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Cash Flow Budgeting -- A Valuable Farm Financial Management Practice

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

Last Modified: July 5, 2013

Introduction
Less favorable input, output price relationships, for example, rising feed prices relative to prices received for milk, livestock and other livestock products, will likely challenge farm business owners' abilities to achieve financial objectives over the next several months. Knowing where the business might be financially given less favorable conditions is a valuable first step in meeting the challenge. Budgets estimate future financial condition or performance.

"Farmers who use written calculations or a computer spreadsheet to make a cash flow budget had a much greater ROA (rate of return on assets with appreciation [a profit measure]) than those who did not use these techniques. ... This provides evidence that there are positive returns to detailed financial analyses." (Gloy, Brent A., Eddy L. LaDue, and Kevin Youngblood. 2002. Financial Management Practices of New York Dairy Farms.)

Budgets
For farm business owners, most budgeting work focuses on estimating expected effects on profit, and on projecting the business' ability to meet cash obligations in a timely manner.

Key characteristics of budgets when facing unfavorable input, output price relationships include the following.

  • Budgeting helps you see what a future period's financial performance will look like for planning purposes. A budget allows one to project cash flow shortages, plan borrowings, and determine the ability to repay borrowings.
  • Budgeting provides the manager with a tool for assessing how well the business is meeting projections, and to identify and correct potential problems.
  • Budgets help the farm business owner communicate to others where the business is headed financially.

Examples of budgets include: partial, enterprise, and whole farm budgets for projecting expected effects on profitability and for projecting expected effects on the business' ability to meet cash obligations; and capital budgets associated with investment analysis. Income statements or cash flow statements that report a past period's performance, for example, an income statement for the 2011 calendar year, are not examples of budgets. They report actual past performance, and do not project or estimate future financial performance.

Whole Farm Budgets
A whole farm budget examining profitability summarizes expected income, expenses, and profit. A cash flow budget for projecting the business' ability to meet cash obligations is a summary of the expected cash inflows (cash farm receipts, money borrowed, capital sales, non farm income) and outflows (cash farm expenses, principal payments, capital purchases, withdrawals for family living and other personal withdrawals).

Characteristics include the following.

  • Whole farm budgets consider all items including those that are not expected to change from the current, base period to the future period. For example, a cash flow budget projects what the cash flow statement will look like in a future period and reports total values for all inflow and outflow items.
  • The most useful, valid projections are obtained when proper procedures are used. LaDue, Schuelke and Mensah-Dartey offer some basic rules to follow to insure useful projections (LaDue, Eddy L., Jacob Schuelke and Virgil Mensah-Dartey. 2000. CASHPRO: A Computer Spreadsheet for Projecting Annual Cash Flows and Pro Forma Income Statements.)

1. Project cash flows from accrual (or accrual adjusted) receipt and expense values.
2. Exclude unusual occurrences from the base year data used for projections.
3. Use causal logic in estimating each receipt and expense item.
4. Be sure to adjust for inflation.
5. Livestock farms that grow forages or concentrates should carefully assess their forage and, or concentrate balance whenever significant changes are expected in the size or composition of the animal herd or cropping program.

  • Conducting sensitivity analysis and seeking critical review of the projections enhance the usefulness and validity of projections.

The CASHPRO electronic spreadsheet with instructions is available at http://agfinancedyson.cornell.edu/tools.html. Monthly, whole farm, cash flow budgeting is also an option. Again, see http://agfinancedyson.cornell.edu/tools.html for a monthly cash flow budgeting tool.


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calendar of events

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.

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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.

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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

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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

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