Partial Budget Analysis

A partial budget allows you to analyze individual changes in your farm operation, such as substituting one crop for another or purchasing your own machinery. Focusing only on the details that would change, you estimate the average annual impact of this change. Then you can calculate the breakeven point (either price or yield) at which profitability would be unchanged for the two options, assuming all other variables remain unchanged. This is a useful but limited tool, as it measures an incremental change in your current operation rather than conducting a complete economic analysis.

See two of the case studies for examples of using a partial budget in a real situation. Case Study 2 compares using a custom operator with buying a piece of machinery. Case Study 4 compares the tradeoffs between planting a crop versus fallowing in a semi-arid farming area.

When doing a partial budget analysis, you only need information on the variables that are affected by the comparison. A partial budget contains four sections where change can result from a proposed decision: additional returns, reduced costs, additional costs and reduced returns (See Table 3).

Table 3. A Partial Budget Template

Scenario:

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				$0.0
			$0.0				$0.0
Subtotal additional returns			$0.0	Subtotal additional cost			$0.0

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
			$0.0				$0.0
			$0.0				$0.0
Subtotal reduced costs			$0.0	Subtotal reduced returns			$0.0

Summary Section
Total Change in Benefits (Section 1 + Section 2)			$0.0	Total Change in Costs (Section 3 + Section 4)			$0.0
Net Change in Income (Change in Benefits - Change in Costs)

First, you enter the individual changes to costs and returns that you anticipate in each appropriate section. Then you add up the total change in benefits (sections one and two, the left column) and the total change in costs (sections three and four, the right column). Finally, you subtract the change in costs from the change in benefits to calculate the net change in income.

Net change in income = (section one + section two) - (section three + section four)

You can also use a partial budgeting tool to calculate the breakeven price or breakeven yield that would make the two options equivalent. This can be a useful risk management tool when you’re evaluating a change to one of your enterprises.

To calculate a breakeven value, you would start by filling out a partial budget as described above (Table 3), but you use “X” instead of a number for the value you’re curious about. Then you put the total returns on one side of an equation and the total costs on the other, including the value X where it belongs:

(section one + section two) = (section three + section four)

You then solve for X using algebra. See Case Study 4 for an example of how this is done. In this example, the farmer wants to prioritize soil health by switching from fallow to spring canola, and he uses this budgeting tool to calculate the breakeven price he would need.