SNUFF AND FINANCIAL HEALTH

National Hog Farmer Editor Dale Miller hits the bull's-eye in a November 15, 2006 editorial, "Are Your Records Up to Snuff?"  (View it online at: http://nationalhogfarmer.com/mag/farming_records_snuff/ .)

Dale describes a first-of-its-kind meeting in Des Moines this past September that offered sow software vendors an opportunity to present their offerings to an audience of large producers and service bureaus.  He offers several thoughtful observations relevant to e.farmsmart readers:

•	"The need for standardized calculations…"  (which should have been accomplished through the NPPC efforts in the late 90s)
•	"The growing need of grow-finish data collection and analysis…"
•	"The number of independent software providers has actually increased slightly in recent years…  counter to the typical whittling down process."
•	"As corn prices continue to climb and profit margins tighten, the need to effectively track costs and productivity levels will be magnified several fold."
•	"If your current recordkeeping program does not provide the information you need, now would be a good time to find one that does."

Later in the same issue of NHF, FBS users answer those questions with "Benchmarking Financial Health," featuring the 2005 Cost of Production study by CPA firm Latta, Harris, Hanon & Penningroth.  This study was first presented this past June at the PorkShop seminar jointly sponsored by LHHP and FBS.  Many of the of the participants are FBS users, and Latta, Harris business consultant John McNutt and senior partner Mark Penningroth specialize in helping them interpret the numbers, discover opportunities and develop profitable strategies.  Read the full story at: http://nationalhogfarmer.com/mag/farming_benchmarking_financial_health/.

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•	TransAction Plus	$398.00	•	Crop e.CLIPSE	$598.00
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•	Smart Feeder	$598.00	•	TransAction Plus Scanner module	$238.00
•	Smart Breeder	$398.00	•	Accounts Payable	$158.00

Contact our office now at 800-437-7638 before your new CD "expires."

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(The following is a reprint of a FarmSmart article published in 1988.)

Step Two:  the Enterprise (Responsibility Center) Budget
This process converts a physical production plan into dollars and cents using crop and livestock production centers.

The Production Plan
You are ready to begin the "How-To" phase of Whole Farm Planning – the production plan.  Most farmers do a pretty good job of production planning; unfortunately, that's as far as they ever get.  We're going to teach you a new approach that will produce accurate, detailed financial projections at the same time as it guides your production activities.  Just follow these procedures.

1.	Gather as much known information on your production "plant" as possible.  This includes acres available or permitted for each crop center, acreage already planted or fertilized, livestock facility capacities, breeding records and yield and performance histories.
2.	Develop a crop plan.  Go over each field and determine:
	•	Crop or crops to be grown
	•	Estimated yields
	•	Seeds, chemicals and fertilizers to be used
	•	Application rates per acre
For simplicity and accuracy in planning, we suggest using application units (pints, quarts, pounds, kernels, etc.) rather than the bulk units in which these materials are purchased.
3.	Develop a livestock plan.  If you raise or feed livestock, you will need to document the following:
	•	Beginning inventory numbers and weights for each class of livestock (from the prior year's balance sheet)
	•	Numbers, dates and weights of animals to be sold
	•	Numbers, dates and weights of animals to be purchased
	•	Numbers, dates and weights of animals to be raised
	•	Numbers, dates and weights of estimated death loss
	•	Dates, quantities and weights of animal products to be sold
	•	Ending inventory numbers and weights for each class of livestock
Be sure to verify that projected ending inventories balance against production, death loss, purchases and sales.
4.	Develop a feed consumption plan.  If you feed livestock, you must calculate:
	•	Type and quantity of commercial feed to be consumed
	•	Type and quantity of grain to be consumed
	•	How much of each feed is available from beginning inventories (from prior year's balance sheet)
	•	How much and when new crop gain will be available (from crop production plan)

The Unit Budget
The production plan answers the questions, "where?", "what?" and "how much?".  The unit budget incorporates price information into the plan.

1.	Crop input unit costs.  The crop production plan should have summarized the total quantity of each type of fertilizer, seed and chemical needed.  Now you should determine:
	•	What percentage of these expenses are "your share" (for crop share leases)
	•	What price you will be paying per unit for each item
The units used here are purchase units (gallons, bags or tons).  Your software should automatically convert the "application units" from the production plan into these "purchase units". Once again, refer to as many "knowns" as possible when answering these questions.  Call several suppliers for product quotes and price trends.
2.	Crop and feed purchases and sales.  Internal feed needs have already been computed in the livestock production plan.  As a result, you will know a.) the quantity of each crop not needed for feed and therefore available for sale and b.) the quantity of commercial feed and grain to be purchased.  Now assign a price per unit for:
	•	Monthly crop or feed purchase
	•	Monthly crop or feed sales
	•	Ending inventories of crops and feeds
Coming up with accurate projections will be easier if you've already contracted or hedged some of that crop or feed.  Refer to current futures or cash price bids for the rest of your purchase or sales price assumptions.  Be sure to allow for your expected cash "basis."
3.	Livestock purchases or sales.  Return to the livestock production plan and assign a price per unit (per head or pound) for:
	•	Monthly livestock purchases
	•	Monthly livestock sales
	•	Monthly livestock product sales
	•	Ending livestock inventories
As with crops and feed, enter unit prices from any contracted or hedged contracts first, then refer to current futures or cash quotes for the rest of the price assumptions.  Be sure to allow for your normal "basis."

Adding Variable Costs
The last phase of the process merges the remaining variable costs into the production budget.  These include:

	•	Machine hire
	•	Supplies
	•	Gas, fuel and oil
	•	Utilities
	•	Seasonal and "overload" labor

If your enterprise mix, practices and production levels remain constant from year-to-year, then it's fairly safe to handle variable costs assumptions just like fixed costs.  In other words take last year's variable costs from your accounting records and adjust them to this year's conditions.

On the other hand if you are planning to modify your current mixture of enterprises, implement new practices or increase production, then you'll need to dig deeper for variable cost assumptions.

The best place to find that information is from your own cost accounting history.  Examine historical labor, fuel, utilities, etc. costs per production unit (pound, ace, bushel, etc.), then multiply your new production assumption by these unit costs.

If you're planning to venture into uncharted territory (a brand new enterprise or practice) or just don't have the quality of cost accounting records that you can trust, then help is still available.  Most county Extension offices can provide state-wide unit cost averages for major crop and livestock enterprises.  Farm magazines often compile and publish machinery "custom rates".

The Completed Enterprise Budget
So far, we have:

	•	Prepared production plans for each crop and livestock centers
	•	Used the unit budgeting process to assign prices for crops, livestock, feed and materials to be purchased or sold
	•	Assigned the remaining variable costs on a unit basis to each production center

The enterprise budget, then, is a process that uses the same set of numbers to systematically prepare:

	•	Operating (production) plans
	•	Purchasing plans
	•	Marketing plans
	•	"Breakeven" budgets by production center

The next step is to assemble all the known facts and assumptions recorded so far into a Total Farm Budget.

If you would like to be part of the "Budget Testing Program" please send an e-mail to norm@fbssystems.com.

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