Partial Budgets: Comparing Potential Profit Scenarios

As a grower, how do you decide whether or not to adopt a new cultural practice, new crop or variety, pest treatment, or equipment change? Do you do the math, or go with your gut?

Having a “feel” for what course of action to take is important, but in these uncertain financial times it makes sense to use a technique called Partial Budgeting. This tool allows you to compare marginal costs and marginal benefits of small, specific changes – without having to financially analyze the entire farm. The simplicity of partial budgeting facilitates decision making by estimating profitability of a given change.

Comparing Farm ScenariosUse Partial Budgets to compare two alternatives -no more than that- for which you have gathered good data on the following four questions:

– What new or additional costs will be incurred?
– What current costs will be reduced or eliminated?
– What new or additional returns will be received?
– What current returns will be reduced or lost?

New Crop and Market Yields

One of the best uses of Partial Budgeting is to help determine if a new crop would be more profitable than one you are currently growing. For example, that block of peaches that needs replanting, would it be more profitable to put in 3 acres of wine grapes?

Partial Budgeting Analysis assumes that you have already determined that there is a market for the new crop you are considering. It also assumes that your conditions are suitable for the new crop to have yields that allow for profitability. Don’t make the mistake of a production-before-research approach. Look into the growing requirements of the new crop and appropriate varieties for your climate and soil. Find out about the specific cultural practices the new crop needs to thrive. Determine if the production practices can be adapted to your situation.

Before doing a Partial Budget analysis, make sure you have thought about your new crop market and can meet minimum potential yields.

What Data to Gather for a Partial Budget

When comparing your two alternatives – whether they be crops, varieties, or a particular treatment – many of the inputs will be identical and can be ignored. That way you can focus on the particular inputs that are different and, using Partial Budgeting, can estimate which alternative is most profitable for your farm.
The cost data that needs to be gathered for each alternative may include:

Fertilizer Fencing
Soil Amendments Trellising
Herbicides Labor
Fungicides Fuel
Pesticides Irrigation installation and operating costs
Plant Material (Seed, Trees, Vines, Bushes, Plugs) Equipment
Plastic Mulch Marketing costs – picking crates, packing boxes, packaging, storage, and selling charges
Bee Hives

 

Where to Find Local Data for Your Partial Budget

The most useful information for your Partial Budgeting comparison will come from local sources: neighboring farms already growing the crop, variety trial data from your local county extension agent, ag input & product suppliers, production cost budgets generated for the region by university ag economists. Not all of the data found in a production cost budget needs to be used in a Partial Budget assessment, pull out the data you need. The University of California regularly generates production cost budgets for many crops, but they would need to be significantly modified for use in our region.
Resources
NE Beginning Farmers Project – Enterprise Budgets Online
Sample Crop Budgets for NJ, Partial Budgeting Manual
Costs and Returns for Conventional Production Practices, NE US
Organic Production Practices, NE US
Cost & Return Studies UC Davis
Sample Costs to Produce Fresh Market Tomatoes – UC Davis

Putting It All Together

  1. Consult the NJAES Partial Budgeting Manual
  2. Using a Partial Budgeting Worksheet, combine the data for each section. The Iowa State Extension Ag Decision Maker has an MS Excel Spreadsheet for this purpose.
    Costs of the Proposed Change:
    – Add up the additional costs of the new activity.
    – Add up any reduced returns incurred as a result of the proposed change (e.g., if you will no longer be growing peaches, this would be yield per acre x sales per unit).
    Benefits of the Proposed Change:
    – Add up the Returns you expect from the new activity. This would be yield per acre x sales per unit.
    – Add up the costs of the old activity which you will no longer incur (e.g., if you no longer grow peaches in that block, you don’t incur the cost of hand thinning).
  3. Run the Analysis to generate a Net Change in Profits and a Benefit/Cost Ratio to see how this particular change will affect your bottom line.
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