Crop planning involves decisions on return on investment and cost/benefit, and also cash flow and financing considerations. Some producers now utilize both agronomists and financial consultants to help build their crop budget. Optimizing crop budget planning is increasingly important as crop expenses increase and agronomic options continue to expand.
Logistics, opportunity costs and strategy
Logistics also come into play. The ideal agronomic plan won’t be executed if cash flow, labour, machinery and technology aren’t available. Execution needs to happen in a tight window. Precision agronomy and farm expansion sometimes clash for this reason.
Read Also
Veterinary know-how on the farm
If you’re a livestock farmer, you’ve likely faced one of the most frustrating situations on the farm: a sick or…
Is your farm’s strategy to increase economies of scale or to increase margins on existing acres?
And, is bigger better? Chick-fil-A founder Truett Cathy and his board were wrestling with new competition that had big expansion plans. In response, he is quoted as saying, “if we get better, our customers will demand that we get bigger.” Similarly, in farming if you get better, your balance sheet and stakeholders would demand that you get bigger.
Opportunity costs are part of the planning phase of building crop budgets. A cropping option will prevent you planting something else. Another may be eliminated due to constraints such as acres and rotation, or people and machinery. Gross margin analysis is the best way to evaluate different cropping options.
Gross margin analysis
The costs that can be accurately and efficiently assigned to specific cost centres (crops) should be included in the gross margin analysis. Typically, this means seed, fertilizer, chemical and crop insurance. Other variable costs exist on the farm but aren’t usually included. Variable costs are costs that change with acres farmed. Machinery and labour costs are examples. The problem is they’re not easily assignable to a specific crop. For labour, time sheets would need to be used; for equipment, engine hours, yet many crops see similar amounts of machinery and labour used. Few farmers see enough value for the time it takes to assign other costs such as machinery and labour to cost centres. Budget-to-actuals are helpful for all farm expenses, but farms should start with a budget-to-actual at the gross margin level.
Budget-to-actual
Producers should be preparing a budget-to-actual on inputs but in many cases, it’s a challenge just to get the bookkeeping and financial statements done. During your budget-to-actual review, billing or application mistakes could be found. Other benefits include improving the budgeting process for next year. Predicting insecticide and fungicide for the upcoming year is a challenge but a good opportunity to practice your forecasting skills.
A budget-to-actual requires assigning actual input costs to specific crops. Some bookkeeping software allows you to tag expenses to certain crops. This is more practical with a farm owner who knows what inputs were used on what crops, while many farms use third-party bookkeepers with limited agronomy knowledge.
Bin-run seed is a common issue. If it isn’t recorded, it will be buried in the grain inventory adjustment and hide your accurate seed expense.
Cash flow
More collaboration between farmers and agronomists on price points and budgets would be helpful, as most don’t have unlimited budgets for crop inputs. Credit lines should be in place early and be able to absorb contingencies like fungicide and insecticides.
Some farms pay all their expenses in cash while others finance their crop 100 per cent. A good benchmark for working capital-to-expenses for your farm is 50 per cent, i.e. you have cash to pay for half of next year’s expenses and need operating credit to finance the remaining. It’s advantageous if the agronomist is up to date on input prices. With deferred payments and zero per cent financing you can put cash to work elsewhere including land, technology and people investments.
Fertilizer is a commodity that should be managed like grain marketing. Sometimes it’s purchased early for tax planning reasons. If nine years out of 10 it’s cheapest in the fall, maybe there’s no issue. However, recently it became the top line item on farm income statements, surpassing machinery expense. It deserves more agronomist and financial management attention.
Crop shares / joint ventures
Crop shares and joint ventures can complicate crop budgets if some inputs are reimbursed in the budget while others are not. Agreements should be in writing to reduce issues. Open-ended agreements may cause issues later with audits requiring accuracy.
Craig Macfie, CPA, CA, PAg is a chartered professional accountant who specializes in providing fractional CFO services to growing farms. He can be reached at [email protected]
– This article was originally published in the February 27, 2024 issue of Country Guide.
