Enterprise Budgets in Organic Dairy Production
by Robert Tigner, UN-L Extension Educator
Added December 2, 2010. Enterprise budgets can be used as an important decision tool for farm owners and managers. An enterprise budget is an organized listing of gross income and expenses for a specific part of the farm or ranch. An enterprise is defined as a profit center that produces a single main product. There are numerous decisions that can be made with the help of an enterprise budget. These are cost of production, changing production practices and product mix. The Organic Dairy Production Budget is a way to use a spreadsheet to make this decisions. The chart on this page can also be found at http://www.extension.iastate.edu/agdm/livestock/xls/b1-21dairyp21.xls.
Enterprise budgets can be used to compare your costs to other producers’ costs or industry averages to determine if the individual farm’s costs are high or low. If costs are high, then the budget will point to specific areas that need to be analyzed for cost control. Budgets also indicate where key costs occur. If key cost items appear too high, changes in production practices or input sources could be made to lower per unit costs.
Enterprise budgets are usually completed per acre, per cow or sow basis and then scaled-up to reflect actual or expected production.
Typically there are several sections to an enterprise budget. These include:
Often a section that includes break-even analysis is included. The sections referred to above are the same as the sections of the organic dairy budget (below) hosted at the AgDecisionmaker web site hosted At Iowa State Extension.
Gross income is calculated by multiplying output times the price per unit of output. Determining expected yield and price for a new enterprise can be challenging. Base output levels on realistic yield expectations. For enterprises already in place, milk production, or other products, yields should be realistic when using an enterprise budget for planning. Planning to increase milk production by 15% next year when on average a herd is only adding 4% annually is unrealistic. One method to do that is to use a 5-year Olympic average yield for an enterprise that is already part of the farm or ranch. This type of average takes in to account the management choices that are already in place. But for a new organic dairy operation, milk production needs to be below what the producer expects to reach when the system is completely in place.
Price is the other part of income that must be carefully set when using enterprise budgets as planning tools. Using recent milk prices can be deceiving, they have declined at times. However organic milk prices are more predictable for a year than conventional milk prices. A big advantage in our volatile economy.
Variable costs are those incurred due to the production of organic milk. All feed, veterinary care, supplies, breeding fees, utilities and repairs are variable costs. Variable costs are the first ones that must be covered to continue dairying.
Fixed costs are incurred regardless of whether milk is produced in the short-run. Land and unpaid labor are two big examples. Of course all fixed costs can be shed, but then the farm operator really is out of milk production. Unpaid labor costs used in the organic dairy budget should be enough to pay the needed family living.
Break Even Calculation
This section calculates the net return, or loss, to both variable costs and all costs. As mentioned earlier, dairy producers must first have a net to variable costs. Then the net return, or loss, to all costs is calculated. In the long-run, this last calculation must be at least zero in order to pay for the investment made in organic milk production.
One of the advantages to computers and spreadsheets is the ease with which calculations are made. The spreadsheet available for organic dairy producers at www.extension.iastate.edu/agdm can assist organic dairy producers in their management and profitability comparisons. It is a useful tool for both planning future production and calculating past production costs.
Robert Tigner is an Extension Educator with the University of Nebraska-Lincoln. Before his current position he was a farm management field specialist for Iowa State University Extension in Northeast Iowa. He worked with conventional and organic dairy producers in dairy marketing and financial analysis. Tigner has a BS in Dairy Science from Iowa State University and a MS in Agricultural Industries from the University of Wisconsin-Platteville. Tigner grew up on a small dairy farm in North Central Iowa. After college he operated a dairy farm with a mixed Holstein and Ayrshire herd in Northeast Iowa.