Questions may arise as to whether goats will help supplement farm income or if a larger operation is even technically feasible. In an enterprise with seasonal and cyclical price changes, sensitivity to variable grain and hay prices, and a vulnerability to drought, appropriate management practices and an identification of key cost components are important. Circumstances over which the producer has no control can wreak havoc in the short run if a producer neglects strategic planning and risk management.
An enterprise budget estimates the full economic costs and returns projected to accrue to an activity - raising livestock or producing grain - for some period, generally one year. Enterprise budgets incorporate information about the specific resources, management practices, and technology used in the production process. Budgets help provide a decision framework for assessing both short- and long-range economic analyses of production agriculture. Budgeting allows producers to evaluate options before committing resources. Budgets can also be used to estimate potential income and the size of farm needed to earn a specified return or to compare the profitability of two or more systems of production. Budgets provide the documentation necessary to project cash flows and obtain/maintain credit-worthiness. Budgets can be used to estimate the amount of rent that can be paid for land or machinery.
A goat enterprise budget is a statement of what is generally expected from a set of particular production practices, listing the expected revenue and expenses incurred. It is designed to show profitability, not just cash flow. Profit is shown as residual earnings after resources utilized in the operation have been assigned a payment. The enterprise budget shown in Table 1 lists anticipated costs of operating inputs plus fixed costs (interest, depreciation, taxes, and insurance) on machinery, equipment, and livestock along with expected production per doe. Since the budget documents variable and fixed costs, it is useful in calculating profitability, break-even values, and the potential return on an investment.
An enterprise budget should contain several components. A detailed description should include a production goal, the production techniques to be employed, the land resource required, and even something about the capital and labor requirements. An enterprise budget should include all costs and all returns associated with the defined enterprise.
Historically, a lack of a developed nationwide marketing system in the United States caused seasonal price fluctuations and wide variations by location. Goat meat is favored by a number of ethnic groups who have immigrated to this country and many producers have traditionally supplied goat meat to these populations on an individual basis. However, with goat meat demand steadily increasing and domestic producers raising more goats to meet this growing appetite, market outlets such as livestock sales auctions are becoming more common.
A sample budget considering a herd size of 50 does and two bucks is shown in Table 1. The kids are marketed at four months of age. The total quantity of production is multiplied by the actual or expected price to determine value of production. Gross or total receipts are the sum of production values for individual items. For example, the expected returns in the budget are averaged for reporting on a per doe basis. A herd technically does not market 30.5 male kids for sale. This is a statistical result of the averaging process for the herd. The averaging process yields a realistic estimate of the budget unit (doe) returns to the entire herd given the assumed kid crop percentage, death loss, and cull doe replacement rates.
Table 1 - Meat Goat Budget, 50 Head Unit, 180% Kid Crop, 10% Kid Death Loss, 20% Doe Replacement Rate, Central Oklahoma Native Pasture, Per Doe Basis.
|Table 1 - Meat Goat Budget, 50 Head Unit, 180% Kid Crop, 10% Kid Death Loss, 20% Doe Replacement Rate, Central Oklahoma Native Pasture, Per Doe Basis.|
|Total Fixed Costs||$967||$19.34|
|Total Costs (Operating+Fixed)||$4,878||$97.56|
|Returns Above All
Source: OSU Enterprise Budget Software.
Three general types of costs comprise the total cost of producing any type of farm commodity. They are variable (operating), fixed, and overhead expenses. Overhead expenses (also known as indirect costs) are difficult to allocate among individual enterprises. Examples include telephone, electricity and accounting services. Overhead expenses are included in whole-farm budgets, but are generally excluded in enterprise budgets.
Variable costs are those operating inputs that vary as the level of production changes. They are items that will be used during one operation year or one production period. Examples include feed, fuel, vet medicine and supplies. They would not be purchased if production were not undertaken.
Variable costs may also be classified as cash or non-cash in nature. For instance, labor expenses are included in the operating input section of Table 1. No differentiation between owner supplied or hired labor is assumed. If the farm operator or a family member supplies labor, a wage rate or salary that represents earnings if employed elsewhere would be shown. This illustrates one of the most important concepts in economics - opportunity costs. Every resource used in the production process has one true cost, its opportunity cost. The opportunity cost of labor is the return the resource can earn when put to its best alternative. If the operator decides not to assign a charge to the labor item, residual earnings (as defined by Returns Above Total Operating Costs) includes labor income. The producer can then determine whether the return is adequate compensation for his/her labor efforts.
Fixed costs are not affected by short-term enterprise decisions and do not vary with the level of production. Generally, fixed costs are those ownership costs associated with buildings, machinery, and equipment that are pro-rated over a period of years. Fixed costs may also be cash or non-cash in nature. Real estate taxes, personal property taxes, and insurance on buildings are examples of cash fixed costs. Non-cash costs include depreciation and interest on capital investment.
The interest charge for capital assets such as machinery, equipment, and breeding livestock used in the goat operation is based on the average amount of capital invested over the ownership period, usage per year, and an interest rate. It is important to note that money invested in purchased capital assets has an opportunity cost as well - the return they can earn from their best alternative use. This interest on investment reflects a payment to a farmer's owned resources.
Depreciation represents an attempt to spread the investment costs or purchase price of durable assets over their productive lifetime. It is typically the largest cost associated with asset ownership. For example, when a tractor is worn out, it should have been completely "paid for" by depreciation. A producer must, in effect, save this much every year or reinvest it in machinery and equipment, or he/she will eventually end up with worn out items and no cash reserves to replace them.
Taxes vary by region but are generally a function of average value. In the goat budget, the annual charge for taxes is based on 1% of the purchase price.
Insurance policies are usually carried on more expensive machines while the farmer generally assumes the risk of loss on the simpler, less expensive assets. The insurance costs are based on the average amount of capital invested times an insurance rate.
Returns above total operating costs
The return to fixed costs, risk, and management (that is, the returns above total operating costs) is computed by subtracting total operating costs from total receipts. When returns above operating costs are positive, production is economically rational for an established enterprise. Positive returns above total operating costs indicate that the enterprise generates enough revenue to cover all variable costs and some portion of fixed costs. If returns above total operating costs are negative, the enterprise is not generating enough revenue to cover even variable costs. Unless the producer is willing to subsidize the operation (for instance, by contributing off-farm income), eliminating this enterprise will increase profits or decrease losses on the overall farm business. The return above total operating costs is also known as gross margin.
Returns above all specified costs
In determining overall enterprise profitability, fixed costs also have to be part of the profit equation. The return above all specified costs is calculated by subtracting total variable and fixed costs from operating revenues. This amount represents residual earnings for management, risk, and to land (because land costs can have a large variation within a region, land costs are excluded). Each individual must decide whether this return is a sufficient reward for management skills, risk exposure, and to land devoted to the enterprise. It should be noted that since non-cash items may be included in fixed costs, operating profits are not the same as net cash or operating receipts as shown in a cash flow statement.
In Table 1, the return above total operating costs is positive. Having a positive return above operating costs indicates the operation is able to contribute to fixed costs associated with owning capital assets. A positive return above all specified costs indicates that the operation is self-supporting and shows an amount available for reinvestment in the business or family living. In cases where operating costs are covered, but the return above all costs is negative, insufficient income is generated to cover all fixed costs. Any loss may be a short-run problem, however.
Building on budgets to determine break-even prices or yields and view sensitivity analysis is helpful in evaluating the financial risk associated with an enterprise. The break-even price is the price at which all costs will be covered given average production; the break-even yield is the level of production needed to cover all costs given average market prices. Break-evens above variable costs and above all costs both provide useful information. With sensitivity analysis, income variability due to price and production risk is demonstrated, typically with tables of numbers showing returns under different price and yield scenarios. This information helps the managers assess their willingness to assume the risk of these variations.
One of the most important keys to successful goat operations is to be as cost effective as possible. As mentioned previously, one needs to periodically evaluate the contributions of all resources used in the operation. Look at possibilities for improving cost control through new technologies or cultural practices. Identify key leverage points that can generate the "most bang for the buck". Are there ways to reduce the number of trips to the feed store while still meeting nutritional requirements? Can you do a better job of taking care of the herd instead of regular visits from the veterinarian? Benchmark what other producers are doing. Spending dollars wisely given the appropriate management practice can generate major dividends that impact the bottom line. After all possibilities to improve the budget have been exhausted and long-run earnings still appear unsatisfactory, the best decision may be to exit the enterprise and employ resources in a different enterprise or investment.
OSU software is available to develop a customized budget for an individual operation (http://www.agecon.okstate.edu/budgets). The Microsoft Excel-based software provides users access to important agricultural references during an "interactive" budget building process. Through a series of links and pop-up menus, users may override defaults with their own values to customize the budget if their experience and farm records indicate different values and production practices. Where possible, web-links are built into the spreadsheets to provide users important economic and agricultural science information on the Internet. Link examples include OSU Extension publications, Oklahoma Agricultural Statistics Service data, and Langston University goat information.
The software is designed to be flexible and user-friendly. After specifying a base livestock budget setting via a start-up form, the budget (as shown in Table 1) may be further customized by clicking on any budget item which links to a corresponding supporting sheet within the workbook. For example, to access and change the default kidding percentage for the herd, one may click on any of the production items linking to the Production sheet. The Production sheet summarizes herd information, kid retention and sales, culling and replacement practices, and herd buck information. Default values for kidding percentages, kid death losses, and average sale weight are based on information from the American Institute for Goat Research at Langston University. Kidding percentages can then be tailored to match a particular operation on the screen.