Hello and Good Evening from beautiful Northern Nevada. Due to scheduling conflicts the farmer interview for today will be rescheduled for next week. Since I am right in the middle of helping a friend with his five year farm plan and budget; I thought I would seek out some advice on what works for each of you. Therefore, today’s post is going to include more questions than answers.
The farmer and rancher interviews have been excellent. I have learned a lot from them about hard work, patience, persistence and always being honest. I have also learned that by exercising these attributes that things will always work out. Even though these attributes are critical, farmers still must use good financial tools to ensure they are maximizing their net return. This was the basis for the breakeven point analysis from a few posts ago. One of my hopes is to help people sharpen these financial skills.
Due to the limited markets and climate I always knew what was going to be produced on the farm. I knew how many cows would be milked, acres of potatoes, wheat and alfalfa that would be planted. However, on my friend’s farm, due to his moderate climate, rich soils, abundant water availability and being close to markets he has many different crop options. This created a “cool” wrinkle to try and find and plant the crops with the highest net return. My recommendation was to put together a five year crop rotation plan with the current contracts. Next, identify how many available acres are not under contract. Once he knows the number of available acres, he can put together crop enterprise budgets for each possible crop.
The enterprise budgets create a certain dilemma because we do not know what the sales price will be for these crops in the future years. In order to figure out at least an idea, I took the lowest possible sales price, the highest possible sales price, the projected yield, the total operating expenses, overheads and calculated the estimated net return. The table below is an example of soft-white wheat. The costs are just ball-park and not actual.
From here the potential break-even point for both cash and non cash overheads can easily be known. Is there a better way to forecast these sales prices when selling into an open market? What works for you? Will this just create analysis paralysis?
The expense side of the enterprise budgets were straight forward, take into consideration what the historical costs have been and add in an escalator factor for the cost of inflation. The other problem was if the overheads are being allocated correctly. But, that will be a topic for another day.
Please feel free to comment on the blog, any advice will be greatly appreciated.
WORK HARD, BE PATIENT, NEVER QUIT, ALWAYS BE HONEST, and HAVE FUN!