1. Partial Budgeting Dr. Paul D. Mitchell
Agricultural and Applied Economics
University of Wisconsin, Madison WI

2. Goal of This Presentation
Explain purpose of partial budgets
Illustrate their structure and use
Give some examples

3. Partial Budget Purpose
To estimate the net benefit from a small change to a farm operation in order to guide a farm decision
Fine tune your current operation: Hold all else fixed and evaluate effect of a small change
Partial Budget: focuses only on the things that change
Do not budget each enterprise completely, but build on enterprise budgets
Other names that are essentially the same: Marginal Analysis or Incremental Analysis

4. Simple Examples
Plant rootworm Bt corn or conventional corn with a soil insecticide
Plant a little more corn and a little less soybeans
Rent an additional 100 acres for corn
Buy combine or continue custom hiring
Sell current tractor and buy a bigger one
Soil test for N or just use credits/guess

5. Partial Budget Basic Idea
Partial Budget: Answer these 4 questions and then do calculations Net Benefit = Benefits – Costs Benefits: 1) What will be the new or added revenues? 2) What costs will be reduced or eliminated? Costs: 3) What will be the new or added costs? 4) What revenues will be reduced or lost?

6. Partial Budget: Define the change analyzed Benefits Costs
Additional Revenues
What will be the new or added revenues?
Additional Costs
What will be the new or added costs?
Costs Reduced
What costs will be reduced or eliminated?
Revenues Reduced
What revenues will be reduced or lost?
Total Benefits
Total Costs
Net Benefit

7. Planter Example
Look at buying a planter for 1000 acres of corn and soybean versus using custom hiring of the planting
What will be the new or added revenues?
Increased yields due to more timely planting
What costs will be reduced or eliminated?
No longer pay for custom planting
What will be the new or added costs?
Fixed and variable costs of owning a planter
What revenues will be reduced or lost?
I can’t think of any

8. Buy planter vs. custom hire for planting
1000 acres corn-soybeans (500 acres each)
Additional Revenues
What will be the new or added revenues?
Higher yields with more timely planting
Additional Costs
What will be the new or added costs?
Fixed and variable costs of owning a planter
Costs Reduced
What costs will be reduced or eliminated?
No longer pay cost for custom hire
Revenues Reduced
What revenues will be reduced or lost?
Can’t think of any
Total Benefits
Total Costs
Net Benefit

9. Buy planter vs. custom hire for planting
1000 acres (500 each) corn-soybean
Additional Revenues
3 bu corn x $4.00/bu x 500 ac
= $6,000
1 bu soybeans x $10/bu x 500 ac
= $5,000
Additional Costs
corn $19.11/ac x 500 ac
= $9,555
soybeans $20.38/ac x 500 ac
= $10,190
Costs Reduced
Custom corn planting = $15/ac x 500 ac = $7,500
Custom soybean planting = $16/ac x 500 ac = $8,000
Revenues Reduced
none
Total Benefits
$26,500
Total Costs
$19,745
Net Benefit
$6,755

10. Planter Example Only focused on costs and revenues that change
Purely made up numbers for illustration
Estimate 3 more bu of corn and 1 more bu of soybeans due to more timely planting
Corn = 1% loss/day in WI after May 8
Soybeans: 0.25/bu/day in IA study
Estimate cost of owning and operating a planter: Use “Fast and Simple Method” for 100 acres to get corn = $19.11/ac, soybeans = $20.38/ac
Custom rates: estimates from online WI Custom Rate Guide

11. Planter Example: What if “real”
Look at your records: How late was your custom planter over the last several years?
Estimate the average yield loss you suffered
Several equations for corn and soybeans on web
Cost to own and operate planter
Used the Fast and Simple Method:
Is $6,755 ($6.76/ac) enough to justify the added hassle of owning and operating a planter?

12. Think Break
Suppose you are a corn-soybean farmer who currently custom hires all combining. You are thinking of buying a combine.
Do a partial budget analysis of a Combine Purchase vs. Custom Hire decision
Needed assumptions/information and questions are given in the next slide

13. Think Break: Combine Purchase vs. Custom Hire
Corn acres = 2,000; Farm crop acres 4,000
Custom Rate = $25/ac
Scale Factor = (33.026/acres)
1% yield increase with more timely harvest
Average yield = 150 bu/ac; Price = $4/bu
1) What will be the new or added revenues?
2) What costs will be reduced or eliminated?
3) What will be the new or added costs?
4) What revenues will be reduced or lost?
5) What’s the net benefit?

14. Another Example
Add 50 beef cows to your cow-calf herd and convert 100 acres from grain to forage
1) What will be the new or added revenues?
2) What costs will be reduced or eliminated?
3) What will be the new or added costs?
4) What revenues will be reduced or lost?
5) What’s the net benefit?

15. Revenue Benefits 1) What will be the new or added revenues?
Sell more steers, heifers, and cull cows
46 calves (92% efficiency)
Save 5 heifers as replacements (10% cull rate)
23 steer calves: 500 lbs x $0.85/lb = $9,775
18 heifer calves: 460 lbs x $0.80/lb = $6,624
5 cull cows $500 each = $2,500
Total = $18,899

16. Cost Benefits 2) What costs will be reduced or eliminated?
Variable inputs used for grain production
Fertilizer, seed, pesticides, etc.: $5,350
Labor: $1,500
Variable machinery costs: $1,000
Interest on variable 6% = $470
Total = $8,320

17. Cost Costs 3) What will be the new or added costs? Fixed costs
Interest on cows and bulls = $2,500
Bull depreciation = $300
Variable costs
Labor = $600, Vet and health = $500
Feed/Hay = $2,000, Pasture fertilizer = $1,500
Hauling and Miscellaneous = $500
Interest on variable 6% = $300
Total = $8,200

18. Revenue Costs 4) What revenues will be reduced or lost?
Grain production from 100 acres
Corn: 110 bu/ac x $2.00/bu x 100 ac = $22,000
Soybeans: 30 bu/ac x $5.00/bu x 100 ac = $15,000
Use half of each, since 2 year rotation
Total = ½ ($22,000 + $15,000) = $18,500

19. Partial Budget: Add 50 cows to cow-calf operation and convert 100 acres to forage
Benefits
Costs
Additional Revenues
23 Steer calves, 18 heifer calves and 5 cull cows = $18,899
Additional Costs
Fixed and variable costs for 50 more cows and needed bulls = $8,200
Costs Reduced
Variable inputs for grain production = $8,320
Revenues Reduced
Revenue from corn-soybean production = $18,500
Total Benefits
$27,219
Total Costs
$26,700
Net Benefit
$519

20. Comments on Analysis
Note that we needed more complete enterprise budgets for cow-calf and grain operations
Fixed cost added for cows and bulls, but no fixed cost change for crop conversion from grain to forage. Why?
Labor for cow-calf less than for grain ($600 vs. $1,500), an added benefit – What will you do with the extra time?

21. Comments on Partial Budgeting
Final comments on Partial Budgets
Economies of Size
Opportunity Costs
Sensitivity Analysis
Risk Changes

22. Economies of Size
Analysis assumes proportional (linear) changes in costs and revenue when make small changes
Linear (proportional) approximation is fine for small changes, but not for large – need more complete budgeting for large changes
Adding 20 cows to herd of 200 will increase labor demand, but likely less than 10%
Dropping 100 acres from 1000 acre grain farm will decrease costs, but likely less than 10%

23. Opportunity Costs Should be included in the analysis
Capital needs change: include costs (benefits) for borrowing more (less) money or locking up more (less) of your capital in farm assets
Labor and Management changes: include the costs/benefits of your and your family's time commitment changes
Change farm operation due to changes in credit or labor resources or desires

24. Sensitivity Analysis
Assumptions used to construct partial budgets not always known with certainty
Yield benefit for more timely planting
Crop yields and prices
Machinery costs
Run analysis with a range of assumptions
Low, average, high, or worst and best case scenario
Find break even price or yield and decide how likely
Formally model the uncertainty: use probability distributions, decision trees, or payoff matrices and do risk analysis

25. Risk and Partial Budgeting
Partial Budgeting ignores changes in risk
Converting 100 acres from grain to forage and adding 50 cows to cow-calf operation:
What are the risk implications?
Without formal risk analysis tools, comparisons usually ignore risk or add afterwards in ad hoc way
How does the change affect the variability of my income?
What the probably that I will at least break even on the change?

26. Aggregating Partial Budgets for Impact Analysis
Partial budget analysis focuses on a farm to help guide farm decisions
Aggregate over farms to estimate the net benefit for many farms making small changes as a result of a program
Simple example for a hypothetical IPM program for Wisconsin strawberry growers
WI has less than 1,000 acres of strawberries
Program encouraged switch from a scheduled spray program to scouting-based applications

27. Hypothetical Example to Illustrate
Based on meetings and small farmer survey of adopters
Categorize impacts as either low and high benefit farms
Low Benefit Farms: switch from 5 sprays to 3 sprays
High Benefit Farms: switch from 4 sprays to 1 spray, got price premium for “IPM Strawberries” for 10% of crop
Spray costs $10/acre for application and a.i.
Scouting cost $10/acre for the season
Average price = $2.50/lb, $2.65/lb for IPM strawberries
Average yield = 6,000 lbs/acre

28. Partial Budget: Hypothetical Strawberry IPM: Low Benefit Farm Benefits
Costs
Additional Revenues
None
Additional Costs
Scouting costs = $10/A
Costs Reduced
2 fewer sprays, saving 2 x $10/A = $20/A
Revenues Reduced
Total Benefits
$20/A
Total Costs
$10/A
Net Benefit

29. Partial Budget: Hypothetical Strawberry IPM: High Benefit Farm
Benefits
Costs
Additional Revenues
10% acres get $0.15/lb higher price, or 10% x $0.15/lb x 6,000 lbs/A = $90/A
Additional Costs
Scouting costs = $10/A
Costs Reduced
3 fewer sprays, saving 3 x $10/A = $30/A
Revenues Reduced
None
Total Benefits
$120/A
Total Costs
$10/A
Net Benefit
$110/A

30. Aggregating Partial Budgets for Impact Analysis
Survey shows IPM was adopted on 750 acres
Low Benefit Farms: 200 acres
Benefit = 200 A x $20/A = $4,000
High Benefit Farms: 550 acres
Benefit = 550 A x $110/A = $60,500
Total Benefit = $64,500

31. Summary
Explained and illustrated use of partial budgets using some simple farm management examples
Explained some weaknesses of partial budgets (size economies, opportunity costs, sensitivity analysis, risk)
Presented simple IPM example and how to aggregate impacts by multiplying per acre affects by the total acres