPricesatVariousLevels Yield (bu./acre) Priceforcash costs($/bu.) Pricefortotal costs($/bu.) 40 50 60 70 80 4.33 3.47 2.89 2.48 2.17 5.39 4.31 3.59 3.08 2.70Themostgeneraluseofbudgetsistoprovidean estimateoftheprofitabilityofproducingaparticular crop.Establishedfarmersmayalreadyownallthe necessaryequipmentandwantanestimateonhow somenewenterprisestacksupwithwhattheyarenow producing.Peoplejuststartinginagriculturemay wonderifthereisanymoneytobemadeinfarming. Differentsituationsrequiredifferentinterpretations ofabudget.Theproducerwhoalreadyhasinvested inthenecessarymachinerywillbeinterestedin returnsabovecashcosts(sometimescalledvariable expenses).Thisisashort-rundecision,tiedtothe economiclifeofthefarmmachinery.Sincethe equipmentisalreadyowned,theproducermayswitch enterprisesifthereturnsovercashcostsarehigherin the"new"cropthaninthecropwhichisalready growing,evenifnoneoftheenterpriseswouldcover totalcosts.Inthelongrun,ofcourse,allcosts includingareturntomanagementmustbecovered.KEEPINGANDUSINGFARMAND RANCHRECORDS AdvantagesGainedfromWell-KeptFarm andRanchRecordsFacilitatesbettermanagementofthefarmor ranch1.Greaterprofitscanberealizedbycorrectingfor weakpracticesorenterprisesrevealedbythe records. 2.Showamountsofincomeorofexpenseincurred byeachsectionoffarm. 3.Recordhistoryofperformanceofthefarmor ranch-financialpositionandnetworth. 4.Aidincontrolofcurrentoperations-returnsof inputs(fertilizer,feed,etc.).Provideinformationfortaxreports1.Alltaxpayers,includingfarmersandranchersare requiredtokeeprecordswhichenablethemto accuratelyprepareanincometaxreturnand whichwillpermittheInternalRevenueServiceto determinewhetherthelawhasbeenapplied correctly. 2.Oneoverlookeditemof$25.00couldcostyou $5.00ormoreinextrataxdollars. 3.SocialSecurity:Self-employmentandemployeremployeetaxesmustbepaidanddocumented.Facilitatesettlementsbetweenlandlordsand tenants1.Makestenant-landlordandpartnership relationshipssmootherandmorebusinesslike. Youcandealonthebasisoffactsnotjust feelingsandrecollections.Providebasisforplanningfutureoperations1.Developmentofbudgetsorexpectedcostand returnsofdifferententerprises. 2.HowshouldIusemylandforgreatestreturns? 3.WherecanIcutmycosts? 4.Whatenterpriseoffersthebestpossibilityfor expansion? 5.Withanyplanyouneedastartingpoint,your recordbookcansupplybasicinformation.Aidinobtainingcredit1.Yourlenderwillrequirefinancialstatements. (Networthstatement). 2.Agoodsetofrecordsindicateawell-managed business. 3.Recordscanprovidebasicinformationaboutyour farmorranchneededinmakingdecisions regardingborrowingandwherebesttousethis credit.InformationforGovernmentPrograms1.Farmersneedrecordsofacreagesandyieldsin thepasttoestablishtheirclaimstoallotments. 2.RecordsshowingcompliancewithEnvironmental ProtectionAgency,OccupationalSafetyand HealthAdministrator,and/orDepartmentof Health,EducationandWelfareregulationmaybe required.

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FarmManagement Page4WHATISNEEDEDFORAGOOD RECORD-KEEPINGSYSTEM?Asatisfactoryrecordsystemshould: a.Beeasytokeep-simple, b.Giveneededinformation,and c.Providetheinformationwhenitisneeded.AnnualFarmInventory(Listingoftypes,amountsandvaluesofitemsthata farmerhasonhand.)Whytakeaninventory?a.Providesbasisforevaluatingpresentposition. b.Basisforfuturefarmorranchresourceplanning. c.Willaidinobtainingcreditandinplanningthe typeandamountofcreditneeded. d.Basisforplanningpropertyinsuranceneeds. e.Valuableaidinanypropertysettlementsand rentalagreements. f.Aninventoryisnecessaryinthepreparationofa networthstatement. g.Necessarytobesureyouareclaimingyour properdepreciationforIncomeTax.HowtotakeaninventorySetonedayayearasinventoryday;thesefactors shouldbeconsideredwhenchoosingadate: a.Convenience. b.Livestockinventorieslow. c.Growingcropinventorieslow. d.Shouldcoincidewithtaxyear. e.Inventoryshouldbetakeninoneday;ifthis isnotpossible,allinventoriesshouldbe adjustedtothisday. f.Thefirstinventorywillbethemosttimeconsuminganddifficult.ValuationoftheinventoryThisisanimportantpoint.Keepvaluation methodconsistent.Inventorytakenatthebeginning oftheyearisusedastheendinginventoryfor previousyear.Thiscancausewidediscrepanciesif valuationsarenotaccurate. Example -Onehundredacresoflandvaluedat 1950'spurchasepriceof$100peracrewouldonly cost$10,000.Butattoday's$5,000peracreprice, thatlandwouldbeworth$500,000.Thus,inventories shouldshowthetruenetworthofyourproperty.MethodofValuationa.Costlessdepreciation (1)Inflationanddepreciationcausethismethod tobeunrepresentativeoftruenetworth. (2)Thismethodisdifficulttoapplytothings producedonthefarm. b.Thecostofmarketvalue,whicheverislower. (1)AConservativemethodofvaluation. c.FarmPrice (1)Valueatthefarm(marketpriceless marketingchargeandtransportation). (2)Preferredmethodforgrains,feedand livestock. Preparedby:TimothyD.Hewitt,Extension Economist,FoodandResourceEconomics Department,UniversityofFlorida,NFREC, Marianna. d.Valuationbydiscountingfuturereturns (1)Mustapplygoodreasoningandjudgment alongwiththismethod. (2)Usedforrealestate.Processof capitalization.Value=averageannualnet income;orV=i/r.Assumetheaveragenet incomeperacrefora200acrefarmis$35 peracreandgoinginterestrateis8%35/.08 =$437.50peracre.Valueoffarm200acres x$437.50=$87,500(basedondiscountingof futureincome).Aguidetotheselectionof whichmethodtouseforvariouskindsof farmassetsispresentedinTable4.

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FarmManagement Page5 Table3. NetWorthStatementforaSampleFarm ASSETS LIABILITIES Current: Cash Lifeinsurance(cashvalue) Savingsbond Feed Nonfeedcropsandsupplies Feederhogs Feedercattle TotalCurentAssets $3,100 500 518 16,519 2,120 9,130 10,337 $42,225 Short-term: Feedbills Cattlenote Interestonfarmmortgage TotalShort-termliabilities Intermediate: Autoloan(farmshare) $574 8,000 2,382 $10,956 $1,037 Working: Machineryandequipment GiltsandSows Portablebuildings TotalWorkingAssets $8,514 3,038 548 $12,100 Long-term: Silo Farmmortgage TotalLong-termliabilities $4,000 48,038 $52,038 Fixed: Farmlandat$420/A Buildingsandimprovements TotalFixedAssets $96,000 16,852 $112,852 TotalLiabilities: $64,031 TotalAssetsOwned $167,177 NetWorth $103,146NetWorthStatementorFinancialStatement(AsampleNetWorthStatementisshownin Table3.) 1.Indicatesthefinancialstrengthofyourfarmor ranchbusiness. (a)Assetsminusliabilitiesequalsnetworth (b)Assetsarethingsofvalueownedbythe business (c)Liabilitiesaredebtsorclaimsagainstthe business 2.Indicatesthefinancialprogressofyourfarmor ranchbusiness. (a)Completepictureasopposedtoabank accountindicator. 3.Lenderswillrequireafinancialstatementwhen makingaloan.IncomeStatementorCash-Flow IncomeStatementThereisnostandardformatforanincome statement,andmanybusinessesarrangetheirtomake itusefulformanagementpurposes.Oneformatthat findswideuseamongfarmersrelatestothecashflow inthebusiness.Operatingexpensesareseparated fromfixedexpenses,andcashexpensesareseparated fromnoncashexpenses.Receiptsarehandled similarly.Theformatforsuchanincomestatement isshowninTable4.Notethatthetermsdebitsand creditsarereceipts.Debitsandcreditsrefertoboth cashandnoncashtransactionsandnoncashincreases anddecreasesinproductinventoryaccounts.A samplecash-flowincomestatementisshowninTable 5. Farmandranchrecordsareoflittlevalueunless theyareanalyzed,interpreted,andusedindecisionmakingbytheoperationsmanager. Completeanalysisofrecordsshouldpointout "strong"and"weak"pointsintheorganizationand operationofthebusiness.

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FarmManagement Page6 Consultyourspecialistdirectoryforthename, address,phonenumberofthenearestFoodand ResourceEconomistwhowillhelpyouwithyour economics/management/marketing/financequestions. Also,theDepartmentofFoodandResource Economicspublishesalistofeconomicsreportswhich areavailableonawiderangeoftopics.Contactthe Departmentforspecificinformationneeds. Table4.EntriesinanIncomeStatement DEBITS CREDITS CashExpenses Operating: Livestockexpense Cropexpenseincludingfertilizer Machineryandequipmentrepair Improvements,repair,maintenance Fuel,oilgrease Hiredlabor Farmutilities Misc.farm(dues,literature,office,etc.) Feed:Grainandhaypurchased Livestockpurchased: Poultry Hogs Cattle Other Fixedexpenses: Taxes Insurance Interest Rent NoncashExpenses Depreciation: Machineryandequipment Buildingsandimprovements Inventorydecrease:Livestock,crops,supplies TotalBusinessDebits Cashexpensesplusnoncashexpenses TotalCashExpenditures Cashexpensespluscashpaiddownoncapital purchases,principalpaymentsonloans,and beginningbalanceofaccounts CashIncome Livestocksales Livestockproductsales CropSales Machinehire Misc.receipts(govt.,refunds,dividends,etc.) Machineryandimprovements,profitorlossfrom sale NoncashIncome Inventoryincrease:livestock,crops,supplies Farmproductsusedinthehome TotalBusinessCredits Cashincomeplusnoncashincome TotalCashFarmIncome Cashincomeplusundepreciatedvalueof machinery,equipmentandimprovementssold,new loans,andoutstandingbalanceofaccounts IncomeMeasures GrossProfit Totalbusinesscreditsminusinventorydecreases: Crops,supplies,livestock;livestockpurchases;and feedpurchases NetFarmIncome Totalbusinesscreditsminustotalbusinessdebits NetCash-FlowIncome Totalcashfarmincomeminustotalcash expenditures

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FarmManagement Page7 Table5.Cash-FlowIncomeStatementforaSampleFarm CASHEXPENSES CASHRECEIPTS Farmoperation: Hiredlabor Livestockexpenses Cropexpenses Fuelandoil Machineryrepair Buildingrepair Machinehire Farmutilities Miscellaneous Feedpurchases Livestockpurchases FixedExpenses: Taxes Insurance Interestonloans Cashrent Capitalpurchases: Cashpaiddown Principalpayments: Farmloans Total $4,293 1,182 4,543 1,163 1,464 354 1,682 232 247 9,635 12,880 1,584 334 3,633 2,000 4,400 10,357 $59,983 Farmproduction: Livestocksales Cropsales Livestockproductsales Governmentpayments: Feedgrainprogram ASCS Other: Refundsanddividends Customworkandwages Saleofcapitalassets Newfarmloans: Capitalpurchase Farmoperation Total Cash-flowsummary: Cashreceipts Cashexpenditures Net $53,939 3,012 0 2,436 0 370 0 0 3,000 10,000 $72,757 $72,757 59,983 $12,774