Evaluating the Profitability of Changes in Farm Businesses
DOWNLOADMarch 14, 2019 - AABI Farm Business Management Work Team
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EmailChange is the norm farmer’s face in managing farm businesses. They range from considering changes in cultural practices, renting services vs. doing in the farm business, changing the farm enterprise mix or scale to major changes in the farm business. The scope of the prospective change impacts the analysis tool used and specialized educator / specialist skills required.
The focus of this Fact Sheet is on a tool that is widely used by educators and specialists on smaller changes in farm business. The partial budgeting skills discussed in this Fact Sheet are expected of all AABI educators. Many of you are already proficient in the use of these tools and can be a mentor to less experienced educators.
The concept of the partial budget is simple. It is a profitability concept. What is the proposed change? Typically the farmer is considering making a change that adds to gross revenue and eliminates an existing cost but also eliminate the gross revenue associated with current practice and adds the cost associated with the new practice. The “partial” in partial budget means we are only interested in the changes is gross revenues and allocated costs.
Many of the educators with plot data with several treatments will show the gross revenue less the allocated costs associated with the practice. Mike Staton’s research on soybean planting rates is a representative example. He looks at the combined results from trials across years and locations and reports the net revenue above seed costs for each rate of planting. The seeding rate is the only thing that changes so all other costs associated with corn production are irrelevant.
The underlying theme of researchers and educators working with soybeans has been most farmers were planting at higher seeding rates than the most profitable rate. Thus, they might give up some yield by reducing the seeding rate but the decrease in the cost of seed would more than compensate for the value of the decrease in yield.
