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l

BULLETIN 492 SEPTEMBER 1977

CONTENTS
Page
INTRODUCTION .................. ..................

3
3 5
. 5

Assumptions and Procedures
ENTERPRISE BUDGETS

....................................

Objectives of Study ............................................
............................................

Cotton Budget .....................................
Soybean Budget ................................... Corn Budget .....................................

.........
.......... ..........

5
6 7

......... Pasture and Hay Budgets Cow-Calf Budget ..................................
Swine Budget ................................................

................... ..........

7 7
8 9

LINEAR PROGRAMMING SOLUTIONS OBTAINED FOR THE EXAMPLE FARM . . . . . . . . . . . . .

Conditions and Assumptions of Linear Programming ................... Financial Framework Used in Solutions ............................. Solutions Using Operating Capital and Annual Payments to Borrowed Investment Capital as Constraints on Selection of Enterprises .............................. Investment Capital for Machinery ................................. The Effect of Per Cent Down Payment for Land Upon the Selection of Enterprises ................................. The Effect of Implementation of a Swine Operation Upon Net Cash Income and Selection of Enterprises ......................... The Effect of Changing Interest Rates Upon the Selection of Enterprises .........................................
SUMMARY AND CONCLUSION.. ....... SELECTED REFERENCES APPENDIX TABLES ...... ...... .............................. ........................................... ............................................. ..........

9 9

10 13 .15 20 20
.

23 26

. 27

FIRST PRINTING 3M, SEPTEMBER 1977

Information contained herein is available to all without regard to race, color, or national origin.

THE EFFECT and USE of ALTERNATIVE CREDIT POLICIES on the FINANCIAL GROWTH of an ALABAMA FARM
HOMER C. DANIEL, JR., SIDNEY C. BELL, and WILLIAM E. HARDY, JR.*

INTRODUCTION

TECHNOLOGICAL

INNOVATIONS

in agriculture in the past decade

have provided farmers with more efficient means of production. To utilize these innovations, many farmers have had to increase their outstanding debt. Many farmers have been reluctant to use external credit intensively because they had little assistance or guidance in this area of management. Therefore, it has become a critical need to supply Alabama farmers more assistance in the area of financial management. This study reflects the effect and use of external credit on the financial growth of a particular farm in Alabama. Many farmers select the combination of enterprises for the farm solely on the productivity of their resources on their farm. They should consider the combination that would give the highest return to their resources and cash flow. This study used a multiperiod linear programming model to show that the cash flow of each enterprise considered had an effect on the combination of optimal enterprises.
Assumptions and Procedures

An example farm, located in northern Alabama, was selected for the analysis. This farm was chosen because of the adequacy of the farm records, past knowledge of the farm's productivity, and the possibility of open discussions with the owner. The example farm consisted of 1,363 acres of land which included 600 acres of row crop land, 165 acres of pasture, 200 acres of woodland, and 398 acres of unproductive land.
*Research Associate, Professor, and Assistant Professor, Department of Agricultural Economics and Rural Sociology.

4

ALABAMA AGRICULTURAL EXPERIMENTSTATION

TABLE 1.

MANAGEMENT GROUP AND PERCENTAGE OF TOTAL ACRES OF EXAMPLE FARM*

Management group Group 7 Group 13 Group 1 Group 21

Acres 886 273 136 68

Percent 65 20 10 5 Undulation moderately permeable deep soils chiefly from materials of limestone origin. Hilly slowly permeable soils from materials of limestone origin. Well-drained and imperfectly drained soils of the stream bottoms and depressions, chiefly from materials of lime stone origin. Limestone rockland, rough gullied land, and rough stony land.

*The Soil Conservation Service has requirements for the different Management Groups. They are: Group 1--The soils are fertile and easily worked and are generally not subject to erosion. All are well suited to intensive use for crops that require tillage. Group 7-The soils can be tilled throughout a relatively wide range of moisture conditions without destruction of the tilth. The soils should not be bare of vegetation for extended periods. Group 13-Although these soils can be used under careful management for growing tilled crops, they are probably better suited to permanent pasture or forest. Group 21-These soils are not suitable for tilled crops or pasture. Steepness of slope, stoniness, severe erosion, and an inadequate supply of humus prohibit the growing of crops and pasture. These soil types are best suited to forest.

There were many soil types on the farm as classified by the U.S. Soil Conservation Service (SCS) (3). The primary SCS soil management groups of the example farm are shown in Table 1. The level of management and technology used in row crop and livestock production was presumed to be above average. The manager was assumed to use recommended cultural practices with modern machinery and four-row equipment. The soil type and the size of the fields would make the use of such equipment practical. It was assumed that the full-time labor on the farm was composed of an operator and one full-time man with seasonal hired labor available when needed. The quantity of labor supplied by the two full-time men was divided into four periods as shown in Table 2. With the two men working by themselves the operator was assumed to work approximately 4 percent more than the hired man since he did the supervising and management.
TABLE

2.

MANHOURS FURNISHED BY OPERATOR AND ONE FULL-TIME HIRED MAN BY PERIODS

Periods 1 Labor available Jan 1Mar 31 540 460 2 Apr 1Jun 30 660 562 3 Jul 1Sep 31 4 Oct 1Dec 31 540 460

Operator............................ Hired man...........................

Hours ........... 900 766

ALTERNATIVE CREDITPOLICIES

5

The enterprises considered for development of the farm plan were cotton, corn, soybeans, beef cattle (cow-calf), and swine. The selection of these alternatives was based on the personal preference of the owner, quantity and type of land, availability of seasonal labor and local markets. The projected yield for each crop to be considered was based on research by the Agricultural Experiment Station staff at Auburn University and characteristics of the example farm. The quantity of fertilizers and lime used was derived from recommendations of soil sample reports. A multiperiod linear programming model was used to simulate the production and financial development alternatives available to the example farm for a 9-year period. The model was developed using the enterprise budgets developed for this farm and the various stated assumptions of the farming operation.
Objectives of Study

The general objective of this study was to relate the actions and use of certain financial management techniques to the growth of a given farm operation. The specific objectives: (1) Select the optimum combination of enterprises for a selected farm over a 9-year period with borrowing of operating capital, investment capital for machinery and buildings, and annual payments for existing debt as the main constraints of the 9-year plan. (2) Demonstrate how different down payments (percent of equity) affect the optimum combination of enterprises, the net cash income, and net worth after 9 years.
ENTERPRISE BUDGETS

Enterprise budgets were developed for each productive enterprise considered in the analysis (2). These were necessary for an estimation of cost and returns for each activity. Prices of major inputs and products resulting from each productive activity were projected for the first 5 years of the farm plan. It was assumed that prices would remain at the fifth year level for years six through nine. Projected prices for crop and livestock budgets can be found in Appendix tables 1 and 2.
Cotton Budget

A cotton budget for 1976 with a projected yield of 600 pounds of lint cotton per acre is shown in Appendix Table 3. This yield would be

6

ALABAMA AGRICULTURAL EXPERIMENT STATION

expected if recommendations for fertilizer, chemicals, and cultural practices were followed. The gross return per acre was calculated as being $340.80. The variable costs were divided into preharvest and harvest costs, $118.89 and $43.70 respectively. Preharvest cost consists of expenses that will occur during the production year before harvest plus a charge for operating capital. The machinery and tractor expenses are gas, oil, lubricants, etc., that will occur before harvest. Harvest costs include defoliation, ginning, machinery (cotton picker), and tractor expenses. All of these expenses occur during or just after harvest time. Item 4 in the budget shows the fixed cost computed per acre of cotton. The depreciation shown was based on the purchase price, salvage value, and hours of use for the tractor (with implements) and cotton picker. Labor costs (Item 5) were computed by calculating the amount of machinery time (in hours) used per acre and then multiplying by $2.00. This again was divided into harvest and preharvest. Item 6 gives the total cost (variable cost + fixed cost) of production for cotton. Subtracting the total cost, $231.91, from the total receipts, $340.80, yields $180.89, the net returns to land and management. Cotton budgets for years 1977 through 1980 were calculated the same way except different projected input and output prices were used. The budgets for the other crops considered were calculated in the same manner as the cotton budget except that different input and output coefficients were used.
Soybean Budget

The receipts and expenses for the 1976 soybean budget are shown in Appendix Table 4. The projected yield was 32 bushels per acre with an expected price of $4.80 per bushel giving gross receipts of $153.60. Again, the variable costs were divided into harvest and preharvest. The preharvest cost was calculated at $52.92 and the harvest cost as being $.98. The harvest cost includes only the fuel and lubricants used by the combine for an acre of soybeans. The total variable cost for an acre of soybeans in 1976 was calculated at $53.90. The income above variable cost was $99.70 ($153.60-$53.90). The depreciation (fixed cost, Item 4) for the tractor and combine was $10.85. This value (basic depreciation rate) was calculated the same for all budgets except that the hours of use and the type of machinery used were different. The total cost for soybeans was calculated to be $69.63. Subtracting this value from the gross receipts resulted in $83.97, net returns to land and management per acre of soybeans. Soybeans budgets for 1977 through 1980 were also calculated in a similar manner.

ALTERNATIVE CREDIT POLICIES

7

Corn Budget The corn budget for 1976 is shown in Appendix Table 5. The corn

and soybeans budgets for 1976 were very similar in cost although different input coefficients were used. The equipment used in the two enterprises were the same except a corn header was used on the combine when harvesting corn. Total variable cost for corn was $63.47 with gross receipts being

$162.50 income above variable cost was $99.03 per acre. The net returns to land and management per acre was $79.45 for corn in 1976. Corn budgets for 1977 through 1980 are now shown but were
calculated in the same manner but with different prices. Pasture and Hay Budgets These budgets were made for use by the cow-calf enterprise. Each year the cow-calf operation (30-cow herd) will require 37 acres of Coastal bermudagrass pasture for grazing and 12 acres to be harvested for hay, producing 6 tons of hay per acre. The hay and pasture budgets were formulated assuming that the Coastal bermudagrass was already established. The 1976 budgets for each are found in Appendix tables 6 and 7. Neither of the enterprises have any sales; thus, there are no returns listed for either crop. Therefore, the net returns are negative in each case. The cost of production for each enterprise was deducted from the cow-calf en terprise which is discussed later. The 1977 through 1980 budgets for hay and pasture were calculated the same way except for different prices. Cow-Calf Budget

The cow-calf livestock budget was designed to show the cost and returns to a 30-cow herd. The cow-calf budget for 1976 for the example farm is shown in Appendix Table 8.
Like the row-crop budgets, the cow-calf budget was made on the assumption that recommended management practices would be

followed. The cattle on the farm were considered to be of fair quality;
therefore, using recommended practices, a 90 percent calf crop was ex-

pected and was included in the analysis. The calves were sold at weaning time as steer calves weighing 425 pounds and heifer calves weighing 400 pounds. Five heifer calves were
kept for potential herd replacements; likewise, five culled cows were sold from the herd each year weighing 1,000 pounds each. Along with the other receipts shown in Appendix Table 8, an aged bull was sold

8

ALABAMA AGRICULTURAL EXPERIMENTSTATION

every 4 years. The value was prorated over 4 years; thus, only 1/ of a bull is calculated with the gross receipts for 1976. Item 2 shows the variable costs associated with maintenance of a 30cow herd with one bull and producing 27 calves. The quantities shown in the budget are based on a per head basis. For example, the protein supplement cost was figured by multiplying the amount fed per head (1.8 cwt) times the price per hundred-weight ($8.00) then that value ($14.40) is multiplied by the number fed (30) which will give a total value of $432.00 (1.8 x 8. x 30). The other values listed are selfexplanatory. Total variable cost is $842 which includes an interest charge of 9.5 percent for 6 months on operating capital. Subtracting the total variable cost from the total gross receipts ($3,684.25) resulted in $2,842.25 of income above variable cost. Item 4 indicates the depreciation associated with the cow-calf herd. An interest charge was levied against the breeding livestock and equipment. Also, depreciation was figured on all depreciable capital items used by the cow-calf enterprise. The total fixed cost was $1,413.66 per 30-cow herd. Adding the variable and fixed cost, total cost for the 30 cow unit was $2,255.67 (Item 5). Item 6 shows the net returns to land, management, and produced feed (pasture and hay). This figure will be negative when the cost of pasture and hay is subtracted from receipts. Additional cow-calf budgets for 1977 through 1980 were calculated using different prices.
Swine Budget

The cost and returns of an 80-sow hog budget are shown in Appendix Table 9. The hog budget is based on producing 1,360 pigs per year with 40 of the pigs saved for replacement gilts and 1,320 of the -pigs fed to a market weight of 200 pounds. The operation is completely confined and has the capacity to house 300 sows including the pigs fed to market weight. The cost data for the building and other system equipment were based on data collected from hog farms within the area. The gross receipt for a year's operation consists primarily of the sales from market hogs shown in Item 1. The hogs are sold at a weight of 200 pounds and at a price that would consist primarily of Numbers 1 and 2 grade hogs. The remaining amount of receipts come from the sale of cull sows and boars. Variable costs, Item 2, show the expenses for a production year. The quantities are specified in number of units bought for the year. Total variable cost for 1976 was $24,221.67. Subtracting this value from the gross receipts resulted in $105,698.31 of income above variable cost.

ALTERNATIVE CREDIT POLICIES

9

Fixed cost associated with the hog enterprise is shown in Item 4. The equipment, breeding livestock, and buildings required to produce the 80-sow unit were depreciated based on the specified life of each item. Total depreciation was $8,160.55. Total costs were $32,382.21, shown in Item 5. This value does not include the 16,592 bushels of corn needed for the 80-sow herd. Net return to land, management, and grain was $97,537.75. Hog-budgets for years 1977 through 1980 were calculated using different prices. LINEAR PROGRAMMING SOLUTIONS OBTAINED FOR THE EXAMPLE FARM Linear programming is a tool widely used in choosing the most profitable combination of enterprises for a specific farm situation and in aiding decisions which require a choice among a number of alternatives.
Conditions and Assumptions of Linear Programming

There are basically three quantitative components of a linear programming model: an objective function, alternative methods or processes for attaining the objective, and resources or other restric tions. The objective function should be precisely defined and expressed results can be in quantitative terms so that "relevant" and there are generally obtained. Given a specific objective function, numerous ways of satisfying the objective. Limited resources or other restrictions exist in the model which limit how much can be produced. These may be limitations with respect to the availability of labor, equipment, capital, irrigation facilities, size and location, distance from market, ownership of farm, and borrowing capacity. (1). Linear programming solutions generally show activities optimized in fractional units. Analyzing solutions often results in increasing or decreasing the size of units optimized so that realistic values will be obtained. The values shown in the solution tables were rounded so that whole units could be shown.

"sensible"

Financial Framework Used in Solutions

It was assumed that the example farm was purchased in 1976 for $608,500. Open land was valued at $600 per acre with the remaining land valued at $250. The purchase was financed for 30 years at 9 percent per annum. The amount financed was assumed to be 75 percent for the first solution and 50 percent of the $608,500 for the second solution. A determination of the effect of different amounts borrowed

10

ALABAMA

AGRICULTURAL

EXPERIMENT

STATION

upon potential enterprise selection and net worth for the farm was one of the specific objectives of this study. Assuming that financing was available for 30 years at 9 percent and 75 percent of the $608,500 was borrowed, annual mortgage payments were $44,421.86. This total annual payment, $44,421.86, including principal and interest payments for a declining balance loan, Appendix Table 10. Twenty-five percent of the $608,500 was paid by cash as a down payment on the land. This amount, $152,125.00, was the net worth at the beginning of the first year's business. The borrowing capacity, $76,062.50, for the first year's business was calculated at 50 percent of the net worth. Assuming 50 percent was paid down for the land and the additional $304,250 was borrowed, the annual mortgage payment for a declining balance loan at 9 percent was $29,614.57, as shown in Appendix Table 11. The payments and principal amounts shown in Appendix tables 10 and 11 were used as constraints and affected the optimal solutions. The total annual payments, whether for a 25 or 50 percent down payment solution, were deducted from receipts generated each year. The principal paid was added to the cumulative net worth, thus increasing the borrowing capacity.
Solutions Using Operating Capital and Annual Payments to Borrowed Investment Capital as Constraints on Selection of Enterprises

An optimal solution for row crops, shown in Table 3, was used to illustrate the effect of borrowing operating capital and annual payments for borrowed investment capital upon an optimal solution. Row crops usually have receipts only 3 months during the year; therefore, operating capital required during the year has greater effect on the optimal combination of enterprises than when swine, which have receipts throughout the year, are considered.' This solution had $10,000 on hand that could be used for investment capital and/or operating capital for the first year. A small tractor was on the farm to be used for odd jobs and provided a small portion of tractor hours required to produce selected crops. The borrowing capacity was calculated at 50 and 75 percent of the $152,125 paid down for the land.

'Swine have receipts 8 months per year.

TABLE 3. OPTIMAL SELECTION FOR THE EXAMPLE FARM OF Row CRoPS WITH EMPHASIS UPON OPERATING CAPITAL AND ANNUAL PAYMENTS TO BORROWED INVESTMENT CAPITAL, TWENTY-FIVE PERCENT DOWN PAYMENT WITH FIFTY AND SEVENTY-FIVE PERCENT BORROWING CAPACITY

Year 1976 Cash on hand at beg. of year (Dol).......... 10,000 Enterprises (acres) Corn............... Cotton .............. Soybeans............. 765 Total sales (dol)* ....... 117,504 BorroWing operating Capital (dol) January........... February........... 8,870 March............ 15,300 April.............. 3,963 887 May.............. 505 June.............. July............... 3,527 August............ 467 September ..... October ........... November .......... December .......... Total amount borrowed* 33,518 Interest............... 1,740
Total

1977 0 94 671 128,461 3,383 10,560 16,519 3,615 903 443 3,298 409 66

1978 4,804

1979 11,981 17 137 611 143,647 3,128 11,660 14,586 6,926 2,396 2,063 5,052 2,462 727

1980 17,030 628 137 158,344

1981 24,733 628 137 158,344

1982 51,069 628 137 158,344

1983 50,255 628 137 158,344

1984 85,693 490 275 179,944 0

765 129,744

9,204 15,767 4,146 887 505 3,710 467

8,927 20,077 4,075 2,824 1,984 2,870 2,139 1,160

9,564

13,836 4,075 2,824 1,984 2,870 2,139 1,160

1,936 20,077 4,075 2,824 1,984 2,870 2,139 1,160

67 2,139 1,160

1,859 4,277 1,785

Operating capital (Dol) Crops............... 39,168 Additional Hired Labor 0 Total*................ 39,168 Investment capital Machinery purchase.. 51,705 Investment capital paid by cash......... 5,100

paid back*.........

39,196 2,132
41,328

34,525 1,743
36,268

48,999 2,436
51,435

53,621 2,850
56,471

28,888 1,245
30,133

37,065 1,715
38,780

3,366 45
3,411

7,922 126
8,048

35,258

40,028 0i 40,028 0 0

39,329 0 39,329 0 0

54,426 0 54,426 30,628 11,981

58,755 2,185 60,940 17,191 17,030

58,755 2,185 60,940 0 0

58,755 2,185 60,940 34,514 34,514

58,755 2,185 60,940 0 0

72,728 2,090 74,818 30,628 30,628

TABLE 3. (CONTINUED) OPTIMAL SELECTION FOR THE EXAMPLE FARM OF Row CROPS WITH EMPHASIS UPON OPERATING CAPITAL AND ANNUAL PAYMENTS TO BORROWED INVESTMENT CAPITAL, TWENTY-FIVE PERCENT DOWN PAYMENT WITH FIFTY AND SEVENTY-FIVE PERCENT BORROWING CAPACITY

N

Year

1976 Investment capital
borrowed .......... Payment per year for three years ...... 46,605 19,574

1977
0 0

1978
0 0

1979
18,647 7,832

1980
161 68

1981
0 0

1982
0 0

1983
0 0

1984
0 0

Cumulative payments .. 19,574 payment for land ....... 44,422 Total pay at year end* .... 63,996 Payroll Operator............ 10,000 Full-time man ........ 7,500 7,500 0 Net cash income*........ Cumulative borrowing Capacity 50% ........ 80,286 Cumulative borrowing capacity 75%......... 120,430

19,574 44,422 63,996 10,000 7,500 7500 4,804 86,284 129,426

19,574 44,422 63,996 10,000 7,500 11,981 93,377 140,066

7,832 44,422 52,254 10,000 7,500 17,030 107,806 161,708

7,900 44,422 52,322 10,000 7,500 24,733 117,271 175,906

7,900 44,422 52,322 10,000 7,500 51,069 117,971 176,956

68 44,422 44,490 10,000 7,500 50,255 136,628 204,942

0 44,422 44,422 10,000 7,500 85,693 133,017 199,526

0 44,422 44,422 10,000 7,500 98,143 144,965 217,447

*Totals may not sum due to rounding error.

ALTERNATIVE CREDIT POLCIES

13

The 1976 solution included was all 765 acres of land being used for soybeans. Also, $5,100 of the $10,000 on hand at the beginning of the year was paid down on purchased machinery and the remaining $4,900 was used for operating capital in January and February. This solution required $33,518 of borrowed capital for operating expenses during February through August. Cotton for 1976, which had a greater return to land and management than soybeans, was not included in the solution. It did not create enough cash flow to supply the requirements for the operating capital and down payment for a cotton picker required if the cotton enterprise entered the solution. Often crops and/or livestock are produced solely because an enterprise budget indicates a higher return to land and management. Operators should go a little further in their analysis of an enterprise including a cash-flow schedule before selecting the enterprise for the farm. This is especially true if the enterprise requires the purchase of machinery and equipment. An understanding of the cash-flow generating capacity enterprises is especially important when there is a limited amount of cash on hand. Cotton was not a feasible enterprise until 1979. A cash-flow for 1979, shown in Table 4, indicates there was also enough cash generated so that the payment on borrowed funds for the cotton picker could be paid at the end of the year. Soybeans and corn were still in solution in 1979 because both are fairly profitable and generate cash earlier than cotton in the production year. Having their harvest earlier than cotton was beneficial because the operating capital loan could be paid earlier, thus having a smaller interest payment. The optimal interest to be paid for 1979 was calculated to be $2,436. This amount was the least amount of interest that could be paid with this solution.
Investment Capital for Machinery

The amount of capital generated by the system was a key to the machinery purchased for selected crops the following year. In the 1978 solution, only soybeans were produced and the net cash income at the end of the year was $11,981, Table 3. This amount was forwarded to the following year's business, 1979, where it could be used as needed. Because such a large sum was generated, there was enough cash for a down payment on a cotton picker in 1979. Thus, cotton became a feasible enterprise in 1979. The linear programming system optimizes the total 9-year plan. Thus, the machinery requirements for crops in any one year has an effect upon the solution of enterprises in other years.

TABLE 4.

A CASH FLOW FOR THE EXAMPLE FARM WITH

Row CROPS

ONLY WITH TWENTY-FIVE PERCENT DOWN PAYMENT ON LAND, 1979

Months Units Jan. Enterprise receipts Corn (acres)..............17 611 Soybeans (acres) ........... Cotton (acres).............137 Total....................765 Enterprise Expenses 229 Corn (acres)..............17 611 Soybeans (acres) ........... Cotton (acres).............137 3,128 Total.....................765 Transfer of cash to investment Capital ................... Labor Operator ............... Full-time man ............. 0 Additional labor.............. Total ..................... Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. 1,419 48,888 Nov. 1,430 48,888 23,900 Dec. Total 2,849 97,776 43,022 143,647 975 31,514 21,936 54,426

19,121
19,121

50,307
22 0 11 22 149 501 403 3,065 709 8,373 12,790 3,392 1,295 3,523 1,665 1,659 1,986 3,139 11 660 14,586 6,926 2,396 2,062 5,073 0 373 2,089 2,462 12 0 728 728 24 599 0 623

74,218
0 0 677, 677

1,833 1,066

7 0 4,121 4,128

11,981

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

Cash at beginning of month...

Cash difference between receipts and expenses.............. Cash position at end of month ... Cash borrowed................ Principal paid............... Interest paid at 0.5%.......... Total payment.............. Payment to land............. Payment for machinery... Cash at end of month .........

11,981

10,000 7,500 0 0 17,500 0 71,790 73,541 14,994 71,790 86,784 3,623 129 3,752 44,422 7,832 17,030

10,000 7,500 0 17,900 9,220 50,999 2,436 53,435 44,422 7,832 17,030

11,660 -14,586-6,926-2,396-2,062- 5,073 -2,462 0 0 0 0 0 0 0 3,128 11,660 14,586 6,926 2,396 2,062 5,073 2,462

728 49,684 0 0 728 47,376 2,308 49,684

ALTERNATIVE

CREDIT

POLICIES

15

The types of machinery purchased for the 9-year solution were: Type of machinery Year Tractor ............................ 1976 Combine ........................... 1976 Cotton picker ....................... 1979 Tractor ............................. 1980 Combine .......................... 1982 Cotton picker ........................ 1984 The total cost of machinery purchased was $164,666 with $99,253 supplied from cash generated by the selected enterprises and $65,413 borrowed during the 9 years.
The Effect of Percent Down Payment for Land Upon the Selection of Enterprises

The percent down payment for land was changed from 25 percent, used in Table 3, to 50 percent to illustrate the effect of a larger down payment on the combination of enterprises and net returns in the optimum solution. The solution, with a 50 percent down payment for land had the same beginning activities, Table 5, as the solution with the 25 percent down payment. The difference between the two was the land payment per year and the initial borrowing capacity required for capital investment loans. The enterprises selected as optimal for the first 4 years of the solution were soybeans only or a combination of soybeans and corn. Cotton came into the solution in 1980 with 137 acres and increased into larger acreage in subsequent years. A previous explanation for cotton not coming into solution at a time of high net returns, Table 3, was that it did not generate sufficient cash above the payment to borrowed investment capital for the cotton picker. When the down payment was increased to 50 percent, it reduced the amount to be borrowed for land and thus reduced the land payment per year. With a reduction in the land payments, there was a sizable increase in the cumulative net cash income which increased the cash on hand at the beginning of each year. The accumulation of cash on hand of $17,033 in 1979, from Table 5, provided the cash flow with that amount. This would reduce the borrowing of investment capital and causing further accumulation of cash above the interest that would have to be paid from the borrowing of operating capital. In 1980 the cash on hand was $45,766. A portion of this was used as a down payment for a cotton picker and thus reducing the amount to be borrowed for investment capital.

TABLE 5. OPTIMAL SOLUTION FOR THE EXAMPLE FARM WITH Row CROPS ONLY, FOR NINE YEARS, FIFTY PERCENT DOWN PAYMENT ON LAND WITH FIFTY PERCENT BORROWING CAPACITY

Year 1976 Cash on hand at 10,000 beg. of year (dol) ....... Enterprises (acres) Corn ................ Cotton ............... 765 Soybeans............. Total sales*........... 117,504 Borrowing operating Capital (dol) 2,295 January........... 11,475 February .......... 15,300 March............ 3,963 April............. 887 May ............. 505 June ............. 3,527 July ............. 467 August ........... September ......... October .......... November ......... December......... Total amount borrowed* . . 38,418 2,069 Interest .............. .40,487 Total paid back* ........ Operating capital (dol) 39,168 Crops .............. 0 Additional labor ...... Total*. .............. 39,168 Investment capital (dol) 51,705 Machinerypurchased... Investment capital 10,000 paid by cash ........ 1977 11,637 94 671 128,461 3,383 10,560 16,519 3,615 903 443 3,298 409 66 765 129,744 1978 20,747 1979 17,033 140 625 123,112 1980 45,765 628 137 158,344 9,564 8,928 20,077 4,075 1,984 2,870 2,139 1,161 1981 40,794 490 275 179,944 1982 64,840 490.27 275 179,944 1983 104,453 353 412 201,546 1984 139,436 216 549 223,145

13,097 15,767 4,146 887 505 3,710 467

13,919 3,560 911 413 3,300 381 98

9,360 17,304 7,364 4,334 3,671 4,723 4,277 1,786

880 3,671 4,724 4,277 1,786

39,196 2,132 41,328 40,028 0 40,028 13,834 11,637

38,579 2,047 40,626 39,329 0 39,329 34,514 20,747

22,581 1,075 23,656 40,485 0 40,485 0 0

50,797 2,850 53,647 58,755 2,185 60,940 47,819 45,765

52,820 2,476 55,296 72,729 2,090 74,818 30,628 30,628

15,337 345 15,683 72,729 2,090 74,819 17,191 17,191

0 0 0 86,701 2,116 88,817 30,628 30,628

0 0 0 100,673 2,244 102,917 65,142 65,142

TABLE 5. (CONTINUED) OPTIMAL SOLUTION FOR THE EXAMPLE FARM WITH Row CROPs ONLY, FOR NINE YEARS, FIFTY PERCENT DOWN PAYMENT ON

LAND WITH FIFTY PERCENT BORROWING CAPACITY

Year 1976 Investment capital borrowed.......... 41,705 Payment/yr. for 17,516 3 years ........... Cumulative 17,516 payment .......... 29,615 Payment to land ........ Total pay at year 47,131 end(dol)* ........... Payroll Operator............ 10,000 Full-time man ......... 7,500 Net cash income* . ...... 11,637 Cumulative borrowed capital 50%.......... 158,241 Cumulative borrowed capital75%.......... 237,362 1977 2,197 923 18,439 29,615 48,054 10,000 7,500 20,747 168,738 253,107 1978 13,767 5,782 24,221 29,615 53,836 10,000 7,500 17,033 184,360 276,540 1979 0 0 6,705 29,615 36,320 10,000 7,500 45,765 191,086 286,629 1980 2,054 863 6,645 29,615 36,259 10,000 7,500 40,794 213,230 319,845 1981 0 0 863 29,615 30,477 10,000 7,500 64,840 225,781 338,672 1982 0 0 863 29,615 30,477 10,000 7,500 104,453 227,662 341,493 1983 0 0 0 29,615 29,615 10,000 7,500 139,436 235,662 353,433 1984 0 0 0 29,615 29,615 10,000 7,500 147,407 259,101 388,652

*Totals may not sum due to rounding error.

18

ALABAMA

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The ability to buy more machinery with a larger down payment and the specific selection of machinery caused the generation of greater incomes. A comparison of incomes for both solutions, 25 and 50 percent down payment on land, is shown in Table 6. The machinery purchased for each solution was not shown because of the different machinery selected during the 9-year plan. One of the reasons for the larger income in the 50 percent solution was because of the equipment that was purchased at optimum times in production. Cotton, which was the key to higher net income above variable expenses, could not come into solution until a cotton picker was purchased. The optimum time for a cotton picker to be purchased in the 50 percent solution was in 1980, whereas the optimum time for the 25 percent solution was in 1979. Since interest on borrowed funds is a cost to the system, it was more economical to wait until 1980 to buy a cotton picker because more money could be paid down for the ,machinery. The solution for the 25 percent down payment had $14,031 paid for interest on borrowed operating capital while interest for the 50 percent down payment solution was $12,993.44. The difference was due to a greater amount of net cash income carried over each year; i.e., a greater amount of the cash on hand at the beginning could be used for operating capital. The 25 percent down payment solution required operating capital to be borrowed every year for 9 years while the 50 percent solution required borrowed operating capital only 7 of the 9 years.
TABLE 6. A COMPARISON OF INCOME ABOVE VARIABLE EXPENSES BETWEEN LINEAR PROGRAMMING SOLUTIONS FOR NINE YEARS WITH 25 AND 50 PERCENT DOWN PAYMENTS FOR FARM LAND

Percent paid down Item 25 Dollars Gross receipts ................................... 1,332,676 Operating capital................................. 491,529 Borrowedcapital.................................. 286,369 Interest paid ..................................... . 14,031 Total variable expense ............................. . 505,560 Net income above variable expense .................... 827,116 1,442,742 561,320 257,729 12,993 574,314 868,429 50

As was stated earlier, the machinery required for each enterprise had a specific effect upon the selection of enterprises. The 50 percent solution with its smaller annual loan payment for land facilitated the purchase of more machinery and thus had a different selection of enterprises from the 25 percent solution. The data in Table 7 reflect the machinery purchased, amount borrowed for machinery, and interest

ALTERNATIVE

A

TAWA TVP

CREDIT

RPJIIT POJJCJFS

POLICIES

19

19

TABLE

7. COMPARISON OF 25 AND 50 PERCENT DOWN PAYMENTS FOR LAND WITH MACHINERY PURCHASED, CAPITAL BORROWED FOR MACHINERY, PERCENT BORROWED, INTEREST PAID ON BORROWED CAPITAL, AND NET INCOME ABOVE VARIABLE EXPENSES

Percent down payments

Item

25
Dollars

50

827,116 Net income above variable expenses ................... 164,666 Machinery purchases .............................. . 65,413 Amount borrowed ............................... 40 Per cent borrowed of purchase............................. ... Interest paid ................................. 810,109 Net income* ...................

17,007

868,429 291,461 59,723 20 852,901

15,528

*Net income is net income above variable expenses, less the interest paid on borrowed money for machinery.

paid for the two solutions. There was $126,795 more machinery purchased for the 50 percent down payment solution. This solution generated more income, thus the machinery purchased for the 50 percent down payment solution was primarily paid by cash; therefore, less interest was paid on borrowed funds. The 50 percent down payment solution was more profitable than the 25 percent down payment with respect to net worth and cumulative net cash income, Table 8. At the end of the ninth year, the net worth for the 50 percent solution was $665,608 as compared to $388,074 for the 25 percent down payment solution. The change in net worth was a better comparison of the net worths for the two solutions. The change in net worth was the dollar change from the beginning net worth to the ending net worth. The change in while the net worth for the 25 percent down payment was

$235,949,

change in net worth for the 50 percent down payment was down for the land, it would be to the If it is possible to pay

$304,250

$361,358.

TABLE 8.

BEGINNING AND ENDING NET WORTHS FOR NINE YEARS FOR THE EXAMPLE FARM WITH 25 AND 50 PERCENT DOWN PAYMENT FOR LAND

Percent down payment for Land Item Assets Land.........................................
Machinery .....................................

25 Dollars 608,500

50

94209

608,500

184,887
147,407

Cash..........................................
Total ...........................

800,852
412,778 388,074

98,143

940,794
275,186 665,608
3 04 ,250

Liabilities Land mortgage ......................... Ending net worth..................................
Beginning net worth .............................. Change in net worth..............................

.......
..

151,125 235,949

361,358

20

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operator's benefit to do so. This would create a larger net cash income and a significant increase in net worth.
The Effect of Implementation of a Swine Operation Upon Net Cash Income and Selection of Enterprises

When the swine enterprise was added as an enterprise to be considered, it entered the solution in the second year and was expanded into a 300-sow capacity unit in 1981, Table 9. After 1981, the swine facility was limited to a 300-sow capacity because of the personal preference of the operator. Corn for the swine operation was provided by producing corn on the farm and/or buying corn. The net returns to soybeans competed with growing all corn in some years, but after the sow operation got to 240 sows and larger, it was feasible to produce all 765 acres in corn and buy the remainder. This was a favorable characteristic of the program because many farmers have the ability to produce row crops that could be used for selling activities or, if feasible, could be used as feed on the farm and sold through the hogs produced. There was a tremendous reduction in the borrowing of operating capital when the swine operation was implemented. One reason was that hogs were sold 8 months out of the year, whereas crops were sold only once or twice a year. The swine operation required a swine facility for each sow purchased. Thus, when the swine operation came into solution with 100 sows, an investment capital of $41,377 was required to construct a facility. Since there was insufficient cash at the beginning of the year, investment capital was borrowed. The $41,377 borrowed for the swine facility and the $46,264 borrowed for machinery and livestock reduced the borrowing capacity at the end of the year to $23,649. This was the first solution that showed borrowing capacity instead of cash generated having an effect upon the amount that could be borrowed; i.e., if additional facilities were preferred this year, they would be limited to $23,649 of investment capital. The swine operation generated a higher net cash income and at a faster rate than just row crops. Also, the swine operation generated a larger borrowing capacity in later years because of the building and additional machinery purchased.
The Effect of Changing Interest Rates Upon the Selection of Enterprises

The interest rates for borrowed operating capital for the solutions discussed thus far were all calculated at 9.5 percent per annum. Interest

TABLE 9. OPTIMAL SOLUTION FOR THE EXAMPLE FARM WITH Row-CROPS AND A SWINE ENTERPRISE LIMITED TO 300 Sows, FOR NINE YEARS WITH TWENTY-FIVE PERCENT DOWN PAYMENT ON LAND WITH FIFTY PERCENT BORROWING CAPACITY

Year 1976 Cash on hand at beg. ofyear (dol) ...... 10,000 Enterprises 765 Soybeans (acres) ...... Corn (acres). .......... 0 0 Cotton (acres) ........ 0 Swine (sows) ......... Gross receipts ......... 117,504 Borrowing operating Capital (dol) January ........... February ........... 8,870 March............ 15,300 April.............. 3,963 May ............. 887 June.............. 505 July ............. 3,527 August........... 467 September......... October ........... November......... December......... Total amount borrowed*.. 33,518 . 1,740 Interest .............. .35,258 Total paid back* ........ Operating capital (dol) Crops and buy Corn (dol) ......... 39,168 0 Swine (dol) ........... Additional labor . 0 (dol) ............. 39,168 Total*. .............. 1977 0 446 319 100 205,202 1978 21,113 765 140 314,544 1979 37,049 127 638 200 267,795 1980 56,571 765 240 277,200 1,402 12,092 18,248 10,493 1,468 779 1981 67,224 765 300 346,500 1982 85,399 765 300 346,500 1983 156,334 765 300 346,500 1984 224,919 765 300 346,500

12,092 128 12,220 41,914 29,556 5,944 77,413

28,741 263 29,005 119,178 42,200 8,158 169,535

1,468 12 1,480 44,173 60,562 16,560 121,295

2,181 17 2,198 44,937 71,084 20,829 136,850

0 0 0 82,518 88,855 26,383 197,756

0 0 0 82,518 88,855 26,383 197,756

0 0 0 82,518 88,855 26,383 197,756

0 0 0 82,518 88,855 26,383 197,756

TABLE 9. (CONTINUED) OPTIMAL SOLUTION FOR THE EXAMPLE FARM WITH ROW-CRoPS AND A SWINE ENTERPRISE LIMITED TO 300 SOWS, FOR NINE YEARS WITH TWENTY-FIVE PERCENT DOWN PAYMENT ON LAND WITH FIFTY PERCENT BORROWING CAPACITY

Year 1976 Investment capital (dol) Machinery and Live51,705 stock purchased. Investment capital 5,100 paid by cash ......... Investment capital borrowed..........46,605 Loan pay/Yr. for 3 Years............19,574 Swine facility pur 0 0 Inv. cap. paid by cash ... Inv. cap. borrowed..... 0 Loan pay/yr.......... 0 Cumulative and Pay for Machinery and
Facilities.........

1977

1978

1979

1980

1981

1982

1983

1984

46,264
0 46,264

4,700 4,700 0 0 16,551 16,413 138 22 45 ,648 44,422 90,069 10,000 7,500 37,049 63,001 VIVL(V LL

24,241 24,241 0 0 24, 826 12,808 12,018 1,923 27,996 44,422 72,418 10,000 7,500 56,571 83,803 \ I~j~~

56,405 56,405 0 0 16,551
166

32,634 32,634 0 0 24,826

4,700 4,700 0 0 0 0 0 0 11,187 44,422 55,609 10,000 7,500 156,334 222,441

7,050 7,050 0 0 0 0 0 0 11,187 44,422 55,609 10,000 7,500 224,919 282,233

34,514 34,514 0 0 0 0 0 0 11,187 44,422 55,609 10,000 7,500 266,1 314,483

41,377 0 41,377
6,620

19,431

16,385
2,622 11,187 44,422 55,609 10,000 7,500 67,224 119,089 Y)VIL-

24,826
0

0 11,187 44,422 55,609 10,000 7,500 85,399 170,073

19,574

45,626
44,422 90 ,047

Pay to land (dol)......... 44,422 Total pay at year End (dol)............ 63,996 Payroll (dol)
Operator............ full-time man.........

Net cash income (dol)*.. Cumulative borrowing capital (dol)..........

10,000 7,500

0

10,000 7,500
21,113 23,649

80,287

Totals may not sum due to rounding error. 1

ALTERNATIVE CREDIT POLICIES

23

rates at 6 and 12 percent were implemented in the program and separate solutions for each interest rate were analyzed. The solutions with different interest rates showed a change in net cash income and a slight change in the selection of enterprise for 2 years. The change in income for both solutions was primarily due to the increase and decrease in the cost of borrowed funds. The increase in cost was due to the interest being changed to 12 percent. The solution with 12 percent interest rate had cotton come in at a later year when less borrowed operating capital was required.
SUMMARY AND CONCLUSION

The general objective of this study was to relate the actions and use of certain financial management techniques to the growth of a given farm firm. Certain assumptions were formulated before the enterprise budgets were constructed. These included the basic assumptions for a linear programming model and the farm under study. The assumptions about this farm were that recommended management practices would be followed, an above average level of technology would be obtained, additional labor could be hired, and prices used were conservative estimates of future prices. Enterprise budgets were constructed for corn, cotton, soybeans, an 80-sow swine operation, and a 30-cow calf operation. All budgets were formulated on the premise of recommended management practices. From the budget's gross receipts, variable cost (preharvest and harvest), fixed cost, labor cost, total cost were subtracted and net returns were obtained. The enterprised budgets provided a basis for cost and returns for each enterprise considered. There was a total of 1,363 acres on the example farm with 765 open acres available for pasture and/or row-crop production. A matrix was developed in compliance with the assumptions of linear programming systems and the assumed constraints set forth for the example farm. The matrix was constructed so that the enterprises considered had separate cost and selling activities. This was used so that certain activities that entered solutions were sold or used on the farm as feed. Also, having cost activities for each enterprise simplified the implementation of the cash flow system within the matrix. The cash flow system was the key to all solutions since each enterprise required operating capital. The operating capital had to come from cash on hand or from selected borrowing activities. Borrowed operating capital was paid back within the production year at a specified rate of interest on the unpaid balance. Each enterprise had an exclusive har-

24

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vest time and required different amounts of operating capital per month. The time of harvest and operating capital required per month caused a constraint to be levied upon each enterprise, thus restricting the enterprises entering the solution. This constraint is often neglected by farmers in their selection of enterprises. Often, enterprises are selected only on the basis of their net returns when return to cash flow is not considered. The total value of the land was $608,500 and could be.financed at 9 percent for 30 years. Twenty-five percent down payment was used in all solutions except when the comparison of a 50 percent down payment was used for the row crops only solution. The annual payment for land was $44,422 for the 25 percent down payment and $29,615 for the 50 percent down payment. Optimal solutions for each specific objective were obtained by variations of constraints that were required by each objective. Operating capital and annual payments to borrowed investment capital for a 25 percent down payment solution for row crops only had an effect on the selection of enterprises. Soybeans or a combination of soybeans and corn were the only crops produced until 1979 when 137 acres of cotton were produced. Then from 1979 until 1984, there were 137 acres of cotton and a combination of soybeans and corn. In 1984, cotton acreage increased to 274 acres and corn was produced on the remaining acres. The optimum selection of borrowing and payback activities of investment capital for machinery was a vital part of all optimal solutions with only row crops considered. The 25 percent down payment solution required more borrowed investment capital for machinery than the other two solutions-a 50 percent down payment for row crops only and 25 percent down payment with row crops and livestock. The 25 percent down payment solution required $164,666 of investment capital for machinery at the end of 9 years. Of the $164,666 of investment capital, $99,253 came from cash on hand and $65,413 was borrowed and paid back plus the interest, $17,007. The selection of machinery by type and year was done by the computerized system for the total 9 years. The type of machinery purchased at the beginning of the year was purchased for the enterprises considered for that year and the following years. All three row crops used some different type or version of harvesting equipment. Because of this, certain crops, especially cotton, were restricted until the investment capital required to purchase the harvesting equipment and/or additional machinery was available at an optimum time. The optimum time was when the use of the investment

ALTERNATIVE

CREDIT

POLICIES

25

capital for the machinery would return an optimum net return for the total 9 years. For instance, it was more profitable to wait until 1979 to purchase a cotton picker, $30,628, than to purchase one in 1976 because the total net returns for the 9-year period was greater when it was purchased in 1979. Also, purchase of an additional cotton picker in 1984 allowed cotton acreage to increase. When the percent down payment for land was increased to 50 percent for row crops only, it reduced the amount to be borrowed for land, thus reducing the land payment per year from $44,422 to $29,615. With a reduction in land payments, there was a sizable increase in the cumulative net cash income from $98,143 for the 25 percent down payment to $147,407 for the 50 percent down payment. With a 50 percent down payment, the initial net worth would be higher so a change in net worth was used as a comparison of the two different down payments. The change in net worth for the 25 percent down payment was $235,949 and the change in net worth for the 50 percent down payment was $361,359. The 50 percent down payment solutions for row crops only borrowed 20 percent of the investment capital, while the 25 percent down payment solution borrowed 40 percent. Thus, with a larger down payment to land, more of the cash on hand was spent on investment capital. Special preferences were considered for row crops alone and/or row crops and livestock together. It was shown that having a swine operation on the farm enhanced the net cash income for the 9-year period by $266,041. The swine operation required a hog facility, at a cost of $124,132, to be constructed on the farm. The linear programming solution provided the information needed to know the optimum time for implementation. The size of the sow unit was held at 300 sows because of preference by the operator. The corn for the sow operation could have been bought and/or produced on the farm, whichever was more feasible. Optimal solutions for the 9-year period had soybeans on all the 765 acres for 2 of the 9 years and buying the corn required for the swine. Corn was produced for feed the other 7 years. Cattle for the example farm were never profitable enough to come into solution. The reason was that the pasture and hay acreage required to produce the cattle had expenses greater than the cattle receipts. Also, the labor and machinery required by the cattle did not show a profitable return as compared to the other enterprises considered. The multiperiod linear programming model built for the example farm was a financial management tool that could be prescribed for any size farm and/or enterprise preference. The model developed

26 26

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ALABAMA AGRICULTUA

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specifically for this study provided an analysis of different down payment strategies and different preferences to row crops and/or row crops and livestock. If different farm sites and/or enterprise selections were warranted, then data similar to that utilized for the example farm would be needed, i.e., productivity of land, acreage, enterprises considered, etc. The model provided strategies for financial growth and also could be used as a lending aid for lenders as well as for borrowers. Farmers and prospective farmers often buy land because of a "good deal" on land. They should have some foresight of the use of the land and their investment. This model would provide the foresight for the use of purchased land and/or land for prospective purchase. Realtors could benefit by implementing such a linear programming model into a sales package for prospective clients.
SELECTED REFERENCES
(1) AGRAWAL, R. D. AND EARL O. HEADY. 1958. Operations Research Methods for Agri-

(2) (3)

culturalDecisions. Ames: Iowa State Press. KLETKE, DARRELL D. June 1975. "Operations Manual for the Oklahoma State University Enterprise Budget Generator," Oklahoma State University, Agricultural Experiment Station, Research Report No. P 719. United States Department of Agriculture. 1975. Agricultural Statistics, United States Government Printing Office.

ALTERNATIVE

ALTERNATIVE CREDITPOLICIFS

CREDIT

POLICIES

27

27

APPENDIX
APPENDIX TABLE 1. PROJECTED PRICES USED IN DEVELOPING CROP BUDGETS

Years Item 1976 Dol. 0.50 Cotton (ib).................. 2.50 Corn (bu)................... 4.80 Soybeans (bu)................ 50.00 Cottonseed (cwt) ............. 8-24-24(cwt)................ 7.00 0-20-20(cwt)................ 6.00 0-10-20 (cwt)................6.50 8.00 15-0-15 (cwt) ................ 6.50 Nitrogen (cwt)............... 12.00 Lime (ton) .................. 6.30 Cot. preherb (acre)............ 4.95 Cot. herb. (acre).............. Corn herb. (acre).............. 5.50 10.00 Soy herbicide (acre) ........... 6.00 Cot. fung. (acre).............. 3.50 Cot. inst. (acre) ...............
Cot. def. (acre)............... 4.00

1977 Dol. 0.45 2.75 5.20 48.50 6.79 5.82 5.75 7.25 6.37 12.00 6.49 5.10 5.67 10.30 5.74 3.60
4.12

1978 Dol. 0.40 2.50 5.30 47.00 6.59 5.65 5.00 6.50 6.24 12.00 6.68 5.25 5.83 10.61 5.91 3.71
4.24

1979 Dol. 0.45 2.65 5.00 48.50 6.39 5.48 4.25 5.75 6.12 12.00 6.88 5.41 6.00 10.93 6.09 3.82 26.50 0.85 10.00

1980 Dol, 0.50 2.75 4.80 50.00 6.20 5.31 3.50 5.00 6.00 12.00 7.09 5.57 6.19 11.26 5.27 3.94
4.50

Ginning (500 lb) ............. Cornseed (lb)................ Soybean seed (bu).............

25.00 0.80 10.00

26.50 0.82 9.00

27.00 .85 10.00

4.37

25.00 0.85 10.00

APPENDIX TABLE 2. PROJECTED PRICES USED IN DEVELOPING LIVESTOCK BUDGETS

Years Item 1976 Dol. Steercalves(cwt).............27.50 Heifercalves(cwt)............ 26.00 27.50 Stockens (cwt) ............... 85.00 Feederpigs(cwt) ............. Market hogs (cwt)............47.50 Cullcows(cwt)............... 19.00
Cullheifers(cwt).............23.00

1977 Dol. 28.00 26.50 28.00 72.00 40.00 20.00 23.50 21.50 20.00 18.00

1978 Dol. 30.00 28.50 30.00 72.00 40.00 20.50
24.00

1979 Dol. 35.00 33.50 35.00 67.50 37.50 20.50
24.00

1980 Dol. 40.00 38.50 40.00 63.00 35.00 21.00

21.00 Aged bull (cwt) .............. 30.00 Cull sows (cwt)............... 20.00 Cull boar (cwt) ............... Creep (cwt)..................8.50 Prot. sup. (cwt)...............8.00 Vet. exp. (head)............... 1.00 Salt and min. (cwt)............. 5.00
Cust. hauling (head)...........

8.75
0.75

22.00 20.00 18.00

8.75

22.25 19.00 17.00
9.00

25.00

22.50 19.00 17.00

8.75

0.75

8.25 1.00 5.00 1.00

8.50 1.00 5.00

0.75
1.00

8.50 1.00 5.00

0.75
1.00

0.75

8.25 1.00 5.00 1.00

Sales comm. (head) .............

1.00

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ALABAMA AGRICULTUA

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APPENDIX TABLE 3. COTTON, RECOMMENDED MANAGEMENT PRACTICES, ESTIMATED ANNUAL COST AND RETURNS PER ACRE, 1976

Item

Unit

Price or cost/unit Dol.

Quantity

Value or cost Dol.

Gross receipts lb. Cotton lint .......................... Cotton seed..........................Ton Total ............................... Variable costs Preharvest Cotton seed ........................ Cwt. Complete fert.......................Cwt. Nitrogen .......................... Cwt. Lime ............................. Ton Pre-merge herb.....................Acre Herbicide ......................... Acre Fungicide ......................... Acre Insecticide ......................... Acre Machinery..........................Acre Tractors .......................... Acre Int. on op. cap.......................Pct. Subtotal, preharvest............... Harvest costs Defoliate .......................... Acre Bl. Ginning .......................... Machinery ......................... Acre Tractors .......................... Acre Subtotal, harvest.................. Total variable costs...................... Income above variable costs.............. Fixed costs Machinery .......................... Acre Tractors ............................ Acre Total fixed costs........................ Labor costs Preharvest labor ...................... Hour Harvest labor ........................ Hour Total labor costs..................... Total costs........................... Net returns to land and management.. 111I~~~1I C~I~I11~~

0.50 80.00

600.00 0.51

300.00 40.80 340.80 8.50

50.00 7.00 6.50 12.00 6.30 4.95 6.00 3.50 0.74 10.52 9.50 4.00 25.00 5.33 4.36

0.17
2.50

2.10 0.25 1.00 1.00 1.00 12.00 1.00 1.00 60.31 1.00 1.20 1.00 1.00

13.65 3.00 6.30 4.95 6.00 42.00 0.74 10.52 5.73 118.89 4.00 30.00 5.33 4.36 43.70 162.58 178.22 37.40 12.99 50.39 10.81 8.12 18.93 231.91 108.89

-17.50

37.40 12.99 2.00 2.00

1.00 1.00 5.41 4.06

ALTERNATIVE CREDIT POLICIES

29

APPENDIX TABLE 4. SOYBEANS, RECOMMENDED MANAGEMENT PRACTICES, ESTIMATED ANNUAL COST AND RETURNS PER ACRE, 1976

Item Gross receipts Soybeans...........................Bu. Total ............................... Variable costs Preharvest Soybean seed.........................Bu. P and K............................Cwt. Lime..............................Ton Herbicide ........................... Insecticide ........................... Machinery .......................... Tractors ............................ Int. on op. cap........................Pct. Subtotal, preharvest................. Harvest costs Machinery .......................... Subtotal, harvest.................... Total variable cost ...................... Income above variable cost .............. Fixed costs
Machinery

Unit

Price or cost/unit Dol. 4.80

Quantity

Value or cost Dol.

32.00

153.60 153.60 10.00 15.00 3.00 10.00 8.00 0.40 3.81 2.70 52.9.2 0.98 0.98 53.90 99.70 7.50 3.35 10.85 4.26 0.62 4.88 69.63 83.97

Acre Acre Acre Acre

10.00 6.00 12.00 10.00 4.00 0.40 3.81 9.50 0.98

1.00 2.50 0.25 1.00 2.00 1.00 1.00 28.46 1.00

Acre

..........................

Acre

Tractors ............................ Total fixed costs........................ Labor costs Preharvest labor ...................... Harvest labor ........................ Total labor costs .................... Total costs........................... Net returns to land and management.. YIY~VCI-~ CI~ ~L-l- ~V~

Acre Hour Hour

7.50 3.35 2.00 2.00

1.00 1.00 2.13 0.31

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TION

30
APPENDIX TABLE 5.

ALABAMA AGRICULTUA

XEIETTTO

CORN, RECOMMENDED MANAGEMENT PRACTICES, ESTIMATED ANNUAL COST AND RETURNS PER ACRE, 1976

Item

Unit

Price or cost/unit Dol.

Quantity

Value of cost Dol.

Gross receipts Corn..............................Bu. Total................................ Variable costs Preharvest Lb. Corn seed ........................... Complete fert.........................Cwt. Nitrogen ............................ Cwt. Lime...............................Ton Acre Herbicide ........................... Acre Machinery .......................... Acre Tractors ............................ Int. on op. cap........................Pct. subtotal, pre-harvest................. Harvest costs Acre machinery ........................... Subtotal, harvest.................... Total variable cost....................... Income above variable costs.............. Fixed Costs Acre Machinery .......................... Acre Tractors ............................ Total fixed costs........................ Labor costs Hour Preharvest labor ...................... Hour Harvest labor ........................ Total labor costs........................ Total costs........................... Net returns to land and management.. \llllllllnl lllr-llnl VT\I

2.50

65.00

162.50 162.50 8.00 11.90 21.45 3.00 3.25 0.68 5.28 3.45 62.0)1 1.46 1.46 63.47 99.03 8.98 4.52 13.50 5.38 0.70 6.08 83.05
79.45

0.80 7.00 6.50 12.00 5.50 0.68 5.28 9.50 1.46

10.00 1.70 3.30 0.25 1.50 1.00 1.00 36.36 1.00

8.98 4.52 2.00 2.00

1.00 1.00 2.69 0.39

ALTERNATIVE CREDIT POLICIES

31

APPENDIX TABLE 6. COASTAL BERMUDA PASTURE, RECOMMENDED MANAGEMENT PRACTICES, ANNUAL OPERATING COSTS PER ACRE,' 1976

Item Gross receipts Total ........... Variable Costs Preharvest P and K ........................... Lime .............................. Nitrogen ........................... Machinery .......................... Tractors ............................ Int.onop.cap. ........................ Subtotal, pre-harvest ................. Harvest costs Subtotal, harvest ...................... Total variable cost ....................... Income above variable costs .............. Fixed costs Machinery .......................... Tractors............................ Total fixed costs.................... Labor Costs Preharvest labor ...................... Total labor costs ....................... Total costs ........................... Net returns to land and management .......

Unit

Price or cost/unit Dol.

Quantity

Value or cost Dol. 0.00

Cwt. Ton Cwt. Acre Acre Pct

6.50 12.00 6.50 0.24 1.57 9.50

5.00 0.52 3.60 1.00 1.00 34.71

32.50 3.00 23.40 0.24 1.57 3.30 64.01 0.00 64.01 -64.01

Acre Acre Hour

1.13 1.43 2.00

1.00 1.00 0.99

1.13 1.43 1.98 68.54 -68.54

'This enterprise was used as an input for cow-calf enterprise.

32

32
APPENDIX TABLE 7.

ALABAMA

ALABAMA AGRICULTUA

AGRICULTURAL

EXPERIMENT

XEIETTTO

STATION

COASTAL BERMUDAGRASS HAY, RECOMMENDED MANAGEMENT PRACTICES, ANNUAL OPERATING COSTS PER ACRE, 1976

Item

Unit

Price or cost/unit Dol.

Quantity

Value or cost Dol.

Gross receipts Bermuda...........................Ton Total ............................... Variable costs Preharvest Cwt. P and K ............................ Cwt. N and K ............................ Lime..............................Ton Nitrogen............................Cwt. Acre Machinery .......................... Acre Tractors ............................ Int. on op. cap........................Pct. Subtotal, pre-harvest................ Harvest costs Hour Seasonal labor ........................ Acre Machinery .......................... Acre Tractors ............................ Subtotal, harvest.................... Total variable cost....................... Income above variable costs.............. Fixed costs Acre Machinery .......................... Acre Tractors ............................ Total fixed costs........................ Labor costs Hour Preharvest labor....................... Hour Harvest labor......................... Total labor costs........................ Total costs........................... Net returns to land and management.

0.00

6.00

0.00 0.00 32.50 53.60 3.00 58.50 0.13 0.89 7.60 156.23 18.00 3.50 9.48 30.99 187.21 -187.21 12.88 9.42 22.30 1.12 11.97 13.09 -222.61 -222.61

6.50 8.00 12.00 6.50 0.13 0.89 9.50 2.00 3.50 9.48

5.00 6.70 0.25 9.00 1.00 1.00 80.04 9.00 1.00 1.00

12.88 9.42 2.00 2.00

1.00 1.00 0.56 5.98

'This

enterprise was used as an input for cow calf enterprise.

ALTERNATIVE

AL TERNATIVE CREDITPOLICIES33
APPENDIX TABLE 8. COW-CALF BUDGET, 30-Cow HERD RECOMMENDED MANAGEMENT PRACTICES 90 PERCENT CALF CROP, 1976 Weight each Price or cost/unit

CREDIT

POLICIES

33

Item

Unit

Quantity

Value or cost

Dol. Gross receipts Steer calves ............... Heifer calves..............4.00 Cows...................10.00 Heifers .................. 7.00 Aged bull ............... 20.00 Total ..................... Variable costs Protein supple................. Vet. and med................. Salt and miD.................. Sales comm................... Mach. (fuel, lube, rep).......... Equip. (fuel, lube, rep).......... Labor, tractor and mach......... Labor, equipment............... Labor, livestock................ Int. on oper. cap................ Total variable costs............ Income above variable costs ... Fixed costs Int. on livestock capt............. Int. on other equip .............. Depr. on beef bull............... Depr. on other equip............. Other fc, mach. and equip........ . Total fixed costs.............. Total costs .................... Net returns to land, management, and produced feed.............

Dol. 14.00 8.00 5.00 1.00 0.25 1.80 0.30 0.44 1.00 72.00 9.00 6.00 305.11 1,636,25 832.00 950.00 161.00 105.00 3,684.25 432.00 9.00 66.00 41.56 75.02 15.43 144.00 18.00 12.00 28.99 842.00 2,842.00 865.69 198.31 12.50 140.33 196.83 1,413,66 2,255.67 1,428.58

4.25

Cwt. Cwt. Cwt. Cwt. Cwt. Cwt. Dol. Cwt. Dol. Dol. Dol. Hr. Hr. Hr. Pct.

27.50 26.00 19.00 23.00 21.00 8.00 1.00 5.00 1.25 2.00 2.00 2.00 9.50

Dol. Dol. Dol. Dol. Dol.

0.09 0.09

9,112.49 2,087.50

'Pasture

Qrh nr

and hay cost are not included.

34

34

ALABAMA

ALABAMA AGRICULTUA

AGRICULTURAL

EXPERIMENT

XEIETTTO

STA

TION

APPENDIX TABLE 9. BUDGET, COST AND RETURNS FROM FARROW TO FINISH, RECOMMENDED MANAGEMENT PRACTICES, MARKET HOGS SOLD AT 200 POUNDS, 1976

80-Sow

Item

Weight each

Unit

Price or cost/unit

Quantity

Value or cost

Dol. Gross receipts Slaughter hogs............2.00 Sows ................... 3.50 Boar .................... 4.00 Total ..................... Variable costs Protein supple................. Creep ...................... Other ...................... Vet. supplies................. Utilities..................... Custom hauling................ Labor, equipment............... Int. on oper. cap ............... . Total variable costs............ Income above variable costs ... Fixed costs Int. on livestock cap............. Int. on other equip .............. Depr. on boar.................. Depr. on other equip............. Other fc, mach. and equip........ . Total fixed costs.............. Total costs .................... Net Returns to land, management, and produced feed............. Cwt. Cwt. Cwt. Cwt. Cwt. Dol. Hd. Dol. Hd. Hr. Pct. 47.50 30.00 20.00 8.00 8.50 1.00 1.00 1.00 0.75 2.00 9.50 1,320.00
40.00

Dol. 125,400.00

4,200.00

4.00 1, 878.40 441.60 1, 296.80 1,364.00 600.00 1,364.00 37.50 11,390.35

320.00 129,920.00 15,027.19 3,753.60 1,296.80 1,364.00 600.00 1,023.00 75.00 1,082.08 24,221.67 105,698.31
1,232.62

Dol. Dol. Dol. Dol. Dol.

0.09

0.09

24,946.01

12,975.00

2,369.87 162.50 2,649.35 1,746.21 8,160.55 32, 382.21 97, 537.75

'Budget does not include corn cost and hog facility is a completely confined system.

ALTERNATIVE

CREDIT

POLICIES

35

AL TERNA TIVE CREDIT POLICIES
APPENDIX TABLE 10. REPAYMENT SCHEDULE, SHOWING TOTAL PAYMENT, PRINCIPAL AND,

3

INTEREST FOR A FARM LOAN OF 456,375.00 DOLLARS WITH ANNUAL PAYMENTS FOR 30 YEARS AT NINE PERCENT INTEREST RATE

Year

Balance

Payment Dollars

Principal

Interest

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 ~r ,,

456,375.00 453,026.81 449,377.31 445,399.38 441,063.44 436,337.25 431,185.69 425,570.50 419,449.94 412,778.50 405,506.69 397,580.38 388,940.69 379,523.44 369,258.63 358,070.00 345,874.38 332,581.19 318,091.56 302,297.88 285,082.81 266,318.38 245,865.13 223,571.06 199,270.56 172,783.00 143,911.56 112,441.69 78,139.56 40,750.25 ?/~ ~c

44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44421 .86 44,421.86 44, 421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44, 421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86 44,421.86ttl r. 1111IIYI-\ ,i. 11 1.

3,348.13 3,649.46 3,977.92 4,335.93 4,726.17 5,151.52 5,615.16 6,120.53 6,671.38 7,271.81 7,926.27 8,639.64 9,417.21 10,264.77 11,188.60 12,195.57 13,293.18 14,489.57 15,793.63 17,215.06 18,764.42 20,453.22 22, 294.01 24, 300.48 26,487.52 28,871.40 31,469.83 34,302.12 37,389.31 40,754.34

41,073.73 40,772.40 40,443.95 40,085.93 39,695.70 39,270.34 38,806.70 38,301.33 37,750.48 37,150.05 36,495.59 35,782.22 35,004.65 34,157.10 33,233.27 32,226.29 31,128.68 29,932.30 28,628.23 27,206.80 25,657.45 23,968.64 22,127.85 20,121.39 17,934.34 15, 550.46 12,952.04 10,119.75 7,032.55 3,667.52

36.

36

~

.:ALABAMA

ALABAMA

AGRICULTURAL

AGRICULTUA

EXPERIMENT

XPRMNTTTO

STATION

REPAYMENT SCIIEDULE, SHOWING TOTAL PAYMENT, PRINCIPAL, APPENDIX TABLE. AND INTEREST FOR A FARM LOAN OF 304,250.00 DOLLARS WITH ANNUAL PAYMENTS. FOR 30 YEARS AT NINE PERCENT INTEREST RATE Year Balance 'Payment Dollars Principal Interest

11",

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

i)

304,250.00. 302,017.88 299, 584.88 296,932.88 294,402.25 290, 891.44 287,457.06 283,713.56 279,633.19 275,185.56 270, 337.63 265,053.38 259,293.56 253,015.38 246,172.13 238,71 3.00 230,582.56 221,720.38 212,060.63 201,531.50 190,054.75 177 ,545.06 163,909.50 149,046.75 132,846.38 115,187.94 95,940.25 74,960.25 52,092.09 27,165.80

Lqy. I ~I IIL.

29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57 29,614.57

L;I.VL1./1

2,232.09 2,432.98 2,651.95 2,890.63 3,150.78 3,434.36 3,743.45 4,080.36 4,447.60 4,847.88 5,284.20 5,759.78 6,278.16 6,843.20 7,459.09 8,130.41 8,862.15 9,695.75 10,529.13 11,476.75 12,509.65 13,635.52 14,862.73 16,200.37 17,658.41 19,247.66 20,979.96 22,868.16 24,926.29 27,169.65

27,382.49 27,181.60 26,962.63 26,723.95 26,463.79 26,180.22 25,871.13 25,534.21 25,166.98 24,766.69 24,330.38 23,854.79 23,336.41 22,771.38 22,155.48 21,484.16 20,752.42 19,954.82 19,085.45 18,137.83 17,104.92 15,979.05 14,751.85 13,414.20 11,956.17 10, 366.91 8,634.62 6,746.42 4,688.29 2,444.92