Crop Enterprise Budgets

Agricultural operations are currently facing challenges due to the rising costs of inputs and stagnant output prices. To secure farm profitability, it is crucial to carefully assess expenses and revenues. Washington State University offers resources, such as tailored enterprise budgets, to guide producers in making informed decisions.

How to use enterprise budgets?

Enterprise budgets help farm management decisions. For example, projecting higher chemical costs prompts cost reduction exploration. Similarly, identifying high equipment depreciation may lead to selling underutilized machinery. Enterprise budgets can help you determine if the prices offered for your product will return a profit or a loss.

Structure of enterprise budgets

Enterprise budgets present returns and costs. Total or gross returns, which are price times yield, are usually presented first. In WSU tree fruit crop budgets, we include the prices negotiated by the packinghouse on behalf of the grower. In other words, these are not the prices received by the growers, it is the price received by the packinghouse. We include the packinghouse charges as a variable cost. In other WSU specialty crop budgets, farm-gate prices are used, which are prices received by farmers for their crops.

Costs include variable costs and fixed costs. Variable costs are those expenses that only occur when production happens. Examples of variable costs include, but are not limited to: hired labor, chemicals, trees/plants, fertilizers, fuel, lube, etc. Fixed costs are those costs that need to be paid even if there were no production. Examples of fixed costs include, but are not limited to: depreciation, interest cost on fixed capital, taxes, crop and property insurance.

Interpreting profits

Profits are the difference between total returns and total costs. There are different ways to look at profits. Accounting profit is the difference between total returns and cash costs, often calculated with the guidance of your accountant. Economic profit is the difference between total returns and total production costs, which include the accounting costs, depreciation of fixed capital (except land) and opportunity costs. Opportunity costs denote the potential revenue foregone when opting to invest in your business line (in WSU budgets, it is a block within your whole agricultural operation). If your economic profits are greater than zero, it means that you are maximizing your profits by allocating your money in that business line. In the WSU enterprise budgets, opportunity costs include management labor, interest costs on land, machinery, equipment, irrigation and trellis systems, and capital amortization.

Sensitivity analyses

Enterprise budgets can be used for planning of future plantings and as such depend on assumptions. Therefore, it is essential to evaluate the impact of varying assumptions on your projected profitability. WSU enterprise budgets include different profitability forecasts to different output prices and yields. WSU enterprise budgets also include break-even analyses to understand the minimum price required to cover different types of costs: variable costs, cash costs, and cash costs plus opportunity costs.

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