Financial Planning for Hay Production
David Dinkins¹
Florida hay producers continue to operate in a period of adverse weather patterns, significant competition and moderate prices. Add increasing production costs, government regulations and on-going pest problems and the financial outlook for hay production and marketing appears risky at best.
Both production and marketing planning will be important in the quest for profits. A complete farm management plan, including financial planning is essential to all producers.
Producers with small herds and limited land area may find it more feasible to purchase hay, rather than trying to grow and harvest their own. For one thing, buying your own haying equipment might not be cost-effective unless you enter the custom baling business. And if you grow your own hay, depending on custom harvesters can result in delayed harvests; most producers will want their hay harvested at the same time as you- when the weather is clear.
Caution should be followed in making production decisions. Tight profit margins dictate that all decision making is critical and planning becomes even more important.
The first requirement for any farm operation is to develop an enterprise budget. An enterprise budget is simply a systematic listing of expected expenditures for a given enterprise in a given area for a period of time and with a given level of technology (production practices). Budgets are divided into two main parts: 1) cash expenses or out-of-pocket costs (also called variable costs) and 2) fixed costs (overhead) related to the particular enterprise. Fixed costs, which include depreciation, interest, major repairs, taxes, and insurance, may often occur regardless of production. They are called "fixed" because they do not change during the production period.
¹ David Dinkins, Bradford County Extension Director, University of Florida, IFAS, Starke, FL 32091
Defining a budget and listing some major uses for it should help show a budget’s value in farm planning.
A Budget :
- a systematic listing of income and expenses for a production period.
- for crop and livestock enterprises.
- for all enterprises on farm.
- for business financing.
- for forward planning.
- for management control.
Budget Uses:
- gives a clear picture of costs.
- determines financial needs.
- projects cash flow.
- determines break-even prices.
- develop asking price for marketing decisions.
- helps in determining land buying decisions.
- helps determine rental rates.
Forage Budgets
An estimated per-acre budget for establishing Coastal bermuda grass and for the annual production costs is included in this paper. Producers should use these costs as a guide for their operation. Each producer should substitute their estimates for the practices that are applicable to their particular forage operation. The perennial forages form the basis for a viable pasture and hay program for Florida producers. Once established, a stand of perennial forages produces a harvestable yield each year for several years and creates a cost advantage for those type of forages. The productive lives vary depending on the types and cultural program. Even if livestock producers use annuals, budgeting is still an important step of the planning process.
Establishment Costs
Estimates of costs required to establish Coastal bermuda grass are presented in this paper. The values are based on establishment methods recommended by extension specialists and the current input prices. Costs include lime, fertilizers, custom charges, chemicals, labor, and equipment (both variable and fixed).
Annual Production Costs
All forages require annual inputs of resources for efficient production. For perennials, these inputs consist of annual fertilizers and prorated lime, machinery and labor services, and possibly herbicides, insecticides and baler twine. The annual production of perennials also includes interest and depreciation on the establishment costs of the stand. The yearly inputs for the annual forages, of course, pertain to all the inputs required by the crop, including those to establish it.
Estimates of the current annual production costs for bermuda grass, both hay and as a pasture forage, are presented in this paper. Costs of pastures do not include fencing, roads, or water supply, since these needs depend on the grazing situation.
Producers can use these enterprise budgets to fine tune their operations. In the example budget most of the expenses are for the fertility program. In this example producers should be most diligent in evaluating their fertilizer inputs against their hay yield and quality.
Break-Even Analysis
An analysis that looks at the break-even price needed at various yields if the field is hayed is shown with the production budget. Break-even costs plus a profit margin per ton can be compared to market prices in the area to serve as a pricing guide for hay. Producers could also determine some type of break-even forage yield if the field is only grazed. This type of analysis is useful for producers to determine the importance of maintaining high yields while holding cost current.
Generally speaking, producers would need to yield 5 tons of hay (ten-1000 # rolls) to the acre and receive $30 per roll just to break even.
Field Records
Keeping records on all fields should be a normal practice in a farming operation. These records enhance decision making and possibly provide information on lowering costs. Good records also provide information for future budget projections. Keep records for each field showing.
- type of forage
- weed problems, herbicides
- insect problems, insecticides
- disease problems
- nematode problems
- pest management results
- date, type and amount of fertilizer
- date and amount of lime application
- date and amount of water application
- harvest date if hayed
- yield
Deciding What To Do In Future Years
From a financial and management standpoint there are certain financial statements and management exercises that producers should consider. A list of steps to include in deciding what to do this year include:
- Pull a net worth statement. This will tell you what financial resources are available.
- Project needed incomes for debt commitments, family living expenses, operating needs.
- Analyze this year for the lessons to be learned for the 2004 season. (Field and financial records are best, budgets an acceptable substitute).
- Get familiar with the outlook for the commodities that may be produced.
- Estimate the cost of production for those enterprises.
- Pare the enterprises down to those things that might be profitable.
- Develop an asking price for the things that might be produced.
- Develop a cash flow plan for the trial farm plan.
- Will the plan likely provide enough money to cover needs?
- If it looks workable, concentrate on: lining up inputs cheaply; fine tuning the marketing plan; doing the important things well, and above all, doing them at the right time.
- If there isn’t likely to be enough money to cover needs:
- Review managerial abilities, preferences, recent performance and goals.
- Review the available resources.
- Try to expand the most profitable alternative until the most limiting resource is exhausted.
- Explore possibilities for other alternatives, being careful to preserve the ability to perform well what is already planned.
- Decide on a plan of action and implementation.
- Make time during every week for marketing decisions. Know what price you need, and continually watch what the market is giving.
Summary
Part of financial planning for hay production includes having a production plan as well as a marketing plan. You should know production costs and be aware of break-even prices. Develop an asking price and have a plan to change with weather, pest and marketing conditions. Keep useful field records. Evaluate what you do, what happened and what it cost or saved. Don’t forget to plan for safety and time for your family. Happy Haying!