1. Partial Budgeting
AAE 320
Paul D. Mitchell

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

3. Partial Budget Purpose
To analyze net gain from small changes or refinements to farm operation
Partial Budget: focus only on the parts that change, do not need to completely budget each enterprise
Use to fine tune current operation: Hold all else fixed to evaluate a small change
Marginal/incremental analysis: change input use, shift between inputs or between outputs

4. Simple Examples to Analyze Using Partial Budget Analysis
Do I plant rootworm Bt corn or conventional corn with a soil insecticide?
Do I rent an additional 80 acres for corn?
Do I buy a combine or continue custom hiring?
Do I sell my current tractor and buy a new one?
Do I pay for a soil test for N or just use credits?

5. Partial Budget Basic Idea
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?
Partial Budget:
Answer these 4 questions and then calculate
Net Gain = Benefits – Costs

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
Total Benefits – Total Costs = Net Gain

7. Planter Example
Look at buying a planter for 1000 acres of corn and soybean versus custom hire
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?
None
Total Benefits
Total Costs
Total Benefits – Total Costs = Net Gain

9. Buy planter vs. custom hire for planting
1000 acres (500 each) corn-soybean
Additional Revenues
3 bu corn x $3.00/bu x 500 ac
= $4,500
1 bu soybeans x $9/bu x 500 ac
Additional Costs
Corn $15/ac x 500 ac
= $7,500
Soybeans $12/ac x 500 ac
= $6,000
Costs Reduced
Custom corn planting = $20/ac x 500 ac = $10,000
Custom soybean planting = $16/ac x 500 ac = $8,000
Revenues Reduced
None
Total Benefits
$27,000
Total Costs
$13,500
Total Benefits – Total Costs = Net Gain

10. Planter Example Only focus on costs and revenues that change
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: “Estimating Farm Machinery Costs” (ISU Extension
Custom rates: Rounded 2016 Iowa Custom Rates:
Is $13,500 ($13.50/ac) enough to justify the added hassle of owning and operating a planter?

11. Think Break #1
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

12. Think Break #1 Combine Purchase vs. Custom Hire
Corn acres = 1,000
Custom Rate = $25/acre
Cost Estimate if owned: $22/acre
1% yield increase with more timely harvest
Average Yield = 180 bu/ac; Expected Price = $3/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 gain?

13. Partial Budget: Think Break #1: Combine Purchase vs Custom Hire
Benefits
Costs
Additional Revenues
Additional Costs
Costs Reduced
Revenues Reduced
Total Benefits
Total Costs
Total Benefits – Total Costs = Net Gain

14. Another Example: See how detailed it can become
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 gain?

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 x 500 lbs x $1.25/lb = $14,375
18 heifer calves x 460 lbs x $1.20/lb = $9,936
5 cull cows $500 each = $2,500
Total = $26,811

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: 160 bu/ac x $3.00/bu x 100 ac = $48,000
Soybeans: 40 bu/ac x $9.00/bu x 100 ac = $36,000
Use half of each, since 2 year rotation
Total = ½ ($48,000 + $36,000) = $42,000

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 = $26,811
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 = $42,000
Total Benefits
$35,131
Total Costs
$50,200
Net Gain
–$15,069

20. Comments on Analysis
Needed more complete enterprise budgets for cow-calf and grain & forage 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. Final Comments on Partial Budgets
Some things to consider when using partial budget analysis
Economies of Size
Opportunity Costs
Sensitivity Analysis
Risk Changes

22. Economies of Size
Partial budget analysis assumes linear or proportional changes in costs and revenues
Likely not quite accurate, but a useful and simple approximation
Adding 20 cows to herd of 200 will increase labor demand, but less than 10%
Dropping 100 acres from 1000 acre grain farm will decrease costs, but less than 10%
Main Point: Linear (proportional) approximation is fine for small changes, but not for large—need more complete budgeting if examine a large change

23. Opportunity Costs Should be included in the analysis
Capital needs change: include costs (benefits) for borrowing more (less) money or tying 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, worst or best case scenario
Find break even price or yield and decide how likely
Formally model the uncertainty: use probability distributions, decision trees, or pay off matrices and do Monte Carlo 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 “tools”, comparisons ignore risk, or you bring it in afterwards in ad hoc way
“The financial risk of owning a planter is too great to justify the $1,380 net benefit”
“The risk of not finding a custom combiner is too great to justify the $6,900 net gain if I switch to using custom combining

26. More Information
Partial Budgeting a common tool in ag, use Google to find examples
Partial Budgeting: A Tool to Analyze Farm Business Changes (ISU Extension)
Partial Budget Analysis (NDSU Agriculture Law and Management)

27. Summary Explained and illustrated the purpose of partial budgets
Did examples, including Think Break #1
Explained some issues/weaknesses of partial budgets (size economies, opportunity costs, sensitivity analysis, risk)
For problem set and exam: be able to make simple partial budget using given information and interpret findings