Case Study 2: Hay Production Budgets

Round Bales for On-Farm Use Plus Square Bales for Sale

Two separate enterprises are developed for this case study that examines the profitability of hay production in western Washington. Hay for on-farm use (in both cow-calf and steer operations) receives liquid manure from local dairies, and it’s sprayed for broadleaf weeds. All of this hay is harvested into round bales, and about 40% are wrapped in silage plastic. Hay for the retail market doesn’t receive liquid manure, isn’t sprayed for weeds, and is harvested into small square bales for ease of handling. Local customers want herbicide-free hay, and some may even want precise information on fertilizer usage.

This case study combines with Case Study 1 (the cow-calf operation) and Case Study 3 (the grassfed beef operation) to provide a complete economic picture of this sample farm. Hay production is a labor-intensive process, and tracking revenue is complex when you’re using hay for other enterprises as well as selling it to the public. Machinery is an integral part of hay production, and you would need to track your machinery costs carefully to assess the economics of both of these hay enterprises.

At the end of this case study we provide an example of how you can use partial budgeting to evaluate a decision you might be faced with, like whether to replace an old baler or accept a neighbor’s offer to provide custom baling. 

Summary of Hay Production Costs and Returns

The first sheet of our budget spreadsheet, Hay Production Budgets, Round Bales and Small Square Bales, summarizes total hay production. We’ve priced the round bales that are used on-farm at their breakeven cost of production. This means that the other enterprises, the cow-calf and the steer operation, “pay” what it costs to produce the bales that each uses. In this example, the yield of round bales for on-farm use is 2 tons per acre and the cost of production is $240 per acre, or $120 per ton. Thus, we’ve set the price at $120 per ton so that the revenue from this enterprise, $240 per acre, is the same as the cost of production, and the return is $0 per acre.This approach makes it possible to isolate hay production into its own budget, and also pass along the hay expense accurately to the rest of the farm’s enterprises. On the Summary sheet, the price per ton (rounded up to $120) for round bales is linked to the total cost of production in the Round Bale Budget sheet, making the profit from this operation equal to zero.

Hay Production Budgets in Detail

Additional sheets in the spreadsheet show the hay production budgets for Round Bales for On-Farm Use and Small Square Bales for Sale, respectively. They follow the same general format, with each budget including costs and returns that are specific to that enterprise. They take the usual form of a Gross Returns section at the top. As stated earlier, the per-acre revenue for the round bale enterprise is set at the breakeven value of $240 per acre, while the small bale return is the actual amount for that enterprise, $738 per acre. (In the spreadsheet version of the budget, the color coding described at the top of each spreadsheet explains which numbers can be adjusted on each sheet, and where the various numbers come from.)

A Variable Costs section follows, starting with fertilizer and pesticides. Next, we estimated machinery costs per acre using a machinery cost calculator and the procedures outlined in the section Estimating Your Farm Machinery Operating Expenses in the main document. In the spreadsheet, the Machinery Complementsheet lists each piece of machinery, its value, and estimates on usage and repair expenses. These details provide the inputs for the machinery cost calculator. In the Machinery Costs per Acre sheet, the first table at the top lists the output from the machinery cost calculator for each field operation. The second table lists each field operation used for round bale production, and the third table lists each operation for the small square bales. Total variable costs for machinery are then linked to the appropriate category in the enterprise budget, including both the variable expenses of fuel, lubricants, repairs, and labor, and the fixed expenses of depreciation, interest, and the combined taxes, housing and insurance. Additional variable cost items in the production budgets include baling twine in both enterprises and silage plastic in the round bale enterprise.

The Fixed Costs section is next, and it includes machinery fixed costs described above, land costs such as insurance and taxes, and other overhead costs, including a management fee for the small bale budget. This fee is due to the additional paperwork involved in retail sales. Using this template as a general guide, you can estimate the expenses and returns for your own operation by changing the values to reflect your own operation. 

While variable production costs, such as fuel, twine, and fertilizer, tend to be similar from one farm to the next, fixed costs for equipment will vary widely by operation. The machinery a small operation owns will typically be quite different than a larger operation, and the fixed costs of machinery operation will be spread over a different number of acres and be used for a different number of hours. Because farm machinery is very expensive, you’ll want to have an accurate estimate of how much it costs to use your equipment in your enterprise budget. We explain how to do this in the Estimating Your Farm Machinery Operating Expenses section in the main document.

In this case study, we based the fixed costs for machinery on detailed information from an individual producer. This person has a number of small tractors and loaders, plus a mower, a rake, a tedder, a self-propelled bale wrapper, and a truck with a trailer. He’ll be using this equipment for at least the next 10 years, maybe even 20, but the enterprise will need to generate enough profit to pay for replacements at some point. This is the reason to include machinery depreciation as a non-cash, fixed cost in your enterprise budgets. It will ensure that you’re earning returns on the capital invested in your farming operation and that, over time, you’re covering the costs of machinery replacement.

Partial Budget Analysis Example: Hire Custom Baling or Replace an Old Baler

When you’re faced with an important decision, you can use a partial budget to calculate the impact that a proposed change will have on profitability. This simplified budget only examines what would change, rather than comparing two complete enterprise budgets. 

Situation: Your small baler has a major breakdown and you feel it’s not worth repairing. With a trade-in credit of $10,000, you can buy a new baler for $35,000. If you don’t do this, you’ll have to give up half your production to have someone else harvest your hay on shares. This is the new status quo without an operational baler. Since you’ve been keeping careful data on hay production, you can use the following partial budget calculations to determine the financial tradeoffs of this situation. 

See the partial budget for this situation in Table 4. (A reminder that Table 3 is a blank template you can download or copy for your own use.)

• Section 1: Additional returns. You’ll have additional returns because you won’t have to give up half your yield to have someone harvest your hay on shares. This is estimated at $12 per bale multiplied by 31 bales per acre, for a total of $372.
• Section 2: Reduced costs. Your costs are reduced by the additional returns in Section 1; they could be listed as either additional returns or reduced costs.
• Section 3: Additional costs. This section shows the annual machinery cost per acre for the new baler, based on a purchase price of $35,000, a salvage value of $15,000, and 20 years of use. Using a machinery cost calculator, the total annual value including both operating and ownership costs is $27.46 per acre, which includes an interest expense of $7.31 per acre. While it might be tempting to put the entire purchase cost of the baler into the equation, the appropriate expense from an economic perspective is annual depreciation and interest on the investment. 
• Section 4: Reduced returns. This section is blank because the option of buying a new baler won’t result in reduced returns.

The annualized interest “cost” of 5% for this capital purchase of $7.31 per acre is small in comparison to the potential annual loss of half the yield, valued at $372 per acre. The interest cost represents an opportunity cost for the value of your money tied up in this purchase.

As we mentioned earlier in this publication, you would summarize the changes in this way:

In this example, the net change on an annual basis is estimated at $344.54 per acre if you buy a new baler rather than hire custom baling in exchange for half the crop. While the out-of-pocket cost for a new baler may be a struggle from a cash-flow standpoint, from a profitability perspective it’s a sound long-term investment. However, a profitable decision isn’t always doable, for example if you don’t have access to this type of funds, either from your own savings or through financing.

Table 4. A Partial Budget Comparison of Purchasing a Baler Versus Custom Hiring

Scenario: Should I purchase a new baler or give the neighbor half the crop exchange for harvesting it? Impacts per acre
Section 1.				Section 3.
Additional returns from proposed changed	Price/unit	Quantity	Amount of Change	Additional cost of proposed change	Price/unit	Quantity	Amount of Change
			$0.0	Increase in annual machinery costs from new baler (s/acre)	$27.46		$27.46
			$0.0				$0.0
Subtotal additional returns			$0.0	Subtotal additional cost			$27.46
Section 2.				Section 4.
Reduced costs from proposed change	Price/unit	Quantity	Amount of Change	Reduced returns from proposed change	Price/unit	Quantity	Amount of Change
Loss of half the yield	$12.00	31	$0.0				$0.0
			$0.0				$0.0
Subtotal reduced costs			$372.00	Subtotal reduced returns			$0.0
Summary Section
Total Change in Benefits (Section 1 + Section 2)			$372.00	Total Change in Costs (Section 3 + Section 4)			$27.46
Net Change in Income: $ (Change in Benefits - Change in Costs)