Farming is subject to many variables, from forces you can’t control, such as weather and markets, to your decisions around crops and cropping practices. The key to profitability and smart decision-making is knowing your costs, so you can allocate your limited assets to their best uses. These assets include your land, labor and capital.
As the farm manager, you’re the one to define the best use of your assets. In doing so, you may prioritize profits, the environment, your lifestyle, or any other goal. The more complex your farming operation is, the harder it is to estimate both asset use and the profitability of each component. This publication explains how to itemize asset use by enterprise as a decision-making aid for optimizing economic, environmental, and personal tradeoffs.
We’ll begin by presenting a system for creating a set of enterprise budgets for your farm. This approach starts with simple recordkeeping for the enterprises and variables that are of interest to you. An enterprise can be, for example:
- a particular crop
- a type of livestock
- a particular method or technology for raising crops or livestock
- a particular level of production (e.g., 20 head or 200 head)
This exercise will help you determine the profitability of a specific enterprise, which in turn will provide acceptable market prices and affordable input levels.
We’ll also cover the use of a partial budget analysis for comparing the pros and cons of two options. This approach narrows the focus of your analysis to the specific tradeoffs involved with a decision, like trying a different crop or making a capital investment. We’ll demonstrate how to use a partial budgeting tool to find the breakeven price or yield for this specific situation, assuming no other changes occur.
We also include five case studies that illustrate the details of enterprise budgets in three typical farm systems:
- a cow-calf operation that sells both hay and grassfed beef (Case Studies 1, 2, 3)
- a grain farm that’s considering intensifying and diversifying its crop rotation (Case Study 4)
- a perennial crop system, strawberries in this example (Case Study 5)
With each case study, we share a set of spreadsheets to track specific details for each enterprise and to estimate annual economic impact. These spreadsheets are specific to each case study farm but are available to modify and use for your own situation. For each spreadsheet you want to customize, either make a copy of it for use within Google Drive, or download it as an Excel spreadsheet.
We provide suggested resources for assistance or more information as well.
The Value of An Economic Assessment
Once you’ve created a complete set of enterprise budgets, whole farm planning and management will be a more straightforward process. As they say, you can’t manage what you don’t measure! A whole farm plan links together all the individual enterprise budgets for the entire farm and provides important information on total production, such as input levels and resources needed, as well as estimated income and expenses.
Having this information will allow you to calculate both short- and long-term profitability, and whether you can afford specific capital investments, like buying a more efficient piece of machinery. You’ll also find it easier to analyze whether you’re meeting the economic, social and environmental goals for your operation. Are you happy with the financial returns to your time, energy, and investments? Should you expand certain enterprises, or invest more in certain areas? A detailed analysis by enterprise will help you determine which ones are successful and which aren’t.