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Enterprise Budgets and Breakeven Analysis

2024 F.A.R.M. Workshop Series

Arkansas Corn and Grain Sorghum Producers Building, Newport, AR

February 1, 2024

Ryan Loy, Ph.D.

Assistant Professor and Extension Agricultural Economist

Department of Agricultural Economics and Agribusiness

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My Extension Program Focus

    • Maximizing Production
    • Optimal Allocation of Resources
    • Business Planning

Farm Management

    • Farm Programs
    • Budget Resources
    • Finance 101

Farm Finance

    • Market Activity
    • Value Added Marketing Channels
    • Macroeconomy/Profitability

Risk Management

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Roadmap

  1. Importance of Enterprise Budgets
  2. Components of an Enterprise Budget
  3. Breakeven Analysis as a Tool
  4. Breakeven Price
  5. Breakeven Yield
  6. A Different Perspective
  7. Strategies for Managing Breakeven Points
  8. Concluding Remarks

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Importance of Enterprise Budgets

  • Estimate of potential revenue, expenses, and earnings.

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  • Fundamental in decision making.

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  • Provides resources to estimate:
  • Break even yields or prices
  • Rental rates
  • Investment returns
  • Components of an Enterprise Budget

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OSU-CES (2022), Langmeier (2015), USDA-NRCS (2009)

  • Based on one year

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1. Income

Price * Quantity:

$6.75*170 bushels

  • Other Items May Include:
    • Government Payments
    • Insurance Indemnities
    • Other Income

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2. Direct (Operating) Expenses

  • 2024 Arkansas Conventional Rice Example
  • Variable Costs
    • Change as level of production changes.
  • Contains items used during production.
  • Seed, Fertilizer, Chemicals
  • Fuel, oil, and lubricant
  • Repairs
  • Veterinary
  • Labor (operator & hired)
  • Interest on Operating Capital
  • Other cash expenses

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3. Fixed Expenses and Returns

  • Fixed Costs:
    • Cost incurred regardless of production level.
  • Machinery, Buildings, and Equipment:
    • Depreciation
    • Interest Expense
    • Taxes & Interest

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  • Profit (loss) remains after covering both operating and fixed expenses.

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O.C. + F.C. :

$877.65 + 135.23

T.R. – T.C. :

$1,147.50 – 1,012.88

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Breakeven Points

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Breakeven Analysis as a Tool

  • Study of yields and market prices

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  • Weighs revenue relative to costs
    • Operating, fixed, or total

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  • The point at which net returns just cover operating expenses
    • Sales = Cost of Production

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  • (Price * Yield) = Operating Cost

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Min

Average

Max

Jackson Co.

Corn

Bu/Ac

83

145

182

159

Cotton

Lb/Ac

623

1,013

1,247

1,020

Rice

Lb/Ac

4,548

6,763

7,808

7,010

Soybean

Bu/Ac

29

42

55

38

Source: USDA-RMA, UADA-CES

 

Corn

Cotton

Rice

Soybeans

Direct (Operating)

$774.99

$758.64

$877.65

$491.73

Fixed

$105.92

$190.41

$135.23

$94.97

Total

$880.91

$949.05

$1,012.88

$586.70

Yield and Expense Assumptions (2023 RMA Reference Yields)

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What Price Covers Operating Cost?

  •  

 

Min

Average

Max

Jackson Co.

Corn ($/bu)

$9.34

$5.34

$4.26

$4.87

Cotton ($/lb)

$1.22

$0.75

$0.61

$0.74

Rice ($/CWT)

$19.23

$12.98

$11.24

$12.52

Soybean ($/bu)

$16.96

$11.71

$8.94

$12.94

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What is the Minimum Yield I Can Afford?

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Yield

Corn

Bu/Ac

160

Cotton

Lb/Ac

893

Rice

Lb/Ac

5,485

Soybean

Bu/Ac

38.3

2023 RMA Harvest Price

Corn

$4.84

Cotton

$0.85

Rice

$0.16

Soybean

$12.84

Source: USDA-RMA, UADA-CES

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Agricultural Lending in 2023

Type

Q3 2023 Rate (%)

Fed Funds

5.25

Prime Rate

8.50

Operating (Fixed)

8.81

Intermediate (Fixed)

8.14

Real Estate (Fixed)

8.04

Source: FRED Database & KC Fed

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Interest Rates (50 Bu/Ac, $491.73)

Interest Rate

Effective Interest Rate

Interest Expense

Total Soybean Operating Expenses

Breakeven Price

$ Change

5.0%

3.75%

$18.44

$510.17

$10.20

-

8.0%

6.0%

$29.50

$521.23

$10.42

+ $.22

9.0%

6.75%

$33.19

$524.92

$10.50

+ $.07

9.5%

7.13%

$35.04

$526.77

$10.54

+ $.04

10.0%

7.50%

$36.88

$528.61

$10.57

+ $.04

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Using Present Value of Future Payments

  • Crop Rotation over 2 years: soybeans (50%) and rice (50%)

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  • Average value per acre of production (1 year):
    • (Price * Quantity) – Total Expenses

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    • Soybean: $12.84 * 50 Bu/ac – $586.70 = $55.30

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    • Rice: $0.16 * 7,650 lbs/ac - $1,012.88 = $211.12

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  • ($55.30 * 50%) + ($211.12 * 50%) = $133.21

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  • P = $133.21
  • r = 7%
  • n = 20 years
  • You are considering the installation of solar panels.
  • Use present value of annuity to determine returns over 20 years

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  • $133.21 * [10.59] =

$1,410.69/ac

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Strategies and Concluding Remarks

  • Budgets provide a decision tool for enterprises
  • Help identify sources of risk
  • Maintain accurate financial and production records.
    • If costs are unknown, profit is unknown.
  • Use available budget resources to your advantage!
  • Knowledge of budgeting will help make and save $$$

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Thank You! �� Questions?

  • Ryan Loy
    • University of Arkansas Division of Agriculture
    • 2301 S University Ave, Little Rock, AR, 72204
    • Office: 307L
    • rloy@uada.edu
    • (214) 642-9066

Link to UADA-CES Enterprise Budgets