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Fruit Production Budgets

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Fruit Production Budgets

  1. 1. Fruit Production: Using Interactive Budgeting Tools to Assess Costs, Revenues and Risks Jennie Popp, Ph.D. Hector G. Rodríguez, Ph.D. Curt Rom, Ph.D. Heather Friedrich, M.S. Jason McAfee, M.S. Missouri Organics Association Annual Meeting February 6, 2014 Springfield, MO Center for Agricultural and Rural Sustainability Division of Agriculture University of Arkansas
  2. 2. Fruit Production Budgets • Tools used to assess costs and revenues associated with production • Traditionally paper based • Require large amount of information from producers to work
  3. 3. New CARS Decision Support Tools • Interactive Budgeting: – Computer based; User specifies input, tool automatically makes calculations • User Friendly – Little computer knowledge required – Little data input needed • True Decision Support – Assess costs, revenues AND risks
  4. 4. Fruit Production Decision Support Tools
  5. 5. Presentation Objective • Describe the benefits of CARS Decision Support Tools • Walk through an example for apple production
  6. 6. Traditional Budget Sections Variable Costs Fixed Costs Total Costs Yield Relevant Price Total Revenue Total Revenue Total Cost Net Revenue
  7. 7. • Net Revenues may be calculated for one year • Present value of net benefits – Calculates what the value of all net revenues generated over time are worth today Traditional Budget Sections
  8. 8. New Section: Breakeven Analysis • Breakeven Point – Point at which costs and revenues are equal • Can be calculated for – Breakeven Price – Breakeven Yield
  9. 9. Breakeven Price • Given yields and costs, what price do I need (on average over time) to break even? Total Cost Over Time Expected Yield Over Time Breakeven Price
  10. 10. Breakeven Yield • Given market prices and costs, what yield do I need (on average over time) to break even? Total Cost Over Time Expected Market Price Over Time Breakeven Yield
  11. 11. New Section: Sensitivity Analysis • “What if?” analyses – How different values of an input impact final result • What if: – My yields over time are actually higher/lower than I predict? – The market price for the fresh/processing market over time is higher/lower than I predict?
  12. 12. New Section: Risk Analysis • A technique that calculates the probability of obtaining a net present value of returns greater than a specific dollar target • What is the probability that I will earn a net present value greater than $90,000?
  13. 13. Importance of The Tool • Allows the user to make more informed decisions by – Comparing costs/revenues of different production practices – Estimating impacts of changes in yield/prices on the solvency of the operation – Assess the economic risk associated with a particular production system • Assessments can be made hypothetically; without having to actually change practices
  14. 14. Decision Support Tool Example Organic Apple Production
  15. 15. Quick Start Menu
  16. 16. Help Menu
  17. 17. User’s Guide
  18. 18. Start • Tool can be run two ways: – User input – Demo
  19. 19. Start • Tool can be run two ways: – User input – Demo
  20. 20. By clicking on the Full Production Yield button, a new screen will appear that allows the user to change the expected yields for the fresh and processing markets for each production year.
  21. 21. Similarly, annual prices can be changed by clicking the Full Production Price button.
  22. 22. Run Once data are entered (or demo is chosen) click run.
  23. 23. Summary • The tool will generate net returns for each year of production
  24. 24. How to Change Levels of Activity or Prices • Click on a gray button associated with one of the years
  25. 25. How to Change Levels of Activity or Prices Here you can change - Quantities - Prices - Activities Once changed, the tool will recalculate all costs and returns
  26. 26. How to Change Levels of Activity or Prices Added - Poultry Litter - 1 ton/acre - $12
  27. 27. Before After
  28. 28. After Economic Analyses Click on the Gray Economics Button at the top of the Summary screen
  29. 29. Economic Analyses Shows a Summary of the Current Situation and a Breakeven Analysis
  30. 30. CASE ONE Full Production - 45 lbs/tree; Fresh Market 80% ($1.0 lb.); Processed Market 10% ($0.15/lb.)
  31. 31. CASE TWO Change - 5 lbs yield increase per tree each year Full Production – 50 lbs/tree; Fresh Market 80% ($1.0/lb.); Processed Market 10% ($0.15/lb.)
  32. 32. CASE ONE Full Production - 45 lbs/tree Fresh Market 80% Processed Market 10% Constant Price CASE TWO Full Production – 50 lbs/tree Fresh Market 80% Processed Market 10% Constant Price
  33. 33. Comparing Cases Shows a Summary of the Current Situation and a Breakeven Analysis
  34. 34. CASE ONE CASE TWO Total Costs $162,066 (18-yr) To breakeven - cover total costs • 23.13 lbs per tree each year or 209,942 lbs $162,066/209,942 lbs = $0.77/lb. Cover total costs but no profits However, producer is expecting: • $1.00/lb. fresh market and • $0.15/lb. processed market • 45 lb...... per tree/year With those prices and yields, the orchard will breakeven after 7 years or when costs and revenues are each $67,902 After year 7, the orchard produces profit every year Net Profit $96,756 (18-yr) Total Costs $163,731 (18-yr) To breakeven - cover total costs • 23.11 lbs per tree each year or 209,725 lbs $163,731/209,725 lbs = $0.78/lb. Cover total costs but no profits However, producer is expecting: • $1.00/lb. fresh market and • $0.15/lb. processed market • 50 lb...... per tree/year With those prices and yields, the orchard will breakeven after 6 years or when costs and revenues are each $58,024 After year 6, the orchard produces profit every year Net Profit $127,457 (18-yr)
  35. 35. Risk Analysis We can also calculate the risks associated with this operation by answering some questions under risk analysis
  36. 36. Yield Usage Fresh Price Processed Price Costs
  37. 37. Risk Analysis We can also calculate the risks associated with this operation by answering some questions under risk analysis EXAMPLE: suppose we raise most likely yields in the first three years only by 5 lbs/ac
  38. 38. Risk Analysis If expected yield increases, we increase the likelihood of getting returns of $90,000 or more over the life of the orchard. Before With Higher Yields 33.3% chance 46.5% chance
  39. 39. Risk Analysis We can calculate the risks associated with this operation by answering some questions under risk analysis ANOTHER EXAMPLE: Suppose we raise our desired net returns to $100,000 over the life of the orchard?
  40. 40. Risk Analysis If expected returns increases, we decrease the likelihood of reaching that level Expecting $90K Expecting $100K 46.5% chance 17.2% chance
  41. 41. Lots to this Tool! • The capabilities of this tool are great • But at the same time it can be used to answer very simple questions alone • Built to be flexible, based on the needs of the user
  42. 42. Get Your Decision Support Tool for Apple Production Now! • Take CD with you today • Send an email to CARS (cars@uark.edu) to request • CD copy of tool • Web link to download the tool • Electronic copy of this presentation
  43. 43. Tools for Blackberries, Raspberries and Blueberries in Development • Blackberry and Raspberry tools coming late spring • Blueberry tool coming end of year • Watch CARS website for announcements of releases
  44. 44. Visit Our Website Center for Agricultural and Rural Sustainability www.uark.edu/ua/cars Look under Food Industry Program pages for more information
  45. 45. Thank You About the Tool Hector Germán Rodríguez hrodrig@uark.edu About CARS Jennie Popp jhpopp@uark.edu For More Information….

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