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Measuring Expected Changes in Profit Using a Partial Budget

John Hanchar, Farm Business Management
Northwest New York Dairy, Livestock & Field Crops

Last Modified: July 5, 2013

In the October 2009 issue of AgFocus, a common theme among Jerry's and Collin's articles was the value of measuring outcomes or expected outcomes when managing a farm business. The words of wisdom "If you can't measure it, then you can't manage it" are used many times in articles and presentations to make a case for the value of measuring financial condition and performance of a farm business, especially during planning efforts as the farm owner tries to answer the following questions like, Where is the business now? Where do you want it to be? and How will you get it there?

Answering the last question requires measuring expected effects of possible changes -- for example, the expected change in profit -- and selecting the best or set of changes for implementation. Jerry talks about improving results via "better feed efficiency, better forages, tightening up reproductive programs and reducing transition cow metabolic problems and culls." Collin mentions "tweaking feed rations, calving procedures, and training or retraining employees" as means to achieving improved results. Which possible change or set of changes makes the most sense given financial and personal objectives that direct the business, and given the resources available? The producer can use a partial budget to measure the expected financial effects associated with possible changes to the farm business to help answer the question.

THE PARTIAL BUDGET

Definition
A projection of the expected change in some financial measure - profit and cash available among others -- associated with a proposed change in the farm business.

Characteristics
  • Analyzes a proposed change compared to the present farm business.
  • Includes only the changes in income and costs not the total values - a type of marginal analysis.
  • Provides an estimate of the increase or decrease in profit or cash available.
  • Says nothing about the change relative to alternative uses of resources.
  • Analyzes changes such as, enterprise substitution, input substitution or level, changes in practices and changes in the size or scale of operation
Partial Budget Format
A format for a partial budget that estimates the expected change in profit as the change in the total value of production minus the change in costs follows.

See PDF table 1: Partial Budge Format

An Example
To install mattresses in 50 tie stalls would cost $3,250. The mattresses cost $65 each, including installation labor and additional labor to manage cows while mattresses are being installed. The dairy wants a 5 percent rate of return on the average investment before inflation and taxes annually. Assume the mattresses last five years with zero salvage value. Bedding costs are projected to drop 50 percent. Due to improved cow comfort and lower stress, milk production increases 1 pound per cow per day. The milk, in this example, has a value of $7 per hundredweight after deducting milk marketing and feed costs. All other costs remain the same. If the assumptions hold true, then installing mattresses on this dairy can be expected to increase profit by $2,046.25 annually. Here’s how the owner of a 50 cow dairy developed a profit partial budget to determine whether stall mattresses would be a good investment.

See PDF table 2 example


Measuring Expected Changes in Profit Using a Partial Budget (pdf; 323KB)


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Upcoming Events

Beginning Farmer/Hobby Farmer Workshop $5/pp, class size is limited, so pre-register by April 15th!

April 27, 2019
9:00 am - 1:00 pm
Canandaigua, NY

This hands-on workshop is for beginning or part-time farmers who would like to improve their farm machinery skills, learn to properly and safely maintain their equipment to protect their investment. If you have been thinking about buying a tractor, new or used, two-wheel or four-wheel drive, compact or utility or more come join us. Topics include: selecting the right size/type tractor for the job; basic maintenance; staying safe around tractors and equipment; attaching implements properly; and information about ROPS and SMV's. There will be time for questions.

Pre-registration requested by April 15, 2019 email Amy with your name, address, and phone number or call 585-394-3977 x 429.
Fee: $5.00/person. Class size is limited.

2019 Pastured Poultry Seminar, lunch included so please register by May 10th! $25/person

May 18, 2019
Registration begins at 8:00 a.m.w/ coffee & donuts with the Program running from 9:00 a.m. - 5 p. m.
Attica, NY

The main speaker this year is Eli Reiff of Mifflinburg Pennsylvania. Eli raises broilers, turkeys, sheep, and beef, all on pasture. Topics to be covered will include the pasture, feed and nutrition, marketing, costs, and much more. As we grow as farm operators and get bigger, we may not pay as much attention to the basics as we should. So those areas are where we will start, and then expand to cover the group's interests.

Mike Badger, Director of the American Pastured Poultry Producers Association will also be available for a round-table discussion. Plans are to have representatives from Farm Bureau, NYCAMH for farm health and safety, Wyoming County Chamber of Commerce, and Cornell Cooperative Extension of Wyoming County, as well as others.

Calling all 9th-12th graders! 4th Annual Precision Agriculture Day at Genesee Community College

May 21, 2019
9:00 am - 1:30 pm Register by Friday May 10th! $15/per person includes lunch
Batavia, NY

Calling all 9th-12th graders!  We have an exciting new program for students interested in technology, science, engineering, and agriculture!
Would you like to:
  • Learn about how Drones collect information
  • Check out some potential career opportunities that have new and ever-changing technology
  • Learn how these technologies can be used in our own backyards in WNY
  • Discover potential and exciting career opportunities

Announcements

Producers Previously Enrolled in the LGM Program Now Eligible for MPP

Dairy Producers Previously Enrolled in the Livestock Gross Margin Program Now Eligible for 2018 Margin Protection Program
The U.S. Department of Agriculture (USDA) today announced that dairy producers who elected to participate in the Livestock Gross Margin for Dairy Cattle Program (LGM-Dairy) now have the opportunity to participate in the Margin Protection Program for Dairy (MPP-Dairy) for 2018 coverage. Sign-up will take place March 25 through May 10, 2019.
Eligible producers can enroll during the sign-up period at their local USDA service center. To locate your office, visit farmers.gov.


Smart Farming Team Technical Assistance Grant Application

The Labor Ready Farmer Project is offering grants to provide up to 12 hours of Technical Assistance (TA) consulting services to farms who want to make improvements to their farm's processes in hiring, training, managing or evaluating employees. Applicants will choose from one of the following four areas for TA assistance and identify a specific project. If selected they will be matched with a "Smart Farming Team" of consultants who will provide one on one technical assistance.
  • HIRING EMPLOYEES 101 - GETTING OFF TO A GOOD START
  • ONBOARDING & TRAINING EMPLOYEES QUICKLY AND EFFECTIVELY
  • FINE-TUNING & IMPROVING THE WORKING ENVIRONMENT
  • H2-A READINESS
Please complete this application and send to Nicole Waters, Beginning Farm Project Coordinator for the Cornell Small Farms Program. The form can be submitted by email, mail or in-person at the address listed below. Please feel free to call or email with any questions.

Nicole Waters - Beginning Farmer Project Coordinator
Plant Science Building, Room 15b
Tower Road, Cornell University
Ithaca, NY 14853
Phone: 607-255-9911
Email: nw42@cornell.edu

Applications accepted on a rolling basis.



USDA Announces January Income over Feed Cost Margin Triggers First 2019 Dairy Sa

WASHINGTON, March 6, 2019 ? The U.S. Department of Agriculture's Farm Service Agency (FSA) announced this week that the January 2019 income over feed cost margin was $7.99 per hundredweight, triggering the first payment for eligible dairy producers who purchase the appropriate level of coverage under the new but yet-to-be established Dairy Margin Coverage (DMC) program.

DMC, which replaces the Margin Protection Program for Dairy, is a voluntary risk management program for dairy producers that was authorized by the 2018 Farm Bill. DMC offers protection to dairy producers when the difference between the all milk price and the average feed cost (the margin) falls below a certain dollar amount selected by the producer.

Agriculture Secretary Sonny Perdue announced last week that sign up for 
DMC will open by mid-June of this year. At the time of sign up, producers who elect a DMC coverage level between $8.00 and $9.50 would be eligible for a payment for January 2019.

For example, a dairy operation with an established production history of 3 million pounds (30,000 cwt.) that elects the $9.50 coverage level for 50 percent of its production could potentially be eligible to receive $1,887.50 for January.

Sample calculation:
$9.50 - $7.99 margin = $1.51 difference
$1.51 times 50 percent of production times 2,500 cwt. (30,000 cwt./12) = $1,887.50

The calculated annual premium for coverage at $9.50 on 50 percent of a 3-million-pound production history for this example would be $2,250.

Sample calculation:
3,000,000 times 50 percent = 1,500,000/100 = 15,000 cwt. times 0.150 premium fee = $2,250

Operations making a one-time election to participate in DMC through 2023 are eligible to receive a 25 percent discount on their premium for the existing margin coverage rates.

"Congress created the Dairy Margin Coverage program to provide an important financial safety net for dairy producers, helping them weather shifting milk and feed prices," FSA Administrator Richard Fordyce said. "This program builds on the previous Margin Protection Program for Dairy, carrying forward many of the program upgrades made last year based on feedback from producers. We're working diligently to implement the DMC program and other FSA programs authorized by the 2018 Farm Bill."

Additional details about DMC and other FSA farm bill program changes can be found at farmers.gov/farmbill.


New Guidance for Mortality Disposal Issued

NYS Department of Ag and Markets has posted guidelines on disposal of livestock carcasses, in response to reports that some rendering companies have halted pickups from farms.

https://nwnyteam.cce.cornell.edu/submission.php?id=761&crumb=dairy|1