oklahoma state university department of agricultural economics oklahoma state university

Agricultural Economics for High School Ag Classrooms

Oklahoma State UniversityDepartment of Agricultural Economics

Oklahoma State University

Increase the instruction of agricultural economics in Oklahoma high schools

Extend the skill set of high school ag teachers

Increase high school students (future ag producers and business leaders) knowledge of agricultural economics◦ By extension, reach their parents

Increase interest in agricultural economics degrees and courses

Objectives


This is the first of a series of continuing education opportunities for high school ag educators

Over next two years, we are committed to offering curricula and training to at least 250 high school ag teachers◦ Obligated under two federal grants

We will be delivering annual, on-campus in-services each summer◦ Series of modules to be used in high schools

Agricultural Economics Faculty:Our commitment


Budgeting!◦ If a business plan does not work on paper, it will

NOT work in practice Tools

◦ Enterprise budgeting (covered here)◦ Cashflow budgeting (covered here)◦ Partial budgeting◦ Whole farm budgeting◦ Capital budgeting◦ Projected financial statements

Balance sheets (covered here)

Farm business planning: overview


A budget is a forecast◦ It is forward looking

A statement is a historical document◦ Looks back in time◦ Or, is a snapshot of the current situation

This module will look at BUDGETING◦ The basis of farm business planning

Also introduce the basics of Ag. Law◦ What does every farmer/rancher need to know?

Budgets versus Statements


All documents are provided on CD◦ Includes the case study and problem sets + keys

This PowerPoint is on the CD◦ Cut-n-paste as needed!

OSU Cooperative Extension Service (CES) Factsheets with more information◦ OK Beginning Farmer Loan Program◦ Budgeting and balance sheets

Information on our degrees and careers in agricultural economics

Materials provided


All lessons are based on a common case study

High school freshman with a show heifer Wants to expand her “herd”

◦ Buy a bred cow◦ Needs beginning farm loan, line of credit◦ Must supply business plan to bank

Students will be taught the tools and then use them to analyze the case study

Case study


Owns◦ Show heifer, current value $1000◦ Blower, current value $300◦ $500 cash

Purchase a bred cow for $750 in January◦ Calve in February◦ Wean in October, Sell in December after

preconditioning

Case study “facts”


Annual planning process Develop alternative production, marketing

and financing plans Compare alternatives using budgeting tools

◦ Partial, Enterprise, Whole farm, Cash flow & Capital budgeting

Implement plan + revise as situation warrants

Observe results—Financial Statements Assess successes/failures—Analysis Repeat annually

Farm business planning:Enterprise budgets


Concerned with the economic ADVISABILITY of a production alternative◦ Corn, soybeans, hogs, cattle,…

Projects returns to Unpaid factors of production and management

Unpaid factors◦ Family labor◦ Owner’s equity◦ Some fixed inputs if can’t allocate expenses

Enterprise budgeting


Compare alternate enterprises◦ RoundUp Ready vs. Conventional canola◦ Canola vs. Wheat◦ Grass stockers vs. Hay production/sale

Compute breakeven price and production◦ What sales price do returns = 0?◦ What output level do returns = 0?

How to use enterprise budgets


Historical costs and production—if you have historical production!

Published data◦ Experiment Station data◦ OK CES◦ Online budgets

OSU Budget generator—Need access? Call us! (http://agecon.okstate.edu/extension)

National Budget library (www.cffm.umn.edu)

Generating enterprise budgets


http://agecon.okstate.edu/extension

http://www.cffm.umn.edu/

Revenues◦ Cash

Sales Services

◦ Non-cash Increase in the value of raised breeding livestock

Expenses◦ Cash◦ Non-cash

DEPRECIATION Returns to unpaid labor, management and

capital = Revenues - Expenses

Enterprise budget format


Cash sales◦ Quantity sold × price◦ Examples:

100 bushels of corn × $3.40 = $340 260 pound hog × $0.75 = $195 4 tons of hay × $40 = $160

Cash received for services◦ Example: custom work

Government program payments◦ Subsidies◦ Crop insurance proceeds

Cash revenue


Raised and gifted breeding stock can increase in value

For example, value increases ◦ Heifer to Bred heifer ◦ Bred heifer to 1st calf heifer◦ 1st calf heifer to 3-year old

Use additional production expenses at each step to adjust value (non-cash revenue)

Non-cash revenue


Feed, fuel, veterinary, utilities, insurance, property taxes, hired labor, seed, fertilizer, rent,…

Interest on operating expenses◦ Paid on percent of operating expenses that are

financed with debt◦ Note, “interest on percent financed with equity is

a non-cash expense (Opportunity cost) NOT AN EXPENSE—Principal payments!

Cash expenses


How to estimate operating interest Sum cash operating expenses/2 Multiply by the interest rate/12 Multiply by the number of months $s are

borrowed Multiply by the percent debt financed Cash operation/2 × Interest/12 × months ×

percent financed = operating interest expense

Cash expenses: Operating interest


$500 cash expenses, 50% debt financed 8 months in growing season 7% interest rate Calculation

◦ $500/2 × 0.07/12 × 8 × 0.5 = $5.83average Monthly # % financedinvestment interest months

rate

Operating interest example


Durable (long-lived assets) decrease in value over time due to wear and obsolescence◦ Exception—NO DEPRECIATION FOR LAND

Use STRAIGHT LINE depreciation method for class purposes◦ Other methods for TAXES

Depreciation

Annual depreciation expense = (Purchase price – salvage value)/useful life Example:

◦ Purchase tractor for $100,000◦ Sell after 6 years for $40,000◦ Annual depreciation =◦ ($100,000 – $40,000)/6 years =◦ $60,000/6 years= $10,000/year

Straight line depreciation


Breakeven sale price◦ Sale price where revenue = expense◦ Computed as Total expense/output◦ Example: Hog production cost $130 per head and

each hog weighs 260 pounds at sale BE Price = $130/260 pounds = $0.50 per pound

Breakeven output (production) level◦ Output level where revenue = expense◦ Computed as Total expense/sale price◦ Example: Hog sale price = $0.65 per pound◦ BE output = $130/$0.65 per pound = 200 pounds

Breakeven analysis


To get beginning farm loan needs an enterprise budget

Revenue◦ Sell calf in December for $693◦ Increase in value of heifer = production costs for

the year Feed = $172.80, Vaccinations = $4, Parasite control

= $4 Total = $180.80

Case study: Enterprise budget


Expenses◦ Heifer feed $172.80◦ Cow feed $88.20◦ Calf feed $21.60◦ Parasite control $10◦ Vaccinations $16◦ Ear tag $1◦ Depreciation

Blower Purchase cow



Depreciation—blower◦ Purchase price = $300◦ Salvage value =$200◦ Useful life = 5 years◦ Annual depreciation = ($300-$200)/5 = $20/year

Cow depreciation◦ Purchase price = $750◦ Salvage value = $470◦ Useful life = 7 years◦ Annual depreciation = ($750-$470)/7 = $40/year



Interest on operating◦ 100% financed◦ Cash operating expenses = $309.60◦ 5% Interest rate◦ 12 months financing

Calculation◦ Operating interest = 309.60/2 × 0.05/12 × 12 =

$7.74 Interest on long-term debt

◦ $250 × 0.05 = $12.50




Revenue

Calf sales $693.00

Increase in value of raised

breeding livestock $180.80

Total revenue

$873.80

Expenses

Feed purchases $282.60

Grazing expenses

Veterinary expenses $ 26.00

Other cash expenses (ear tag) $ 1.00

Depreciation $ 60.00

Operating interest $ 7.74

Interest on long-term debt $ 12.50

Total Expenses $389.84Returns to Unpaid Labor, Management and Equity Capital $483.96

BE Price = $390/630 pounds= $0.62/ pound

BE Output = $390/$1.10 per pound = 355 pounds

Case study: Breakeven analysis


Cash flow budgeting is concerned with FEASIBILITY of an enterprise◦ Is sufficient cash generated to meet obligations

generated by the project? Long-term investments often have a

negative cash flow, e.g., land purchases, until debt retired◦ Subsidize cash flow with other enterprises, e.g.,

off-farm income

Cash flow budgeting


Focus is on CASH Include ALL sources of cash and ALL uses of

cash Sources of cash:

◦ Full sale price of land, buildings, machinery, breeding stock, feeder livestock, crops

◦ Government program payments, crop insurance◦ Starting cash balance◦ Off-farm income◦ Gifts & inheritances◦ Proceeds from planned borrowing

Cash flow budgeting


Uses of cash◦ Cash expenses◦ Full purchase price of land, buildings, equipment,

breeding stock◦ Principal payments◦ Interest payments◦ Family living expenses

Cash flow budgeting


Can a project cash flow but not be profitable?◦ Yes!◦ Depreciation is NOT a cash flow but is an expense◦ So profit can be negative even though project

cash flows! Can a project be profitable but not cash

flow?◦ Yes!◦ Principal payments are NOT an expense but are a

cash demand◦ So cash flow can be negative while profit > 0!

Cash flow budgeting


Megan’s banker wants to see a cash flow budget

Starting point: Enterprise budget◦ What are the sources of cash?◦ What are the uses of cash?

Case study: Cash flow budget


Any additional sources of cash?◦ Planned loan proceeds

Cow note Operating note

Any additional uses of cash?◦ Principal payments

Cow note Operating note

Case study: Cash flow budget



Sources of cash

Beginning cash balance $ 500.00

Livestock sales $ 693.00

Proceeds-cow note $ 250.00

Proceeds-operating note $ 309.60

Total sources of cash $1752.60

Uses of cash

Cash expenses $ 309.60

Breeding stock purchases $ 750.00

Principal payments $ 79.00

Interest payment long-term $ 12.50

Operating note repayment $ 309.60

Interest on operating note $ 7.74

Total uses of cash

$1468.44

Net cash surplus or deficit

$ 284.16

A balance sheet is a systematic listing of everything◦ Owned (assets)◦ Owed to others (liabilities)◦ Owner’s equity (net worth)◦ Basic identity: Assets = Liabilities + Owner equity◦ Or, Assets – Liabilities = Owner equity

A “snapshot” of the business’ financial health◦ Several years’ balance sheets measure long-term

success of business Current and Non-current assets and

liabilities

Balance Sheet


Current assets--“liquid” assets◦ Assets that can be sold without affecting long-

term profit-generating capacity◦ Cash and near cash assets

Bank account balance, certificates of deposit◦ Owned and sold within one year

Feeder livestock, crops, assets held for sale◦ Assets to be used up in production process in less

than one year Inventories of fuel, chemicals, feed, parts,…

◦ Other Cash invested in growing crops and feeder livestock

Current assets


Cannot be sold (liquidated) without harming long-term profit-generation capacity◦ Land, breeding stock, machinery, buildings◦ Stock in agricultural cooperatives

Difficult to sell quickly and realize full market value◦ How low would you need to price your house to

sell it TODAY?

Non-current assets


Financial obligations that are payable (due) within 12 months◦ Charge account balances (feed store, chemical

dealer)◦ Operating note balance◦ Accrued property taxes◦ Accrued interest on long-term debt◦ Loan payments due in next 12 months

Current portion of long-term debt

Current liabilities


Portion of long-term debt due in 12+ months

Note, need to calculate◦ Principal balance (i.e., total amount owed) –

amount owed in next 12 months (current portion) Example: $100,000 note

◦ Payment required in next 12 months = $8,000◦ Current liability = $8,000◦ Non-current liability = $92,000

Non-current liabilities


Computed as◦ Owner’s equity = Total assets – Total liability

Sources of Owner’s equity◦ Contributed capital

$s invested from outside the business◦ Retained earnings

Profit that has not been taken out of the business by the owner(s)

◦ Change in market value of assets Land value trends up over time

Owner’s equity or Net worth


Cost-basis balance sheet◦ Non-current assets valued at

Cost – accumulated depreciation◦ All other assets at market value◦ Used to measure businesses performance over

time Market-basis balance sheet

◦ All assets valued at market value◦ Used to measure liquidation value of the business◦ Use for class assignments

Two types of balance sheets



Current assets Current liabilitiesCash, near-cash, supplies, accounts receivable, crops held for sale, livestock held for sale, cash invested in growing crops

$ Accounts payable, accrued taxes (property), operating note balance, accrued interest, current portion of long-term debt

$

Non-current assets Non-current liabilitiesMachinery, equipment, breeding livestock, fencing, land

$ Non-current portion of machinery and equipment notes, non-current portion of breeding stock notes, non-current portion of mortgages

$

Total assets $ Total liabilities $Owner’s equity $Total liabilities + Owner’s equity

$

Balance sheet format


Solvency measures Solvency measures the business’ ability to

payoff all financial obligations Debt-to-asset ratio (D/A) = portion of assets

“owed” to creditors Equity-to-asset ratio (E/A)= portion of

assets “owned” by the business owners Debt-to-equity ratio (D/E)= relative portion

of debt financing to equity financing◦ Also call “leverage ratio”


Solvency measures Want D/A to be small

Want E/A to be big◦ Can never be over 1.0

Want D/E to be small◦ Can never be less than 0


Liquidity measure Working capital = current assets – current

liabilities◦ Want > 0

Current ratio = Current assets / current liabilities

◦ Want > 1◦ Businesses with lots of sales will have a high

current ratio

At the beginning of the year Megan owns◦ Heifer $1000◦ Blower $300◦ Cash $500

Has no debt

Case study: Balance sheet


Current assets Current liabilities

Cash $500 Total current liabilities

$0

Total current assets $500 Non-current liabilities

Non-current assets Total non-current liabilities

$0

Blower $300 Total liabilities $0

Heifer $1000 Owner’s equity $1800

Total non-current assets

$1300

Total Assets $1800 Liabilities + Owner’s equity

$1800

Beginning of year balance sheet


Assets◦ Cash balance $??? (Where do you get this?)◦ Heifer $1200◦ Bred cow $800◦ Blower $250

Liabilities◦ Operating note balance $???◦ Cow note balance $???

Current portion & Non-current portion Then compute Owner’s equity

Projected end of year balance sheet


Cash balance $287 (see cash flow budget) Operating note balance $0 (paid off in Dec.) Total on cow note:

◦ Borrowed $250◦ Paid $79 in December◦ Owes $171

Current portion $83 Non-current portion $88

Projected end of year balance sheet



Projected of end of year balance sheet

Current assets Current liabilities

Cash $284 Operating note $0

Cow note payment $83

Total current assets $284 Interest on cow note $9

Non-current assets Total current liabilities $92

Blower $250 Non-current liabilities

Show heifer $1,200 Cow note $88

Cow $800 Total non-current liabilities $88

Total non-current assets $2,250 Total liabilities $180

Total assets $2,534 Owner’s equity $2,354Total liabilities + Owner’s equity $2,534


Case study: Solvency and liquity End-of-year solvency measures

◦ D/A= $180/$2534 = 0.07◦ E/A = $2354/$2534 = 0.93◦ D/E = $180/$2354 = 0.08

End-of-year liquidity measures◦ Working capital = $284 - $92 = $192◦ Current ratio = $284/$92 = 3.09

The manuscript contains links to online resources

The binder contains OSU Extension factsheets with more examples

Call! We’ll be glad to help you out!

Need more information?


Next up Shannon Ferrell:Intro to Ag Law

oklahoma state university department of agricultural economics oklahoma state university

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