Production practices, size of operation, yields or feed efficiency and
prices vary among farms, regions and times of the year. For these reasons,
interactive budgets have been developed which can easily be adjusted for
each individual grower.
To calculate the probability of on net returns, you will be asked to provide five estimates of production possible levels and five estimates of market prices levels. These estimates are best, optimistic, median, pessimistic and worst. DON'T WORRY, YOU DO NOT HAVE TO BE A STATISTICIAN. Start with MEDIAN. This level is the one in the middle. Half of the time you would expect to do better than this estimate and half the time you would expect to do worst. Then the BEST estimate can be considered as the "once in a life-time" good level. Then OPTIMISTIC would be about half way between median and best. The WORST estimate would be "once in a life-time" bad level. Then PESSIMISTIC would be about half way between median and worst.
With these five production and marketing estimates, "risk rated" net returns table at the end of each budget can be calculated. The "Returns($)" row of figures in the table show seven different net returns possibilities. The EXPECTED net return is calculated from "weighted prices and yields". The base budget net return is calculated by multiplying median price by median yield and subtracting the total budgeted costs. The first "chances" row shows the estimated frequency of obtaining the above net returns or more. The second "chances" row shows the estimated frequency of obtaining the above net returns or less. All net returns other than median are determined from their relationship to the expected net return. They are not determined by multiplying prices and yields and subtracting total cost. They do reflect the variability of prices and yields or feed efficiency.
The median net return estimate is the middle income level. There is
a one-in-two chance (50%) that the actual net return will be this level
or higher. There is also a one-in-two chance that the actual net return
will be this level or lower. The optimistic net returns are defined as
more favorable outcomes with a one-in-six chance of being this level or
higher. (The more favorable outcomes could occur when prices or yields
or both are higher than the median). The pessimistic net returns are defined
as unfavorable outcomes with a one-in-six chance of net returns being this
level or less. (The unfavorable outcome could result from prices or yields
or both being less than the median.)
Total costs of producing an enterprise include both variable and fixed costs. The variable or operating costs vary with the amount of crop produced. Common variable costs for crops include seed, fertilizer, chemicals, fuel, labor and containers. For livestock, variable costs include feed, labor and veterinary and medicine. Fixed costs include items such as depreciation, interest and taxes on machinery, management and general overhead costs. Most of these costs are incurred even if little production takes place and are often overlooked for planning purposes.
Further Explanation of Fixed Costs
Land costs may either be a variable or a fixed cost. Even if the land is owned, there is a cost involved. Land is included as a fixed cost in these budgets.
Overhead and management are calculated by taking a percentage of variable expenses. This figure is included to compensate for management and production costs which cannot be allocated to any one specific enterprise. Such items include utilities, the pick-up truck, farm shop and equipment, accountant and fees, casualty losses and other cost items of this nature.
Click on the Main icon (button) at the top of the screen to start. Enter your estimates for your units of production (acres, head, etc) and your production and marketing levels (see Risk Rated Budgets). Remember to start with the median level. It should be the easiest to estimate. Next click on the icons that calculate specific production items and the fixed cost. The figures from these calculations will be automatic entered in the appropriate section for the main budget table. Now change any input units that were not calculated from the icons that best reflect your operation. The total quantity and total amount will be calculated. After making changes, click on Refresh to insure that all calculations have been included.
Now, scroll down to see estimates of breakeven and the "risk-rated" returns estimates with their probability estimates.