Feuz discusses strategy tools producers can use during Master Hay Growers
Casper – The University of Wyoming held a Master Hay Growers session Feb. 6 in Casper. The session was held to help hay producers use the strategy tools of partial budgeting and net present value (NPV) to determine the need of making changes to an operation.
“Agriculturalists have a healthy dose of skepticism,” said UW Extension Educator Bridger Feuz, “which is a good thing, but producers can’t be so skeptical that they aren’t willing to look at these tools and analyze new opportunities for their operation.”
Changes that producers want or need to make to their operations require the assistance from a banker most of the time. Partial budgets and NPV are handy tools producers can use to convince a banker.
“It forces producers to ask themselves questions in terms of what they are giving up and what they are getting in return for making those changes,” explained Feuz.
“Our goal with this analysis is to determine if producers are going to be better or worse off with the changes they are thinking about making to their operation and if they will be making more or less money,” said Feuz.
Feuz explained that partial budgeting is very useful in terms of intermediate term analysis and can be used to answer questions on whether a producer should fertilize a certain year or change from making square bales to round bales, for example.
“A farmer or rancher who really concentrates on their budget and focuses on those issues is, in general, a profitable operation,” explained Feuz, “but there’s data that would suggest, at least in the beef industry, that there are a few things people would invest in to generate more profit than those producers who aren’t making investments.”
Investments producers could make include incorporating new genetics to their herds and making improvements to ranges and pastures.
In general, investments drive profits in farming and ranching operations, and the input costs of buying more fertilizer and herbicide can certainly help an operation. However, those benefits are not always additive.
Questions to answer
“There’s nothing magical about partial budgeting, other than it forces producers to answer these questions individually and forces them to not net plan in their head,” said Feuz, “which leads to them missing important data and usually not getting answers as correct as they should be.”
Questions that need to be asked for a partial budget include what new or additional costs will be incurred based on this change and what current income will be lost or reduced.
Feuz also said producers should ask what new or additional income will be received and what current cost will be reduced or eliminated.
When creating a partial budget, it is important to only include costs that will actually be incurred.
For instance, costs to consider include those incurred if an employee needs to be hired or if a producer has to work fewer hours at an off-farm income job. It does not count if the producer has to work longer days on the operation.
A partial budget is not meant to be a final financial statement. Rather, it only accounts for potential costs and returns associated with the change to an operation.
It is to be used as a tool by the producer for the decision making process. Partial budgets can help decide if changes warrant the extra money, time and effort that would be put into an operation.
The end value of a partial budget can be either a positive or negative, and it provides a good framework for making decisions.
“Even a slightly negative number would be interesting to producers,” said Feuz, “because they have a real ownership in the cattle that they have developed. They might rather keep their own cattle and even sustain a small loss so that in four years they will still have their herd in place.”
Net present value
For bigger investments to an operation Feuz suggests using NPV to determine if the investment is necessary or not.
Investments add risk to future income due to that income is not guaranteed, meaning they aren’t worth as much as today’s present value of money.
A producer could use that same capital that they are investing towards the need or cost for something else. This is especially important if that producer has to borrow the capital.
“The NPV helps with using an interest rate and discount rate to figure out how much money those future revenue sources are worth to producers in today’s dollars,” said Feuz.
Producers enter the investment costs, interest rate, annual cost and revenue for the proposed investment, and the NPV tool calculates a value for where the producer stands at in five years, 10 years, 15 years and a breakeven year.
Most agricultural investments last for 15 years, whereas with other businesses they would only have a NPV for five to seven years.
“There’s no right or wrong answer when using these tools,” explained Feuz. “They can help producers with the decision making process of whether or not to make a change to their operations.”
For more information about all of the presentations presented during the Master Hay Growers course, visit RightRisk.org/presentations.