Online tools available for budget considerations when implementing changesWritten by Natasha Wheeler
Being a low-cost producer doesn’t necessarily translate to being a high-profit producer, according to Bridger Feuz, profitable and sustainable systems educator at the University of Wyoming.
“Ag is generally a fairly tight-margin business, which means we have to do things right each year,” he says.
Changes in an operation that end up being mistakes can cause big financial setbacks, which may take quite a while to recover from.
“Trying to avoid some of those mistakes is one reason to do an economic analysis,” Feuz remarks.
Making large changes on an operation oftentimes involves borrowing funds upfront as well, and an economic analysis may be a useful tool when speaking to a bank or loan officer.
“Ag has a healthy dose of skepticism,” Feuz comments. “Our immediate reaction is that something new isn’t going to work on our place. It may or may not, but we probably ought to do some analysis in terms of our resource base and economics to figure it out.”
A number of different tools are available to producers, and there are also different ways to look at the numbers.
“We can use a whole farm budget or an enterprise budget,” Feuz states as an example.
When considering budgets, he warns producers about getting too focused on one line item and ignoring the big picture. Simply adjusting a yield on paper to see higher profits doesn’t necessarily reflect the costs that go into creating that higher yield.
Wyoming Ranch Tools
Wyoming Ranch Tools is a website designed and maintained by Feuz to provide tools for ranchers to utilize in assessing these decisions. It contains a number of different economic calculators and can be found at uwyoextension.org/ranchtools.
“We can’t go out on a producer’s operation and tell them how to grow hay. We can’t tell them how to grow cattle better than they already do. They know their resources better than us. We don’t want to make producers’ decisions for them, so we’ve focused on building tools to help make better decisions,” Feuz explains.
University research and data can contribute to better practices on a farm and ranch, but the ultimate results are specific to the operation.
The Partial Budget Tool can be used to help decide if it’s better to sell calves or yearlings, retain ownership of heifers or how to manage cull cows. It can also be used to decide if it’s more economical to put up hay or purchase it.
“The nice thing about this tool is that it’s not that much different than scratching it out on paper and trying to make these decisions. It just asks us to do it in a systematic fashion so that we make better budgeting decisions,” he comments.
Feuz continues, “We are pretty good at figuring out how much money we are going to make, but it’s all the hidden costs that we forget to account for.”
The Partial Budget Tool helps producers address four questions – what additional costs will be incurred, what current income will be lost or reduced, what new additional income will be received and what current costs will be reduced or eliminated?
“The reason this is powerful is that it forces us to calculate numbers before we start netting things out in our heads. When we net things out in our heads, we forget things and mess up,” he explains.
To keep information organized when using the tool, gold boxes are used for numbers the producer needs to enter and brown boxes are used for numbers the tool calculates. The producer enters their data and works through the sheet to determine where profits may be gained or lost.
“If a specific change comes out at $7.50 an acre for an improvement, but we have to buy a new tractor and take out a whole bunch of additional risk, will it be worth the $7.50 an acre? Maybe or maybe not. A positive number doesn’t always mean we make the change,” Feuz warns.
A producer might not want to forgo a project that has a negative number either if there are other circumstances to consider.
“Maybe we are trying to bring in the next generation, we’re making a change for our operation because we are allowing our next generation to understand some management skills or we’ve created a niche market for them,” he presents as an example.
Goals, resources and management of an operation will ultimately determine which changes are the most beneficial, but Feuz encourages producers to consider the economic impacts of their actions.
“Let’s maximize production or efficiency, but let’s think about that with the economics,” he says.