Enterprise Budgeting for Beginning Farm Decision-makers

February 21, 2024

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This presentation will focus on developing management skills in agriculture production systems by focusing on enterprise budgets and cost of production. Steve will discuss cost of production, economic profit, and understanding enterprise budgets in production agriculture.

The 2024 MI Ag Ideas to Grow With conference was held virtually, February 19-March 1, 2024. This two-week program encompasses many aspects of the agricultural industry and offers a full array of educational sessions for farmers and homeowners interested in food production and other agricultural endeavors. While there is no cost to participate, attendees must register to receive the necessary zoom links. Registrants can attend as many sessions as they would like and are also able to jump around between tracks. RUP and CCA credits will be offered for several of the sessions. More information can be found at: https://www.canr.msu.edu/miagideas/ 

Video Transcript

This whole track for beginning Farmers is part of our MI Ag Ideas to Grow With virtual conference and we're really excited to have you all today here to learn with us virtually. With that, I'm going to go ahead and turn it over to Steve Whittington who is our guest speaker for this session on Enterprise budget. So thanks so much for being with us, Steve. I'll let you introduce yourself. Excellent, thanks for inviting me, Mariel. I'm very happy to be here and I want to just say good afternoon to everyone. Welcome to this next session here. This session, I'm particularly excited to be a part of here today because this is my first time participating in the Ag Ideas webinar series. This is the third or fourth time that I've done this presentation. And it is meant to mirror two bulletins that we have at extension, on the farm business team. I hope you find value in this 1 hour session. This was originally designed to be a two hour session with a workshop. We're working on getting that more solidified here in the future. But a lot of the topics that we're going to be going over today are economics and finance base. Now, before you rush out of the room and leave the webinar altogether after hearing that, I want to provide value to you by breaking it down a little bit more into digestible components, you can apply this very, very valuable information to your own production systems. Again, my name is Steve Whittington. I currently work as a Field Crops Educator for MSU Extension. I'm based out of Montcalm County, Michigan, covering the West Central part of the state. And field crop production, You might be asking yourself, how is the field crops guide to know anything about fruit or vegetable production or beginning farm resources? While I've got a pretty interesting agricultural background, my journey with Ag began in 2017. After I exited the military, I was in the Student Organic Farmer Program. So Katie Brandt, she was, she was one of my teachers there in the program. Excellent program. And I farm vegetables on a small scale for about two years, including one year of management in that operation. In 2018, I sought out to begin my own farming operation. It's always been a goal of mine. I have a background in enterprise budgeting. I studied this and it was a part of my thesis for my Master's Program in Ag Business. I'm really excited to be here today with you all. All right, so just to start off, we start off all of our programming at MSU Extension here with our affirmative action statement. This essentially says that all of this programming that you see here and from the University in general is open to all regardless of how you identify or what group you're a part of. Very happy that you're all are here today. Again, this session is going to focus on developing our management skills in our own production systems by focusing on something called enterprise budgets and costs of production. I mentioned previously that these are a part of two bulletins that you can find at MSU Extension Farm Business Team, in the demand series on enterprise budgets and cost of production. This skill is going to be particularly useful for any type of grower, new or old. Having an understanding of enterprise budgeting and how that system fits within your own production system is going to benefit your farm and your farm business very much So When we talk about enterprise budgeting, what we're referring to is a budget that is going to provide a producer with an estimate of potential revenue expenses. And overall evaluating profit for a single enterprise. Now when I say the word enterprise, what I'm talking about here and what I'm referring to is each type of crop, livestock or an economic speak unit produced, we can create an enterprise budget specifically for each, each of what we produce, whether that is field crops, corn, soybean wheat, whether that is market farm, market garden style. Where we do bad greens mix, we do bunches of root vegetables, we do summer crops or in orchard production, it doesn't matter. You can create an enterprise budget for each of those enterprises. What you'll often find here, extension services like MSU, are budgets that are developed to represent a typical situation. For example, in field crops, things like corn, soybean, wheat forages. However, these budgets are typically more general and they might not be fitting for all producers. It's important to remember that each farmer and farm has their own way of doing things, their own unique sets of challenges, their own costs to produce their farm products. So if I can hit one point home today, it's going to be that it's important that you adjust or create your budget given your own local situation, the types of crops or products that you produce and the type of farming operation that you operate. That's what we talk about when we are speaking about enterprise budgets, Is budgets around each of our enterprises that we produce on a farm. All right, and thanks for posting that in the chat box Marial. I appreciate that. Why focus on enterprise budgeting? Why is this such an important thing to understand as a beginning farmer or even better, a new farm decision maker? A new farm decision maker could be somebody that has been in agricultural and natural resources for many years. But when you're actually in a position where you're one to be making decisions on a farm, it's a very difficult thing to do. You're often dealing with a lot of ambiguity in your decision making. Farming is not cheap, so you want to make sure that you're putting your scarce capital a good use. And an enterprise budget is going to allow you to quantify different components of your production in that enterprise so you can make sound and effective decision making on farm. In addition to that, the benefits of enterprise budgeting are numerous. One, and this is not an all inclusive list. It's going to provide a useful way to estimate expenses, revenues, and overall profitability of that enterprise. It's a very effective and useful way to organize your production information and the associated costs. It allows you to process, map, pay from start to finish. This is how I produce this crop, or this animal in my production system. And it allows you to take a 10,000 foot view of that step by step process. And you can assign different costs and different revenues for that enterprise. It's going to allow us to quantify economic costs and account for these costs. We'll talk a little bit more about this in the next few slides. The differences between economic profiting cost and accounting profit and cost. It's going to assist in building historical production information in our systems, right? If you're a new farmer, if you're coming back to the family farm, if you're starting your own enterprises, your own endeavors with agriculture, you might not have historical production information all the more for the argument to have enterprise budgets in your business, because it's going to allow you to build historical production data on your farm. It's going to assist in our decision making processes I mentioned earlier. Oftentimes it's difficult to make decisions on farm because there's a lot of capital at stake. We often don't see the effect of our production decisions until maybe a year or two or more later on. This will help you assist in your decision making. Last but certainly not least, the cool thing about enterprise budgets is these budgets can be used as building blocks for profitability plan or production plan. If I have four or five different enterprises that I produce on my farm, each one of these you can create a budget for and it can create a whole farm profitability plan or production plan. And last but certainly not least, the old adage that I always lived by when I was in the military was, if you fail to plan, then you're planning to fail. We have to go into our productions with a plan for that production year. And really maybe a one year, five year, and ten year goal for our production. Otherwise we're just setting ourselves up for failure. And that's definitely not something that we want to see. In moving from our discussion on introducing enterprise budgets, I want to take an opportunity here to move from that discussion and discuss accounting versus economic Profit is a critical component to enterprise budgeting. It's a really important concept when we work with enterprise budgets because the concept is of economic profit, right? Enterprise budgets are an economic tool of analysis. Therefore, we need to include economic profits rather than just accounting profits. Okay, I see I have a question here. Are you using the term enterprise in a similar meeting as a profit and loss line? We'll talk a little bit about profit and loss. Profit and Loss statements, or P and L statements, are going to be a business sheet that you can use. It wouldn't be exactly like a balance sheet or a cash flow statement, or a profit and loss statement, but enterprise budgets, that internal tool that you can use in conjunction or in line with a balance sheet, or a profit and loss statement, or a statement of cash flows to help you in your business decisions, okay? I hope that answer your questions. We're going to talk a little bit more about how this can flow into those profit and loss statements or profit and loss line. Later on in talking about enterprise budgets, we have to talk about economic profit, not just accounting profit. If you didn't already know there are two different types of profits here, and accounting and economic profit. Just to throw out the question to the crowd, what is economic profit and how does it differ from say, accounting profit? Would anybody like to take a stab at that? Would economic profit have something to do with, say you're at a farmer's market and you're selling some of your goods because you grew, say, sweet cherries for example. And then, but accounting would be just the math, if you were selling wholesale, I don't know. Yeah, good staff. Not quite. Okay, What we're really talking about here and the differences between accounting and economic profit is one key concept that we're going to talk about in the next slide. To show this difference between accounting and economic profit, what we're going to first show you is accounting profit, so this is going to be financial profits. Accounting is the total cash earnings from your enterprise. And it's calculated by subtracting all dollar costs from that total revenue. So all the revenue that comes into my farm minus all of the costs it took to operate those enterprises, each of the things that I'm producing All right. Is going to give us our accounting profit. All right? Total earnings and revenue from the enterprises. You'll often and you will find this on a schedule when your profit loss from farming. If you're familiar with a schedule from the top part, it's going to show you an area where you can list all of your revenues. And below that in the section below is going to show you all of your farm expenses that you can list. All right, So it's going to follow that and it's going to have an easy equation. It's going to be total revenue minus total dollar cost. Now when we speak about economic profit, okay, we're going to throw this concept at you that is called opportunity cost, okay? Economic profit is going to deduct both dollar cost and this term, opportunity costs, from our total revenue. What would be an example of an opportunity cost or what is opportunity cost? Would anybody like to take a try at that? So perhaps it would be the chance that you might fail in your crop. Your crop might fail. I like it. It's very close you're getting to it. So the official textbook definition is the amount of income that could be earned if the economic resource was put to an alternative use. Now, I don't know about anybody out there, but that still confuses me when I say that out loud. Okay, Opportunity cost is going to be a foundational concept in economics and is really prevalent in everyday life. Every decision that you make in life, you're taking an opportunity cost, right? So back to your point, opportunity costs arise in the presence of a choice. It's talked about in terms of the cost or what we miss out on when we make the choice, right? So if I choose to do A, I'm missing out on B. I'll never know what happened if I chose the route. That's what we're talking about in terms of opportunity costs in our farming examples. It could be the costs and benefits of choosing maybe one enterprise over its alternative, right? We can have ten acres of land and choose to put an orchard there, or we can choose to put corn on it, or we can choose to graze livestock on it. We have all these decisions that we can make with the assets that we have available. When we refer to opportunity costs, we're really referring to here as the costs and benefits of choosing one enterprise over its next alternative. Okay, let's go through a couple of examples here just to showcase this new concept here. Again, you can see the equation total revenue minus total costs. Nothing has changed there, excuse me, from accounting profit. But now what we have is we're accounting for these opportunity costs. Let's dive into a few examples. You might not pay yourself weekly, which would be considered an accounting profit. However, your time and your management of the enterprises does have value and you should account for it. Another example, you choose to plant all 100 acres to corn, but you might miss out on record soybean spot prices that year and last. And this is probably my favorite example because it deals with a little bit of numbers. Here it introduces that you have 100 acre farm. And you choose to farm all 100 acres instead of say renting it to your farmer neighbor next door. If you were to rent it to your farmer neighbor next door at $200 per acre, your opportunity cost is now $20,000 Unless you can generate $20,000 or more in revenues from that land. Economics would tell you that you're better off renting that land because your opportunity cost is higher if you had farmed it yourself. Okay? So when we talk opportunity costs or economic profit, it must be included in the enterprise budgets themselves because they are economic tools of analysis. Okay, Now to dig just a little bit deeper on opportunity costs because this is a foundational concept that we're going to use in framing our way that we think about enterprise budget creation, okay? So the basic premise here is that business owners are always going to operate their business with a combination of resources, those that they own, and resources acquire from others. Let me give you an example. Input suppliers, seed sales, compost chemicals, landowners. So if you're renting land, employees for their labor and lenders for their capital, okay. Like all other business owners and like any other person who allows their resources or their assets to be used in operating their business, they should be entitled to compensation for using that resource in their business, right? So let's go through a couple of examples here. Let's talk compensation. Should the business owner be entitled to receive the equivalent to rent when the business owner is using their own land in their own business? Absolutely. Let's talk wages. Should a business owner be entitled to receive the equivalent of a wage for the time that the owner spends operating the business? Absolutely. Last for interest, should the business owner be entitled to the equivalent of interest for the capital the owner invest into the business? Yes, absolutely. If you look at the S&P 500 Index, which is the top 500 businesses in the United States, you'll see an average eight to 12% rate of return year over year. All right, so if we use that as a baseline metric, shouldn't you be getting a minimum of 8% back on your money for the capital that you've invested in your business? Yeah, yeah, you can use that as a metric, Absolutely. So these are all examples of an opportunity cost, right? Instead of using my labor to farm on my farm, I could go out and be a W two employee for somebody else. So if I can go and make $50,000 a year welding for somebody, right? My opportunity costs for farming, for my own labor might be $50,000 right? These are all examples to help you start thinking about your own production and your own farm business through that lens of economics. Which is going to be really helpful for you to make decisions later on down the line, okay? Now, we're not all capitalists here, all right? A good reason to farm is you really enjoy farming. And that's completely okay, right? But you should ask yourself as a manager, do my net profits profit after my costs are considered justify my continued investment in the operation of my business, okay? There could be times where you as the business owner even accepts less than your opportunity cost simply because you receive utility. Utility is a fancy economic speak for happiness. You receive happiness for owning and operating your own business and farm and working on your farm. Agriculture is so unique in this way because this is so prevalent in farming. Farmers farm because we love farming, we have to, it's tough work, So only you can make the assessment of how much utility is my time worth and where can I put my time elsewhere. Does it justified my continued investment in my farm business? Okay. Farming, bringing you utility is a perfectly acceptable answer for you in your own production system, okay? So I'll take a quick pause here. I covered some pretty heavier topics around economics with opportunity costs and enterprise budgeting. Are there any questions that anybody would like to go over here? I see one. Does a sump cost fallacy come into play? I think I know what you're getting at. I remember talking about some costs versus different types of costs. Costs are often, well, I've invested in putting up a building on my property for whatever reason, just in this wide example, it's no longer going to be used for my business for whatever reason that might be considered a cost. If you could explain to me what a cost fallacy would be, I'd appreciate it because I'm not familiar with what that is. Any other questions before we move on to our discussion on costs of production? Okay. Just to clarify, do you mind? Absolutely. You were talking about the economic profit and accounting. I got your point. I think pretty clearly. Let me just clarify. If you've got a block of trees that aren't producing fruit trees, and you take those out, for example, maybe it's a few acres, your thought would be to reclaim the land and then maybe put down something that would be a benefit that particular year. That would make you money more money than you were making with dead trees, basically. That's what you're talking about when you say economic profit, right? Is that an example? That would be a great example in enterprise budgeting. That process is a route or a method that you can use to evaluate, well, I'm going to make the decision to take out that stand of orchard trees and put in whatever you're going to put in into that land. So you're absolutely right on the economic analysis and the enterprise Budgeting is sort of that process that we go through to help us make those decisions in our production systems. Thank you. Very clear now. Thank you. Yep. Great questions. Keep it coming. I'm going to keep moving on because I am I do have just an hour before this cost of production. You all probably know that everything on your farm is going to cost. Everything has a cost on your farm and in your business in general. Understanding what our costs of production are are going to allow us to make important decisions for our farming enterprises. Importantly, costs of production is going to be included on our enterprise budgets. So this is a really important slide here. We're going to get exactly into the structure of an enterprise budget following this slide in the next few slides, okay? So when we talk costs of production, we're generally talking about something that's divided into two major parts on our enterprise budgets, okay? Now I really want you to become familiar with different terms around describing your systems and your costs, all right? To increase our skill level and our knowledge as business owners. All right. Two major parts of costs on a budget, we've got variable costs and fixed costs, okay? Variable and fixed variable are often referred to as operating costs, and fixed costs are often referred to as ownership costs, okay? Variable operating and fixed ownership, okay? So when we talk variable costs, what we're speaking about is costs that are only incurred if our enterprise is produced. And can vary based on our production volume or our output, how much of that we produce. Okay, some examples of variable costs could be fertilizer, compost, seeds, plastic, mulch, posts, gasoline, diesel, breeding stock, any of it. If we didn't produce that enterprise, all of these categories would fall to zero. They vary with our production output. Okay? Fixed costs, on the other hand, are costs that are going to exist from owning assets, physical, tangible assets. All right? Tractors, machinery, things of that nature. These types of costs are going to exist even if they are not specifically used for an enterprise that you produce on your farm or in your production system, okay? These costs do not typically fluctuate based on our production volume and are generally the same year to year. Some examples of these are going to be land machinery, buildings, insurance, that's non crop insurance, Taxes, land rents, things of that nature. Okay. An important note about fixed costs. These are often the most difficult to estimate on our enterprise budgets. That's interesting. Why would that be? If fixed costs don't change every year, and they don't vary based on my production output or my volume, why would it be the most difficult thing to estimate in terms of cost on our enterprise budget? What do you think? The tough one? It's a tough one. Let's talk about it like this. They're difficult because fixed costs are necessary and appropriate for our farming operation. But are they tied to any one enterprise? No. Unless we only produce one enterprise, which that's, I think, pretty uncommon as agrarians. Right. So we have to somehow some way assign our expenses correctly, and this usually involves pro rating costs on some basis to all of the enterprises that we produce. For example, if I've got a quarter acre market garden and an operation doing pastured poultry in my backfield, and I do a little bit of field sweet corn for sale at my local market. Right. These are all different enterprises, but I have one tractor, so I have to assign that tractor, that asset, that fixed cost per year to each one of these enterprises. And that's where you have to be a little bit creative sometimes. In this preparation, let me give you a couple of examples. Machinery, hours needed for that one enterprise. Again, if I have one tractor or one building, or one whatever, and I do ten acres of field corn, a half acre market garden, and about five acres of pastured poultry. Right. I can break that down as my tractor, the machinery hours necessary that I need to allocate to each of those enterprises. Additionally, I could also look at it from, in terms of the Enterprise's share of land of a farm operation. Ten acres, a half acre, two acres, We can assign our land value. So let's say it's a $5,000 per acre value. And we can prorate that out to each of the enterprises that they occupy in terms of land. Okay, does that make sense? We're going to keep hitting this example home here. Here is a matrix. An example here to demonstrate how variable and fixed costs can affect a farming operation differently. Again, this is a field crops example, but it still remains true. Very simply, we've got our farm revenue coming in, variable costs and fixed costs coming out. Then we line, itemed out the rent cost here as well. Just to showcase that what you see here in year one is our $75 profit and loss after our variable costs and fixed costs are considered, okay. Year two, and soybeans, we've got less revenue, but we've got lower variable costs. Importantly, our fixed costs stay the same, okay? $15 in total revenue per acre. But if we look at year three, look what happens to our farm revenue. We go from a revenue of $750 in year one to 675 in year three. Our variable costs are the same, our fixed costs are the same in this particular year, and we have an economic profit of zero. This is completely acceptable in agriculture. This just simply says that all of our revenues, or all of our costs, were able to cover all of our revenues. Excuse me. All of our revenues were able to cover all of our costs. Okay? Completely acceptable to have an economic breakeven in agriculture, but if we look at your foreign soybeans, our revenue goes down 540-510 okay? We have the same variable costs, the same fixed costs, but now we're operating in the red, okay, per acre. All right. This just goes to show you how our revenue, if our revenue changes, we have to maybe take a look at our costs that year and say, hey, is there an area that I might be able to shore up? Or not spend so much money on my variable costs in order to remain in that green, or at least an economic breakeven of zero, okay? As this example would illustrate, fixed costs don't carry those sharp swings or increases or decreases. In some years that may be a variable cost would. But they're going to have a significant impact on your business because they're always going to be there, okay? So understanding how these affect our cost of production year after year is important if a pharmas to successfully and consistently reach their goals. Okay? Has everybody heard of depreciation before? If not, that's okay. Yeah, Yeah. So I just want to briefly cover depreciation because it is an important concept when we evaluate our costs. But I do want to caution you, I believe it's best to lean into your accountant to provide depreciation advice or depreciation schedules based on your particular operation. They're going to be the subject matter expert. If you don't have an accountant right now, that's okay. But I would I would recommend that you at least consult with one. Definitely. When you start buying our refurbishing, different farm equipment or different assets from just a depreciation standpoint. Okay? Depreciation is used routinely in evaluating profitability and as a helpful tool for farm managers. It can also be one of the most misunderstood and confusing topics for newer decision makers. It's something that it's not something that you're going to necessarily find on your farm's checkbook, right? So when we talk about depreciation, we're talking about specifically economic depreciation, which is different from taxable depreciation. Economic depreciation is going to focus on calculating the lost value of farm equipment, buildings, and vehicles from age and use. When we think about this in terms of profitability, it's important from a net worth standpoint of the farm itself too, Okay? So let's take a look at example. You a good question. Bill is deteriorating, soil productivity depreciation? I don't believe in this context. No. We're talking specifically about assets. Now, you could argue that your land is an asset and if your soil productivity is deteriorating over time, I would say that would be a different issue. What we're talking about here, and I think it'll hit at home with our skier example is the economic depreciation of our assets that we have on farm. Okay, so in the skits steer example, we purchased a $10,000 skid steer. Which if you find a $10,000 skits steer, be sure to let me know, because the prices of a skid steer nowadays is outrageous. But let's just say for this example, for easy numbers, we purchase a $10,000 skitter for our livestock operation, right? So it's a fair market value purchase. At the time of our purchase, this is what it was worth. When we use it routinely throughout the year, it received regular maintenance. Maybe it was repaired when breakdowns occurred. And at the end of the year though, it might only be worth $9,000 to buyer fair market value, FMV. Okay, how would this change in value impact our business? All right, let's take a look at a table, all right? I hope you all don't glaze over, all right? I promise is going to be, this is relatively pain free. Okay. I'm not going to try to get. Here's annotate. There we go. If you can see over here, we've got two columns, All right. We've got our machinery and equipment moro, and you can see this includes our $10,000 skits steer purchase. Okay? But what we have to account for is this $1,000 loss in depreciation of our skis steer asset. Okay? And you can see that a year later in column B here, the same row, we went 50000-49 thousand. Okay? And that economic depreciation here is accounted for over in our income statement. Now what has to happen is the worth of the business has declined by $1,000 even though that equipment is fully functional and is considered new. We need to offset this economic depreciation in some way, okay? What this usually means is we need to make up that loss with cash. We need to make more money to offset or make up that loss value from depreciation of assets to remain profitable. And also, if we're looking to grow the net worth of the net value of our business, we want to make sure that our equipment depreciation isn't catching up to our revenue generation. Our revenues are going to increase, set a rate greater than our depreciation costs. All right, Depreciation is going to have an added benefit of assisting us as managers in deciding if capital assets should be replaced. If they continue to decline from age or use, assets are going to require a greater amount of repairs or maintenance to keep them functional. By comparing the impacts to variable and fixed costs, depreciation will help us, as managers understand if we're maintaining or growing overall profitability in the net worth of our farm business. Okay? This is a vital component of our understanding our costs of production. Okay? Any questions so far, in short, depreciation will affect the net worth of your farm business. This is incredibly important as new farm decision makers. If we're coming back to mom and dad's farm and they need some equipment and overhaul, we want to invest in new equipment, we should probably have at least an understanding of how that depreciation is going to affect the overall net worth of our farm business, okay? All right, so now we're finally going to get into talking about our enterprise budgeting structure, right? We've talked about foundational concepts with opportunity costs. Costs of production. All right, now we're going to get into a little bit about creating enterprise budgets, okay? Now, typically this is where a lot of people might have trouble, get overwhelmed, get frustrated, and give up. But I want to encourage you to start where you are. If you don't have historical production data, maybe give estimates, research the cost of materials. Go to your local farmers market if you're a direct market producer and research what your current market is selling your products for and start there. But really there's going to be three components of all enterprise budgets, right? We're going to have an administrative data section, a cost of production section, which we just talked about in the previous slides. And our revenue section, everybody's favorite, which is going to include gross and net margins of our enterprise. Okay, Again, we've got our administrative data. All right, When we decide which enterprise budget tool to use or we're creating our own, we want to be very specific about units and time. Some enterprise budgets will measure the whole enterprise. Others will measure a per unit basis. I want to encourage you to go down to the lowest level possible and measure at a per unit basis. Let me give you some examples. One acre for fuel crops, right? That's the size, One bushel for field crops, that's the unit, we often hear bushels per acre. Let's go down to a vegetable setting, pounds of greens per bed, right? We know about the 30 inch bed top by 50 or 100 foot long beds, right? In my intro slides, we saw beautiful pictures of that. That's awesome. Well, we can make that our size, our 30 inch by 50 foot bed. And we can say, well, I estimate that I can get 25 pounds of my bag greens mix out of that one size. So my unit in that example would be pounds of bag greens or pounds of greens. We can do bunched carrots or beets. We could do a unit of bok, choy, a unit of cabbage, whatever you might be producing. Okay, Economics is going to refer to this as a unit of good x. Okay? This is just whatever basic individual unit you're producing in any business but on our farms. Okay. Then revenue. The revenue section, well, we cover costs. So we've got variable and fixed opportunity costs. But revenue is going to be showing our gross margins. This is the total cash sales for our enterprise of our particular size of production. Some examples here would be 150 bushels of corn per acre, where our unit is bushels of corn and our size is acre. We have 50 bunches of carrots per bed, where our unit is bunches, and our size is 30 inch by 50 foot bed. Okay? And our net margin is going to be our revenue after we consider all of our expenses fixed variable and our opportunity costs. Okay? Gross margin is first all revenue before costs. Net revenue is after we consider all of our costs, okay? Here you see corn bushels per acre. And I know I have unit up there. This is an example of an enterprise budget that I built for my particular farm. That unit is actually, it should be bunches of carrots, but it shows where that information is displayed in the administrative data. Okay, let's talk a little bit about revenues. This section is going to consist of all cash and non cash revenue from our crops or our livestock. Okay. Try to get as accurate as possible. Again, if we don't have historical yields, perhaps we could just see what our market is selling this product for by just doing a little bit of research. Usda does have price per unit sold, but that is a national, and I think they have regional in some states to try to get an idea of what your products are selling for in the marketplace and begin there. Now, generally speaking, farmers and ranchers are going to be what's called price takers. Okay? This means that prices are set by the marketplace and you really don't have any influence on pricing. This is especially true for commodities markets. So think corn, soybeans, wheat, things of that nature. All right, however, there are opportunities in specialty crop markets to achieve higher pricing for products. We're not going to go into the concept or strategies around pricing, now just know that that's not a hard and fast rule, that farmers are necessarily always going to be price takers. It's going to be largely dependent on your market and the products that you sell. Okay? Again, cash revenue before costs are considered is going to be called gross revenue. Okay. So essentially what we're going to do here is we're going to take to calculate our gross revenue, our cash price per unit sold in our field crops. Example here at MSU Extension, let's say we've got a bushel of corn worth $4.50 We expect to get around 150 bushels, and that size is going to be one acre, one acre. So we've got 150 bushels per acre. At $4.50 a bushel okay, gives us our gross revenue per acre. 675 gross revenue. I'll keep saying it before costs are considered. All right. And then here is a vegetable example. Now you'll notice here, this is an example that I created. I've broken out your gross returns, your gross revenues based on wholesale and retail outlets. Okay. This is because it fit my particular production marketplace. Well, I wanted to see what the differences would be between a, excuse me, a wholesale market versus a retail market. So retail, think farmers markets wholesale, think brochures or other sort of food cooperatives where they buy larger quantities in bulk. Okay, so we've got 150 bunches per bed. That's $2.50 in a wholesale market per unit times those two together. It gives you the total gross revenue for that size. Same thing for the retail market just down below. But notice the price per unit is $3.50 $1 more than I get in a wholesale market. It gives me a little bit higher gross revenue for that particular market segment. All right, we hit on this already pretty extensively, but again, after revenue, we're going to dive into those variable costs and fixed costs, okay? Again, operating or direct costs are going to be synonymous with variable costs. We've got examples, again, labor fuel materials, fertilizer, plastic, mulch, et cetera. Again, these are only going to be incurred when our production happens. We can organize these differently based on the producer that provided the labor cost. And we can differentiate how we organize this based on what enterprise we're producing. Okay, now I do want to mention the order in which you want to do this. We want to calculate our revenue first. The first cost that I think that we should evaluate after our revenue is going to be variable, okay? And then fixed, okay? Variable income over variable costs is going to give us a ratio called gross margin, okay? All this does is show us how much of our production in variable costs will contribute to fixedter ownership costs. Okay? So that's next on down the line. So we have leftover revenue, or at least we should try to have leftover revenue after we consider our variable costs to contribute to our fixed cost. Right? Those are our assets that we own on our farm. They're going to be there and they're going to cost no matter what, right? So we want a particular enterprise to have money left over from our revenue after variable costs to contribute to the fixed costs. I hope that makes sense, okay? Again, that income over variable cost is going to be referred to by a term called gross margin, okay? A quick note about labor. Some enterprise budgets do go into enough detail to divide labor requirements into the operator that provided it. For example, hired labor versus your own farm labor. However, most are going to use one labor cost with no source identication. Again, you can organize this however you see fit when we estimate opportunity cost of labor, okay? It's important to include not only the cost of labor, but the cost of your management as well. Management charges can be shown as a separate item on your budget, or they can be included in the estimated net return, okay? Labor is a variable cost. It varies based on how much that you produce on your farm. Okay? Ten acres of production is vastly different from 100 acres of production. Okay? So in terms of labor, your labor is going to go up at a similar rate that your acres producer, your production volume goes up, okay? All right. So here's an example of our budgets here. We've got our MSU Extension Field Crops budget, where we're listing all of our variable costs and our categories for them. At the very bottom, we've got the total of those variable costs. Here's an example from the budget that I created for my own vegetable farm. Okay, This might answer your question. Tammy is right here. I listed all of my labor and all of my variable production costs in terms of labor minutes. Because I do operate a smaller scale market, farm machinery hours didn't make sense to me. How much labor is spent conducting each task to produce that crop was more important to me. I literally broke it down. My minutes. We have our minutes for each, for that particular enterprise, okay? Our total production hours, I value $50 per hour per labor. I think that was two employees and one manager. And then you times those two together to get your total variable cost of $262.50 Now, there was a question. How do I count for my own personal labor, right? Let's say for example, I'm the owner and the operator, okay? So I farm and I also own the farm business, okay? We can account for our management costs over here in this separate section, okay? And you'll notice organization and supervision costs for equipment, costs for labor cost for infrastructure and other, right? So if I value my management costs at a higher rate than my other labor, right, this is the section that I would include that there. Okay. So you can again, your own choice. You can allocate an entire section on your enterprise budget for management costs or you can just roll that into another cost area on the budget itself. All right, fixed costs, we know these as ownership costs, right? This is going to be underneath our variable costs, right? It's important to remember that order. And again, these are going to be costs that are incurred even if no crops or livestock exist, right? We're going to have that machinery, equipment, building cost, whatever it might be. Okay? And again, we need to figure out a way to pro rate these to our enterprises that we produce. All right, and you can see examples here on our field crops budget done at a per acre value. And then you can see examples here. On this particular budget, what you'll notice is after total fixed costs are accounted for, then we have a sell for total variable and total fixed costs. So all of our costs minus opportunity costs minus those management costs are going to be tallied together. And then that's going to give you a net farm income, okay? So revenue, variable costs, fixed costs, opportunity costs. At the very end, this net farm income line, it is going to be called the bottom line. It's also referred to as a return to management, okay? This is going to be the payback of our investment into the farms resources. Your time and attention management in your operation can then decide how to utilize that revenue to maximize future returns or make other management decisions. Do we replace Grandpa's old tractor with a new one? Right? Do we put up another who house? Right? What do we do with this money to continue our growth in revenue or our farm business in general? Okay. Over here in our vegetable example, Less fixed costs for my particular situation. Right now, I'm just starting out, maybe like you out there. I just valued cost of land. I prorated that down $5,000 per acre. All right. And I took a portion of my current production right now for that carrot crop and came up with $121.03 cent value there. You can see how easy can be. You just have to do a little bit of number crunching. Total fixed costs, wholesale cost, bill fixed and variable. Retail costs, bill fixed and variable. Then down here we've got our gross returns. Remember gross before, costs are considered for both wholesale and retail settings. And then after all of our costs are considered, look at this, look at the stark differences between our wholesale net returns and our retail net returns. All right, now you can see the value in enterprise budgeting because these budgets allow you to make these comparisons like, hey, it's not really worth my time and effort to sell in a wholesale setting at my scale. But if I go to the farmer's market on Saturday, I can make a pretty decent profit from that one bed of carrots, Not too shabby. Okay, Perfect. All right. I do want to leave the floor open a little bit for questions. I know I covered a tremendous amount of information and resources and concepts, but let's go ahead and just open the floor up a little bit to some questions and answers. And we've got about 5 minutes left. One note before I get some questions floating in here, I'll give away my secret from my development of the enterprise budget I created for myself. This is a great resource, sustainable vegetable production from start up to market. It'll fill that niche from like a field crops budget. Those aren't getting it done for you. And you need a template. This book in the index, in Chapter 19, give you all these different enterprise budgets and how these different growers approached it. And it also gives you, in appendix D, a worksheet for developing your own enterprise budget. And last but not least, we're working on developing a workshop later this year. So if you're interested in this, we will reach out to you, everybody that attended this particular session on enterprise budgets. When we have that workshop available in person and you want to dive into this concept a little bit further for your own operation, just know that that's coming down the line later this year. If you go to a farmer's market, instead of doing wholesale, you have to have additional labor for going to that market and spending the time. Is that taking place out of that net return there? 100% 100% Now you'll see, let me see if I can find the slide here. That's one of the drivers in the reasons why I wanted to segment out a wholesale versus a retail section in that vegetable budget. Because wholesale setting, they'll order 100 bunches of carrots. Your only job is to drop the carrots off at wherever you need to drop the carrots off. But if I go to the farmer's market on Saturday mornings will have to drive from the farm to the farmer's market location. I've got to pay for the labor to staff that market. I have to engage with the public. If you don't like doing that, then you might not enjoy a retail setting. The cost might be a little bit higher in a retail setting versus a wholesale in this vegetable example. Good question. It's a tough concept to wrestle with opportunity costs, costs of production. But I do feel strongly about this by going through this process and getting familiar with the terms. You can do back of the envelope style budget where you're just writing down, I think I can get 50 bunches of carrots for this vet, okay. My local market sells them for $3.50 in a retail setting. Okay, do the math on that. And you just go, hm, how much is it going to cost me to prepare these carrots for market from seed to sale? Walk through the steps, assign a cost to each of those steps, and see what the numbers look like. Revenue minus variable costs. Attempt a fixed cost allocation, right? Don't get wrapped up in the weeds about it. Same thing with management. You can grow to that point. But getting an idea of your potential revenue that you can make based on what you want to produce is going to open up a whole world of decisions that you can make for your farm. Focusing on what's profitable for your farms. If you're a successful farm out there, you understand your numbers, you understand how much revenue you can make based on your scale, and you understand what your costs are to produce those particular revenues. It looks like there was a question about any farm budgeting apps out there. Not that I know of, but that's not saying much. I I like pen and paper and I just do, or I mean, I would consider Excel spreadsheets, pen and paper. Even though that's just wild to say out loud, I'm just comfortable working on Excel. I can get the information exactly what I want in an Excel or on a piece of paper, whereas an app, you have to fit their own constraints that they might have. I don't personally know of any apps, but I'm almost positive there's plenty of apps out there that you can have if you like apps. Thank you so much, Steve, for sharing your time and expertise with us. This was fantastic.