MSU Feedlot Educational Series: Failing to Plan is Planning to Fail: Enterprise Budgets and Financial Analysis
April 4, 2021
In session three of the MSU Feedlot Educational Series, Dr. Melissa McKendree teaches how to use the MSU Feedlot Enterprise Budget Tool and Dr. Corey Clark discusses financial analysis for feedlot operations. First, Dr. McKendree presents the different functions of the MSU Feedlot Enterprise Budget Tool. The MSU Feedlot Enterprise Budget Tool can offer information regarding the price and nutrient composition of your diets. The MSU Feedlot Enterprise Budget Tool has a yardage cost calculator and budget calculator to determine the income received from the cattle being raised. Additionally, the MSU Feedlot Enterprise Budget Tool allows breakeven analysis for purchasing or selling cattle and a sensitivity analysis section to adjust values in the budget spreadsheet. Dr. Corey Clark discusses the different components to conducting financial analysis for a feedlot operation. Dr. Clark also mentions programs, such as Telefarm, that producers can utilize to perform a financial analysis of their feedlot operation.
Hello, everyone. Thanks for attending this month's session of the Feedlot Educational Series. This will be our third session. And today we have two speakers instead of just one. We have Dr. Melissa McKendree and Dr. Corey Clark, that will be speaking with us tonight. And the title of their talk is failing to plan is planning to fail and they will be talking about enterprise budgets and financial analysis for us tonight. So with that, I will turn it over to Melissa. - Hello everyone. I'm so happy to be with you tonight. I miss being with you in person and I've had a hell of a day. So I'm looking forward to ending it on a high note with you all. I'm sorry, we can't all be together in person at the Franklin Inn, I always have enjoyed coming and being with this group. So tonight, Cory and I want to talk to you about enterprise budgets, right? I'm an economist as most of you that I have had the opportunity to meet before know and I'm looking forward to also getting the opportunity for you guys to engage with Dr. Clark as well. So I'm gonna start off here first and then we'll transition over to Corey in a few minutes. So the game plan for the first part of our talk is we're gonna review what enterprise budgets are. So about two years ago, I think I gave a talk during the beef short course there with Dr. Rust about the enterprise budget tool. So we have updated that but it's always a good refresher to go back over these tools and talk about how they can help you forecast your economic profitability and interpreting what those numbers are. So we're gonna walk through the enterprise budget and then talk about opportunity costs. And then we'll go over to Cory and she'll focus more on financial analysis. So what is an enterprise budget? Well the first part of this word, enterprise, is just one part of your business. So that could be your feedlot cattle it could be your corn. Maybe you even grow two types of field crops and maybe grow corn and soybeans if you're a diversified farmer. So that would be two different enterprises and then a budget. We all know what a budget is. So that's helping you forecast how you're looking financially, how much money are you bringing in versus how much money is going out? So an enterprise budget is essentially just a budget for one part of your business. You're really trying to hone in and focus in what we're talking about tonight, your feedlot. So it's an organization of looking at the revenue so the money coming in, your expenses and then the ultimate goal is to calculate your economic profitability. And we'll talk about the key distinction of economic profitability in a minute. And so it's forward-looking but to make an enterprise budget, you're gonna have to bring in some historical information maybe your average daily gain, for example but also you have to bring in some future expectations around prices, for example. So, oh yeah Jeannine, just put a reminder. If you have questions throughout the night, go ahead and stick those in the chat and we'll be monitoring that. Thanks Jeannine. So there are some assumptions here, right? And we all know what happens when we assume most of the time we end up being wrong. But the point of these enterprise budgets is to at least give you some confidence and help you in your decision making process 'cause as a manager that's what you're doing all day is you're making decisions. And so our goal tonight is to arm you with some extra tools to help you in your decision making process. I think I've already covered most of this but the enterprise budgets the other way that you can use this is when you're comparing different options that you might have. So maybe you're looking at putting in native cattle. So some traditional beef breeds into your feedlot versus placing some Holsteins, or maybe you're looking at placing under different weights and having them different number of days in the feedlot. So you could use these enterprise budgets to kind of help you look at those the differences in the profitability between different decisions that you have. So we can call that partial budgets but you can use the enterprise budget like maybe make two of them under these different options that you have and compare. So, one thing that sets enterprise budgets apart is that they include opportunity costs. So opportunity costs. This is an economic concept and with opportunity cost what you're looking at is valuing your resource at its next best alternative use. So what that means is if I wasn't utilizing my land for my feedlot, what else could I potentially be using that land for? And that would be the economic value of that land. So an example that most people can relate to is their time, right? You have a fixed amount of time, you have 24 hours in a day. So your opportunity cost of being here in this meeting tonight is you're not able to watch your favorite program on Netflix, right? Or my opportunity cost is that I'm not putting my daughter to bed tonight. My husband's doing that. So we were all making trade-offs with the resources that we have and enterprise budgets help us to fully capture that economic value of resources. So we're going to include costs for things that might not be cash. And we'll look at some examples of that as we move through the budget, but your labor time might be one. You might not write yourself a paycheck, right? But you could have used your time in some other way. So we want to assign a value to that time. So that gets at the idea of opportunity cost. So, with enterprise budgets, we're calculating economic profit. So this is essentially that after you have fully valued all of the resources that go into your production at their economic value. So at their opportunity costs what profit do I have left over? And so in the long run in economics we always expect economic profit to be zero. But that doesn't mean that you're gonna have $0 in your bank account because some of these are non-cash things like your labor, et cetera. Now, if you're talking about accounting profit that doesn't take this opportunity costs into account that's just the cash that changes hands, right? That's what your lender is concerned with. But so a lot of times what happens is these economic budgets that we create when we account for these opportunity costs they're gonna look a lot worse than the cash that you're gonna have on hand and Corey is gonna talk to us later about looking at cashflow and those other different types of financial analysis that you can do. Let's see, we got a question here on the chat. So, yeah so one area of the comment that we got is that grain prices are very high right now. So we'll see how bad Melissa's projections look about economic returns, but in this tool you can actually go in that we're gonna talk about and make those adjustments for your specific numbers. And we're not gonna look tonight about forecasting prices. We don't have any control over that as an individual but what it can do is help you make decisions about whether, maybe these feeder calves the market prices this right now based on what these grain prices look like. Am I gonna make any money by placing those feeder steers? Or maybe should I wait until prices go down a little bit or maybe look at other markets, for example maybe you've got opportunities to buy cattle from a couple of different locations. So we can use this enterprise budget when we're looking at those forecasts and trying to decide whether this is the best alternative for us or not. So this is the basic setup of an enterprise budget. So with an enterprise budget usually these are calculated on a per head basis. So what's my return per steer. If you've seen these with another extension talks related to grains, a lot of times those are on a per acre basis. So usually enterprise budgets are on some unit. And with feedlots we're looking at a per head unit. So there are some major sections. And so the first section looks at your gross margin and we'll go into some more depth on this, but it's looking at based on your projection for your fed animal, what's your gross revenue going to be you've purchased or when you know what your potential purchase price would be for your feeder steer. And you have some value that you're going to subtract for potential death loss. And so when you look at that difference there then that's essentially how much money do you have left to pay for all your other expenses? So once you've purchased the feeder steer and you looked at selling that feeder steer what do you have leftover to pay all of your other expenses? And then we're also gonna talk about operating and yardage costs and I'll show you where are these how you can use the tool to help you calculate these costs. And then our two key values that we're interested in are kind of our profitability implications are gonna be income over variable costs and income over total cost. So where can you find this tool? So Jerad is going to send out, this is an Excel budget tool. So he's going to send it out to all the participants afterwards but there is an older version of this tool up from our talk and 2019 on the MSU extension website. So it's not as updated but it essentially has the same functionality. If you're interested in going ahead and pulling it and off the internet there in and working on it. But Jerad is gonna send the tool out as well after the presentation, if you would like to find it. And we'll work with MSU extension to put the more updated tool online too, but it's not there yet. So this is kind of the basic what, how the tool is set up. So we've got four different enterprise budgets combined into one. So we've got four columns here. Two of them are for beef steers and two of them are for placing Holstein steers. So in each of these different scenarios we've got some wider placement weights that are around 600 pounds for beef steers and then a heavier placement around 800. And then for Holsteins a lighter, maybe you're place in younger calves around 450 after they've already had that, I'm blanking out on the name of that sector but they've already fed the calves up for a couple months and now they're entering into the feedlot and then a heavier placement around 900 pounds. So we've got those four different columns and maybe you only place heavier weight Holsteins. So maybe you're only gonna be really focused in on this last column, but the tool is set up so that you can put numbers in for all of these different potential options for your feedlot. So in the budget tool, any of the gray cells with green text can be edited. So if this doesn't fit you exactly right. I tried to make it for the average person. So then what happens when you do that? It fits nobody in particular. So you can go in and put your actual numbers in here and see, and then you can adjust it so it can be specifically for your operation. Oops! I'm just gonna put my laser pointer on here. So I think, yeah, so right here this is the cells that I'm talking about. So all of these green and gray cells can be adjusted. So then the other thing you'll notice in the slides down here I put the different tabs from the Excel tool. And then I tried to circle which tab the screen shot came from. So this is the main tab that you'll be interested in is this feedlot budget tab. But these other tabs allow you to further customize what's going into the tool. So you can customize your ration and you can customize your yardage charges as well. And then the other parts here. So you can put in your placement weights and your expected sale weights. And then you can also put in information about performance. So the average daily gain, et cetera. Any of the white cells with the black, those are auto calculated based on inputs into the other cells. So you don't want to mess with those cells. And I think the tool will yell at you if you try to change them, won't let you do that. And then you can put in the expected prices here. So Jerad and I tried to update these with some more of the recent prices of what's being offered at JBS and some of the local options for the feeder animals. So the next section of the tool is still here in this feedlot budget tab is that gross margin that we talked about. So after I count for purchasing my feeder steer and a little bit for the death loss how much money do I have leftover to pay all of my other expenses including my variable costs and my fixed costs. So those are fixed costs you can think about overhead. So those are costs that would be, you would have, regardless of whether you decided to place feeder steers or not. And then those variable costs are costs that are only incurred if you decide to actually feed animals. So you wouldn't have any feed costs if you didn't place any animals, for example. So this gross margin tells me how much do I have leftover to pay for all those other expenses once I've really taken my biggest expense into account of my feeder steer. So that's what this gross margin section is. So in this first column we had anticipated gross revenue of just over $1,500. We purchased the feeder steer for around $900 and we had to account for death loss here at $12. So our gross margin is $659 and 48 cents. So then the next part I wanted to jump over to a different section. This allows you to customize the ration 'cause we're working towards looking at those feed costs. So in this Excel tool we've got three different rations. So you can come in here in the feedlot beef finisher ration and you can adjust all of these different values. So right now I've got a diet that 61% corn, 20% corn silage and 15% dry distillers grains. And then you can put in those prices that were mentioned that are killing all of us, all of y'all right now, right? These high feed prices. So you can come in here and adjust those as well. And so you can also use this to look at different diets. Maybe you're considering changing your diet based on prices. So you can come in here and look at how much that's costing you for different diets based on a dry matter percentage and on an as fed basis. So some potential places you can look at getting these expected prices are from your current input suppliers. And you can use these expected volumes and percentages based on your historical records that you have. So there is some nice flexibility built into this tool to be able to help you better identify what your costs are. So all of the, once you put your values into the, sorry, I turned my cell phone off but I didn't consider about my house phone. Once you put all of those values into those ration tabs they'll be automatically populated back into your budget, your main budget tab here. So what we've got for our total feed costs we've got it on, over the total feeding period and then also on a per hundred weight of gain basis. So there's also some notes here on the tool that are helpful for telling you where these values come from. So then the next big section is yardage costs. So this is, you all are familiar with what yardage is but essentially it's how much does it cost you per day to have the animal in your feedlot. So on the yardage tab, it's broken down by variable costs and then fixed costs. So you enter these values on an annual basis. So in the top part up here, you need to stick in how many animals you feed on average per year and then the average number of days that those animals are in your feedlot. So then once you put in your annual cost for all of these different values, then it'll break it down for you on a per head basis and on a per head per day basis. So the top section here are our variable costs. These are costs that would only be incurred if you decided to place those feeder steers in your lot. So your, but remember this doesn't include those feed costs. So those are calculated in other parts of the budget there. So then down here we've got fixed costs and this is machinery and depreciation and property taxes and insurance. So remember earlier we talked about opportunity costs. And so this is where those opportunity costs come into our budget. So two examples here are unpaid labor and unpaid management. So we valued our unpaid labor at around $95,000 and our unpaid management at around $30,000. And then there's some other potential non-cash expenses like depreciation, right? That's a non-cash expense for both your machinery and for your equipment. So this is where you'll see those differences between accounting profit and economic profit. So then that yardage values will auto-populate into your main feedlot budget tab, which is down here that green tab, and you'll have the opportunity to enter in some other potential operating costs like your veterinarian medical costs and your marketing and transportation costs and or beef checkoff dollar per head as well. So then the last major cost section is interest. So this is another area where you could potentially have opportunity costs. So if you're using your own capital so your own funds to finance your operation you could have used those funds somewhere else. So you want to assign some sort of value to those, right? The least risky thing you could do is put that money into a CD. Now CDs are earning crap interest right now but you still could be using your money in some alternative way. So that's a very conservative estimate for the opportunity cost of your money. If you're maybe financing 50% of your feed you've got an operating loan or something you can put those values here into the tool as well. So then it'll calculate once we go through and you've entered in all of those values for your specific operation it'll calculate your total operating cost on a per head basis. So then down towards the bottom of the tool the tool profitability measures are income over variable costs and income over total costs. So income over total costs is gross margin minus your variable costs. So this is essentially how much, once you take this you subtract this, it's how much do I have leftover to contribute towards my fixed costs? So usually we think about this as the shutdown decision. So if this value is negative, then that means that by actually producing cattle, you're losing more money than if you didn't do anything at all. So the other value is income over total costs. And so this is what you would traditionally think of as profit. So in the numbers that I had entered into the tool with the current cattle prices and the feed prices in my assumed ration I've got some pretty ugly looking numbers. Now don't freak out, right? 'Cause if you recall back in that yardage tab I put in some pretty big assumptions about opportunity costs and those fixed costs for depreciation. So if you took those values down to zero these values wouldn't look quite as scary as they do now. So that's why these tools are nice because you can adjust them for your specific operations but it can also raise some red flags when thinking about whether or not this is really the best use of your resources. So, don't freak out about those numbers too much I would suggest that you put your own numbers into this tool. So what does that profit or income reported really mean? So there's lots of other tools that are out there that you can use. So I've got some links in the slides here for budgets that are available through Kansas State University and through Iowa State University, but not all enterprise budgets are budgets that are out there are created equally. So you need to pay attention to see what type of costs are accounted for and whether they've included opportunity cost or not in their calculations. So if opportunity costs are included so you see entries for unpaid labor for the value of your land and for the value of your capital that you're using in your business then that has probably calculating economic profit. Other budgets won't include costs for those. And they'll report the number as returns to unpaid labor, management and land. So essentially that value is whatever money you have left over other, whatever profit you have left over to pay for any of your unpaid factors. So what's weird about these is there's not a correct way to do them. There's lots of opinions out there, but the big thing is that you understand what that very bottom line is that it's actually calculating. So just be careful about what costs are included and non-included in different enterprise budgets that you might look at. So the tool can be used to help you with breakeven analysis. And I knew this was a very valuable part of these tools. So you can either calculate a breakeven purchase price. So how much could you purchase that feeder steer for and just cover all of your based on your assumed output price and cover all of your other costs and the break even sales price. So how much do I need to get for this final finished animal given all of my other costs? So on both of these it's just getting you to that breakeven point. So in the first one the breakeven purchase price you're gonna, the tool will help you calculate that breakeven purchase price. And if the feeder steer prices currently on the market is greater than your projected breakeven price, right then you would lose money. You would have negative profit if you purchased that feeder steer. And then the opposite is true. So if the feeder steer price that was currently offered was less than breakeven, then you would potentially make a positive profit. And then on the breakeven sales price I think this is the easier one to think about. If your fed steer price is greater than breakeven then, that means that you're gonna make a profit. So any value over that breakeven fed steer price would be money in the bank. The other useful part of this particular enterprise budget tool is that we put in a section for a sensitivity analysis. So this is important because we make a lot of assumptions in these enterprise budget tools, right? We're trying to forecast forward. So what happens if I'm off by 5% in my fed steer price projection, or in my feed costs how is that gonna impact my profitability? So in this feedlot budget tab, if you scroll over all the way to the right hand side there's a spot for you to say, well what happens if I was wrong in my assumptions? How is that going to impact my profitability? So you can put in some of those different situations to see if you're off a little bit and it'll tell you what the change in economic profitability would be based on that percentage change. So here I just put in a 2% change in my final finished weight and it told me what my difference in economic profitability would be if I finished those steers two percentage points, higher for final weight. So you can use the sensitivity analysis to answer lots of different questions about feed costs or yardage costs or if my feed to gain ratio increases for example. So some big takeaways here before we transition over to Dr. Corey Clark is that enterprise budgets are useful to help you project your economic profitability for your single enterprise moving forward, right? So we're not talking about whole farm analysis right now or your whole operation. We're just focused in on your single feedlot enterprise. And these enterprise budgets are gonna take opportunity costs into account. One important consideration with enterprise budgets. I don't know if you've ever heard this phrase before garbage in garbage out but these enterprise budget tools are only as useful as the information that you put in, right? So your specific farm numbers are gonna be a lot more valuable for decision-making than the numbers that I put in that represents averages across the state, or maybe even across the region. So enterprise budgets we can use them for breakeven analysis which can be very useful as well as a sensitivity analysis under potential different scenarios. So I'll go ahead and we can transition over to Corey unless Jerad, did you wanna take questions now or you wanna just hold questions to the end. - Let's hold questions until the end. We'll let Corey go and then we'll get all the questions at the end. - Sounds great. - Okay. - Okay you can hear me? Awesome. Okay so my end of the talk is let me put on the presentation mode. All right. So my end of the talk is the financial analysis side and Melissa did a really great job presenting her nice detailed enterprise analysis breakeven prices perspective and so I took a little more like conceptual view or a little more of the big picture view with this. Sorry, I just checked the chat. So I looked at this more from a financial story standpoint so I'm not hitting a lot of numbers. I'm not even hitting a lot of terms, very hard. There's a lot to talk about in terms of financial analysis. There's a lot of terminology to throw around. It's everywhere. We are talking about cost of production but I wanna provide some background for like how all this stuff fits together with the whole farm financial analysis. And then, you know, and then as we break it down into an enterprise, like a feedlot. Okay so with the enterprise budget puts together the five tabs of the enterprise budget put together puzzle. They tell the story about how production and all the aspects of production you're feeding your cattle. You're doing all these things every day and how that translates to financial performance so that the enterprise budget looks at the details of feed and your different costs and then puts them into an income statement. It comes up with economic profit and some breakevens and a lot of stuff about financial performance as well as all the connections in between all those numbers are connected in some way. And it's painting the picture essentially painting a picture in numbers. And that's a really important picture, and it's a intricate picture and it's a big puzzle with a lot of pieces but it's also that puzzle is part of the bigger farms financial picture. So I put it in here also the balance sheet. So how much working capital you have how much debt you have, your debt to asset ratio and all those kinds of things are in your financial situation. And that's not in the enterprise budget. And then we have another document. The other document, the income statement, which we can look at as a production year accrual adjusted income statement or we can look at taxes on a calendar year but the income statement is kind of another piece of the documents and the numbers that tell this story. So the income statement, you know, we prepare that a lot of this is financial reporting, right? The income statement is taxes for tax preparation. Our tax records for tax preparation, the balance sheet lenders want a balance sheet or do a balance sheet or you bring them to or a balance sheet to your lender. And then you do the enterprise budget for your own production, cost of production and looking at your breakeven prices. But they actually, again, they all tie together into one story. This is just the two documents that we look at for history but the enterprise budgets plan forward. So we have a past financial story, which is what's in the income statement and balance sheet and the story that they tell. We have a financial plan which is the direction that the farm has been going. And then also with enterprise budgets looking forward as well as what it's gonna do from a whole farm standpoint, and then the records that you would want to have behind that. Okay. So the first thing I wanna talk about a little bit is the financial performance piece of the story, because there's two pieces, right? There's financial, or the way I've got set up here. There's two pieces of the financial performance piece and the financial situation piece in terms of the story going backwards. And the profitability piece, Melissa talked a lot about economic profit and economic profit like she said, that includes depreciation and includes opportunity costs both of which are non-cash costs. And ultimately profitability is telling us when we look at it from an economic profit standpoint, it's telling us is this worth it? Is it worth it for my time which is incorporated into the opportunity cost? Is it worth it my asset is it worth my asset investment? Is it worth all the things, all the resources I'm pouring into this farm is the farm generating the profit to make this worth all those resources. And of course the components of, you know, the cash that you're taking in as revenues, the cash that you're spending out as expenses those are kind of the fundamentals of profitability. And then of course depreciation and economic opportunity costs. But the cash part flows into a second piece which is the cashflow sufficiency which is the much more practical like survival level type stuff can the farm pay the bills? And which is really the bigger question is on an annual or production cycle standpoint is does the farm's production meet its cash needs. And so that's not just coming up with, you know, profit it's also paying for debt. It's also buying assets and it's also supporting your family and there's breakevens for all this stuff. So we'll incorporate the breakeven thing kind of towards the end, but I want to go back a second and compare the economic profit that we talk about like in an enterprise budget, 'cause enterprise budgets particularly as the universities put them together and the economists to assemble them, is an economic profit is what they're measuring. So cash revenues, which we're all used to, you know what you deposit in the bank account, the variable costs like Melissa was talking about variable costs. Like the more you produce, the more they cost fixed costs. As long as you're operating, you gotta pay them but they incorporate the non-cash costs. They incorporate the opportunity cost and they incorporate the depreciation. The opportunity cost in particular is kind of subjective. So like, what would you be? What would your labor be worth if you weren't using it for the farm, what is it worth to replace it? Or what would you wanna be doing or what would be your next best opportunity? Opportunity costs are kind of subjective. They're important and they're a big question of, I mean you're valuing the resources you're putting into the farm. So it's a real big element of is it worth the resources I'm putting it into the farm but of course it's not a cash cost same thing with depreciation you're putting a value on using up your assets, but it's not something you're paying out every production cycle. It's a measure of what you've purchased over time and how that's being used up in the production cycle to get us to economic profit. In contrast, the cash operating profit is this is usually a lot. This is more likely to be what we talk about when we're talking about profit. I'm thinking of this on a production year basis. So production cycle, but you know annualized kind of the average per day stuff for but again for a year, not the calendar year tax type stuff that is very much manageable. Like you would manage cashflow around the calendar year but production year is really what is your farm bringing in on a production cycle? And what is going out in the actual again, actual cash. And this is when people do cost of production. When farmers do cost to production this is usually the number when analyzing it and doing financial analysis. This is usually what we're looking at and this is different than economic profit. And the reason it's different from economic profit is I mean, the non-cash costs aren't in it but also it has a different purpose. The cash operating profit really its job is to supply the business with the funds it needs to support three things to support debt to make the debt payments, to support family living and taxes and to reinvest assets to reinvest in the assets of the farm. So you're like you're paying funds to purchase new assets to keep the farm going to grow to repair, you know build a building or equipment or whatever the cash operating profit. It can only go to those three places. It's a closed system. Money goes into those things or money comes out of those things. But profits got to support all of those three things it's like a pie chart because that's the only places cash operating profit can go. And the idea is that there should be balance. If there is sufficient cash flow then this pie chart is balanced in some way that meets your particular goals. I was talking about how like opportunity costs are kind of subjective. Well, what this balance should be is kind of subjective and kind of personal, like how much debt do you have? How much debt do you want? How much money does the family want out of the farm or need out of the farm, the size of this pie and how it's divided is really a balance is kind of the overarching goal. But what that balance looks like on every farm is a little bit different but the idea is cash operating profit supplies that so what happens when there's not enough cash flow? Well, the first thing that happens is that green arrow becomes kind of a both ways kind of arrow. If there's not enough cash operating profit, there's not it's not supplying all of debt payment family living and taxes and asset investment. And so something else is supplying something else. And what I see most commonly is that there's not enough cash operating profit to support the family at the, whatever the goals are of the family and pay all debt payments that are necessary and buy some assets that are necessary for the business. And so extra money is getting borrowed to meet those annual requirements or the family is putting money back into the farm to meet the annual requirements. So these little, the little arrows are just kind of this interplay between the three is not near ends up not being nearly as neat as cash operating profit goes to these three things. And, you know, in some proportion everything starts to kind of have interplay in something supporting something else and the worst case is when, and this happens the worst case is when those three things are having to fill a hole that because there's negative cash operating profit. And it's not that like this happens on every farm has happened sometimes. But if this has happened year after year it's literally a cash hole and that money has to come from somewhere. So when cash operating profit is insufficient the holes gotta be filled. And this is an analysis I do with farms. We take all those numbers and all those tax numbers. And this isn't just a picture. This is actual numbers that we put to things every year and take a look at is this what is happening on this farm? Is it the nice sufficient cash flow where it's, you know cash operating profit is supporting these things or do we have something supporting something else or are we generating in our cash hole every year that we're having to fill with probably debt, most likely. 'Cause then debt builds up over time and the next thing you know, you're, you know got a lot deeper set of debt payments and bigger cash requirement needs every year. And so catching this early is really helpful because one of the things that changes over time is the financial situation. So we're going to talk about, you know the liquidity and solvency stuff but how that financial situation changes over time can be explained a lot by the financial performance in both profitability and also in cashflow sufficiency. So from a financial situation standpoint we're talking about liquidity. So what is the cash cushion? And this, when the cash when there is sufficient cash operating profit to meet all those needs, the cash cushion builds up over time. And then in a bad year, working capital is there it's one of the assets. That's the, you know, the current the liquid current asset that is available to buffer whatever cash operating profit isn't there for all of the cash needs. And that liquidity is building up over time. If things are generally sufficient that liquidity is building up over time. And the other part of the financial situation is solvency or the equity foundation. You know, what is the balance of debt and equity in the business? How much of your assets you have debt to asset ratio, right? Much of your assets are accounted for with debt. That's of course, critical for financing. The lender cares a lot about your equity position and your collateral also important for your, you know as you're building up equity over time and your long-term net worth. And again, if the financial performance is happening over time, these things and the cashflow is sufficient to pay the debts and pay it off every year and buy new assets and grow the business that stuff both liquidity and solvency are building up and going in a positive direction over time. Okay. So that's kind of the history part kind of how this is all happening over time brings us up to like right now, right? And then the financial planning is going forward. And the enterprise budgets are really a part of financial planning. They're part of annual production is profitable. They really tell us a lot about is annual production profitable. And then we also have cashflow is sufficient with a good plan, cashflow sufficient with a good plan. The financial situation is stable and it's improving. So again, annual production is profitable. We're talking about over your economic cost of production generating an economic profit, that kind of thing which ultimately means it's worth your you have come up with numbers that say this is worth your time and investment. And the enterprise budget, as we saw that's a tool to evaluate the profitability of production come up with breakeven prices for cost of production and plan all of the production, things that go along with farming, with a feedlot, with any kind of farming, really, but specifically cattle farming. Okay so the breakeven prices, there's a breakeven price for all three of those sections. The cost of production that has done the enterprise budgets is the profitability breakeven. So that's giving you a, if you hit your breakeven price for your sales breakeven price. You come out with zero economic profit, which is, you know in the economist world that's well we're talking about with cost of production. The term cost of production gets used to mean a lot of different things, but that's kind of where we're at with especially with the enterprise budget, that's where we're at cost to production wise. The cash flow breakeven is what does it take sales price wise, or purchase price wise to make sure that all of those cash needs are gonna be met by the production of the farm? And what I see gets tossed around a lot is we're talking about a cash, The cost of production gets called, the cost of production is really a cashflow breakeven that doesn't account for the extra stuff, the debt, the family living, the assets. So we haven't incorporated the non-cash costs but we also haven't incorporated the cashflow requirements of the farm in terms of, you know, debt asset, and debt and family living and taxes in particular. Cash flow, a good cash flow breakeven accommodates both of those. And then the net worth breakeven is very much related to those. It's just what sales price is required to maintain your net worth. - So the second part of a good plan is sufficient cashflow kind of like we talked about farm can pay the bills, can pay the bills on a regular basis, but also builds a cash cushion because it's meeting the needs of the business. And then finally the financial situation is stable and improving. And if all that stuff is happening and the financial situation should be stable and improving building, working capital the farm equity would be increasing. So, in thinking about this from a financial analysis standpoint a whole farm type financial analysis standpoint there are actually as you saw from the enterprise budget, but also from if you look at your, you know if you do your income statement, you have your taxes your balance sheets, whatever these numbers translate into what is your financial story? And where's it going? How does that have to change in order for you to get where you want to go and what information from a record standpoint that you're maintaining over time and, you know, spending time with whether you want to or not, what information do you need from those financial records to tell you what you need to know? So, we can look at levels of information, the level, one is like the level one financial records are like I'm doing what I need to, to get my taxes filed. I'm doing what I need to get the money borrowed I need. So like level one is kind of required. It's, you know, you have to, and there's you know, you could, there's better and worse. There's different ways of keeping tax records. There's different ways of doing a balance sheets. This can be on paper, it can be in software. There's a variety of ways to do this. The difference with going to like management analysis records like financial analysis type stuff is that everything matches up the reconciled and it matches how much cash at the beginning of the year with how much cash you had at the end of the year, what your inventories were what your feed was, all that stuff, reconciles. And then it's just also adjusted for a production year. And then we get into level three is to break that down to enterprises. And usually, and one hand you can use your like whole farm records and break everything down or you can use like the enterprise budget and the records your financial records and your production records to split things into enterprises and divide things into profit centers to get to cost of production and the trends. And of course, I'd be remiss if I didn't, you know, mention that we do have programs, we have educational programs extension does that works with all of this stuff. The Telefarm program provides some different kinds support for different kinds of software and accounting systems within those types of software. We do PC Mars and we're starting to do QuickBooks to get primarily level one records, but then we work with you to get the level two records with the management analysis because we have a benchmarking program where we analyze both the financial performance and the financial situation stuff. And all of those things that I, you know looked at from a big picture level and drew pretty pictures of they're actually your numbers. And we actually look at what those actual numbers are for a farm level and also from an enterprise level and then compare those to a database of lots of farms and right now we actually don't have a lot of beef farms, we don't have feedlots. We don't have a lot in our Michigan database. We ended up having to do some we can do some good comparison with numbers that we've got, but, you know eventually having a database of a nice anonymous database that we can use to benchmark feedlots would be really cool. And there's a civil right slide. And it probably is time now to open up for questions. - Okay so I know that Charlie I think said that he had a question so we'll go ahead and start with Charlie's question and then we can address these ones in the chat. - [Charlie] Can you hear me? Because of the Sugar Beet Disaster Program last year I had to get crop insurance for my sugar beets. And one of the guys who came down to talk to us talked about how they have remodeled not the dairy margin feed, the insurance program, but they've also remodeled the Livestock Feed Protection Program. And he wasn't quite sure yet he brought me some numbers and some stuff from it but do you guys know anyone who has been in that and can you get your premiums back and is a good way to make money? Not necessarily make money, but to protect yourself or he said that the past program was just a complete waste of time and money for the producers. What is you guy's research show about that? - Okay, Charlie, thanks for your question. I have not personally been up on what's going on with the Livestock Risk Management Programs. I know that Frank Wardynski within MSU extension has been doing some research on that. So I can talk to Frank and see if maybe he would be able to be a little bit more helpful. I'm not up to snuff enough to answer questions on that program, but I do know a couple of people I can put you in contact with Jeannine or Jerad or Corey, have you had any experience? I know that Frank is also a cattle producer himself and he has been using the program. So he would probably be your best bet for who to talk to he's up in the UP, but he's a good resource for that. So that's who I can get you in contact with him Charlie. I'm sure Jeannine or Jerad has your email address. - [Charlie] Okay. - Sorry I'm not more help on that but I don't wanna put my foot in my mouth. Okay what other questions did we have that came in? Yeah so I think there was some general chat in here about like unforeseen costs. I think it's Arpitino can you maybe clarify some of your comments that you put into the chat? You're still muted if you're chatting to us I can't hear you. Nope. There was some general discussion about like let's see. Definitely questions in here about like unforeseen costs that can come up and how to account for your labor. So I know that we have parts of the enterprise budget tool where you can look at different costs for your labor. And then there was also some questions in here about depreciation and equipment. So with your depreciation, there's a part in the enterprise budget tool where you can enter in maybe you're looking at building a new building. And so you could go in and calculate what that potential building might cost, and then what your annual straight line depreciation would be and see how that would impact your potential profitability forecast. So you could do that with equipment. I know some of us get the itch to get shiny paint at the end of the year. So you can look at different trade-offs there with your equipment costs as well. So you can use those enterprise budget tools when you're looking at those different types of decisions that you might have to make as a farm manager. Are there any other comments that I missed in the chat? Corey, did you see any others or Jeannine, Jerad? - I run cow/calf to finish. How would these numbers how could I plug numbers into this document? - Yeah, that's a great question. So generally we would consider each of those different stages to be different enterprises. So your cow/calf enterprise would be separate from your feedlot enterprise and some people even break it down and have their stockers separate as well. So just like if you are, do grow corn and you feed that to your feeder animals that would be two different enterprises 'cause what happens sometimes is people are really good at growing corn and not so good at raising feed or I mean raising cattle. And maybe they should actually just be raising feed Right? So with these enterprise budgets what you wanna do is it's almost like one enterprise buys those assets from the other enterprise. So if you grow your, if you have their cow/calf operation you would sell those calves to your feedlot. So you would wanna put in whatever the fair market value is that you could get those calves for into the feedlot enterprise budget. Does that make sense? You're, still muted, but that's the general idea. So like, if you raise your own corn you don't put in your cost of production for your corn you put in whatever you could have sold that corn to somebody else for. - Okay yeah thank you. That's awesome. - And there is even more detailed cow/calf budget that I've worked on the MSU website as well. And so with that one I have all kinds of information to help you calculate your fixed costs like even how many miles of fence do you have to help you calculate your depreciation on your fences? So there was a big grazing project I was on in the Southeast and we worked on putting that tool together. So there are budgets out there for most commodities. And so you, the big thing the one thing that gets a little tricky when you're looking at doing multiple if you have multiple enterprise budgets is thinking about how do you allocate some of those fixed costs? So I have a tractor and I might use that tractor for all of my enterprises. So what you need to do, is do some swagging, some scientific wild guessing, and you put a percentage so maybe you would say 50% that time I'm using the tractor for my feedlot. So then you would allocate 50% of that cost to your feedlot. - Okay could that link be sent to me? - Yeah, sure thing. I'll see if I can Google it here really quick and I can put it in the chat. - Okay thank you. - Are there any other questions tonight? You can still type questions into the chat or you can unmute yourself and speak. - [Charlie] I guess I have one more question. What do you guys think corn and distillers prices are gonna do kind of, I mean even if you don't know exactly what they are gonna do will cattle prices keep up with them or do you think that cattle prices will not keep up with them? - Jerad, do you have any comments on that I saw you unmuted yourself. - Yeah, it looks like a lot of the reports or even in the futures, it looks like a lot of your feed prices like you were talking corn and distillers or we're gonna see some increases in those prices. It's hard to say how the cattle markets are gonna respond if they're gonna follow suit right away or if there's going to be a delay but usually they follow suit eventually just so that the markets stay afloat. So it'll be interesting to see. And that's about the best answer I can give you right now. I also wanted to say that Melissa got that link in the chat. I also posted a link to a survey if you guys would be so kind after we're done here with this presentation if you wouldn't mind taking a look at that and filling that up, survey out, asking you a few questions and you can submit that that'd be great and very helpful. - There is another comment and question in the chat, I would like to itemize the spreadsheet, which you'll be sending it out. So for those that didn't hear that when Melissa said, Jerad will be sending out the Excel work tool to all registered participants, but yes, there's people at MSU extension that can help put the feed prices in based on right rations and such. Jerad should he contact you? - Yes, yeah. Yeah if you'd like some help with that, just contact me and we can get together or something like that and talk through it or work through it. So yep. - Yeah awesome and what Corey was mentioning with MSU Telefarm is if you enroll in the MSU Telefarm program, it's a full record. Corey has much more details on this than I do but it's a full record keeping system. They help you get your records on an electronic system. And then at the end of the year, they work with you to look at your financial analysis to see how you're doing on all of those different measures that Corey talked to you about. And once you're in that system over a few years it's really neat because you can do a historical look back and see how your financial situation has changed over time. So it's even much more detailed than just doing these budgets but it's looking at your whole farm profitability over time. So it's a really neat system that does provide a lot of extra assistance and they can help you with putting your schedule together too to take to your accountant and get ready for your taxes. So it's a nice system for sure but even if you're just interested in using these budgets, Jerad and I can help you with those too. - Awesome Melissa. - Thank you. - My only comment is I'd really wanna thank everybody for their time this evening. It's great information. I started with four I'm up to 28. So I'm needing to springboard some financing here. So I need to find out how I can do that and still be profitable. So thank you. - Awesome I'm glad you're gonna hopefully be able to use some of the tools that we've given you tonight. - Yes thank you. - If you come up with any other questions, feel free to keep entering them in. It looks like we just got one actually. - Okay so Dave asked a question, it says is this information appropriate for a small farm to table setup? So I'm setting up this year with a barn, fencing, and a few head. So what information do I need and where can I access it? So, Dave, are you talking about doing a complete calf all the way up to slaughter and then selling beef on your own direct to consumers? Okay. So this specific tool is set up just for the feedlot portion. So I'm not sure if there's other tools that are out there that can do the complete farm to table set up but one way you might be able to utilize this would be to put in the, you would have to probably add in some more information to account for your harvest cost and things like that. 'Cause this tool doesn't go through the whole production cycle, but the concept here is directly applicable. And if you are skilled in Excel you could probably make a customized one or maybe we can look to find you one online somewhere. I haven't come across one but I haven't searched for one either, but for prices we can help you find, Oh Jeannine just put a link there in the chat. - Yeah I don't have one that does the whole aspect of it but it does a very, at the top. I have a meat marketing one that is on a per head basis. And so it helps at least capture your costs of the animal. And so you could lump them in together. It wouldn't be as detailed as what Melissa went into tonight, but it works for pricing freezer beef where we haven't gotten to the individual cuts yet. - Yeah but for prices if you have questions about prices, Jerad and I can try to help you find some of those. We also, a lot of the local elevators will post grain prices and things like that online. So some quick Google searches can help you find some of those costs and input costs that you might have. They might not be perfect. Yeah Corey. - Just from like if you get some help customizing some of this analysis and individual assistance, we have, we'll have the MSU programs, the MSU extension programs but also we are part of a grant that lets us spend time working with individual producers on this analysis stuff and the planning stuff and figure out some of these things when your farm doesn't quite fit the tools that are out there or needs to use a number of different tools together to get a full picture. - That's a great point. We just recently got that grant. So I had forgotten about it. I'm excited about the opportunities that we're gonna be able to use those grant funds for, good point Corey. - Just for Dave that asked that question because that's exactly what I'm doing is I'm working with Michigan to get USDA inspected so I can sell off my farm from cow/calf to slaughter. - Yeah so in that process you would work with several MSU extension specialists. - That's correct. Yes. - Yep so like I work on the meat side on the end of it and others will work. Yep. - Right? Oh yeah Jeannine just put another freezer beef worksheet in the chat. Are there any other questions? - While we're waiting for questions. I just wanna make a few announcements. The previous two sessions, session one that was on introduction to dairy crossbred beef and session two that was on tips for raising dairy calves. Those previous recordings are up on the beef team website. You can find those under the videos tab. If you guys are interested, we also have two sessions left in the Feedlot Educational Series. Our next session will be in March it's the second Wednesday so that will be the 10th. So if you're interested, the next topic will be on pricing distillers and seeing if it fits in your ration. And so if you're interested in that, it looks like we had a few people talk or are interested in that and are talking about that already tonight. We'll be taking a look at that and we'll be able to discuss that a little bit further. And then our last presentation we'll be looking a little bit at facility designs and how they can affect animal performance in the feedlot. So if you're interested in that stay tuned we have those upcoming. So we hope to see you guys again. - And Jerad are those all online? - Yes right now, all those series will be or all those presentations will be through a Zoom meeting similar to this one and the past ones. So we will try to get those recorded as well. - And I put the link to the beef team website where the videos can be found in the chat. - Thank you. - Any other questions? - Where was the survey located? - We have it in the chat let's see. I can see if I can get it reposted. Okay I just re-posted the survey in the chat. So you should be able to click on it and follow it to participate in that. - All right if there's no more questions I'm gonna stop the recording. - Thank you everyone.