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Farm Business Planning: Lessons

7/25/2013

8 Comments

 
In my last post, I talked a lot about small farm economics, and it has turned out to be my most commented post to date. In a comment, Bruce King  suggested I show a plan for making my goal of 30-40k per year in net farm profit. I'll try to get to that in a future post, but before that, I thought I'd finally post and talk about my business plan from last year and the revised one for this year. It's actually a bit embarrassing to me because I was off by such a large magnitude on the first iteration of the plan, but it is probably illuminating as well. Without further ado, the plan for 2012, which I came up with in the summer of 2011.
This is the first time I'm using the "embed document" feature on the blog, so hopefully it's working okay to view the spreadsheet. The spreadsheet has both the 2012 and 2013 cash flows (there is no heading that separates that two years, but you can probably figure it out). I estimated that I would make $1100 the first year and $22000 the second year. As a reminder, I was about $4000 in the red in terms of cash flow for the first year, but that didn't include the approximately. What I didn't include was the $4000 I spent in 2011, which was included in this business plan. In other words, I expected to make $1000 after starting from 0 for the period of September 2011 to December 31 2012, but in reality I had -$8000. Where did I go wrong?

Lots of places. I made:

1. STUPID MISTAKES:  I didn't budget for fuel costs at all. I didn't budget for a manure spreader that cost me $900. I didn't budget for the costs of turkey processing.

2. POOR ESTIMATE OF COST MISTAKES: I thought it would cost me $700 over that period in rent, when it ended up costing me $3000. I underestimated the cost of seed by a larger margin.

3. MISTAKES OF YIELD AND CONSUMPTION: I thought I would get 40 pounds of honey per hive in the first year. Ha. I got about 6 pounds from the one hive that survived. I thought my pigs would have a hanging weight of 200 lbs at 6 months and only eat $150 of feed. They came in a 170 and cost me about $250 in feed. The final weight of the turkeys was about 3 pounds less than my estimate on average.

4. FAILURE TO ADEQUATELY PREDICT SCALE OF LOSSES: I expected some losses (for instance, I thought  I would lose 15 of 65 turkeys), but I was way off on the amount of loss I experienced. Some of that was due to inexperience, but some was just due to the nature of dealing with living things that can and will get sick/die. For instance, I ended up buying 80 turkey poults and lost almost 30, 10 at a fairly late stage to coyotes. I lost 4 of the 5 packaged bee colonies I bought, and the one that made it to the fall was dead this spring.

5. FAILURE TO MEET ESTIMATED DEMAND: While I was able to sell all pigs, I only sold half of the Thanksgiving Baskets.

On the flip side, some costs and income were not budgeted for and offset the scale of the potential loss. For instance, my disc harrow cost me significantly less than predicted. I made some income on hay sales that I hadn't considered. I sold weaner pigs in late summer of last year that brought in some much needed moneys. I spent about $60 on the website after I decided to design it myself.

Overall, my main issues were a lack of experience in running a business, inexperience with with animals I was producing, and a tendency toward over-optimism. Luckily I had another job and a savings to cover the shortfall.

The second year plan is laughable in hindsight, but it was basically an extension of the unrealistic expectations from the first year.

So given what I learned from that experience, here's the plan I developed in the spring of this year:

Halfway through the year I can already see how some things won't work as planned, but nonetheless, it's a lot more realistic than the previous. I think I capture all the costs, not making stupid mistakes. I was a bit unsure what to expect from the vegetable side of production, and I was probably a little too optimistic. One thing I did was to add a 10% predicted loss over the plan on everything I did (which was probably too optimistic). In the end, I expected a $5700 net profit at the end of the year--a far cry from the $22,000 predicted in the first plan (note that I tend to include depreciable assets as a one time negative expense in these calculations, which is not what I report on my taxes but it is how I like to look at things, for better or worse).

I'll keep working at getting better at planning, and I'd like to include estimated time commitments to the plan to get an idea of my potential wage and if/when it makes sense to hire a helper.
8 Comments
Mike
7/25/2013 10:31:10 pm

I noticed you don't plan to raise turkeys? If I could get $80 each they would be on my farm plan. Thanks for laying out all the costs that most farmers with an off farm job don't bother adding up and continue to lose money.

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Jeff
7/26/2013 01:00:32 am

If you look at my last two posts in the "turkey" category you can see why I chose to not raise turkeys this year.

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George
7/26/2013 07:43:39 pm

Did you sell all that pork? The feeder cow... I see 699 x 2 = 1398.. is that the weight of 2 cows as slaughter? Was it an old dairy cow, why turn it all into ground beef at 1.50/lb ?

How much land are you renting for $2400/year?

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Jeff
7/26/2013 11:34:30 pm

We haven't sold all the pork yet, but we're well on our way. Getting people to go beyond interested to committed with a deposit is always the hardest.

The 1398 is my projected hanging weight of two 1.2 year old steers. I'm selling them cheap because I'm concerned that might be too lean and want to taste them for myself before I decide to use this husbandry practice again and charger a higher price.

Last year we rented about 5 acres and four barn stalls. This year, we own the land, but since the business is separate, the business pays rent for 4 acres, electricity, and barn.

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George
7/27/2013 06:06:21 am

1398lbs for 2, 16 month old steers... If you aren't grain finishing them that number might be a bit high, I'm not saying you won't make it, but realistically on 100% grass fed at 16 months you'll probably see more like 1000-1200lbs hanging weight for the pair. I've had them end up around 470-525 hanging weight at 14-16 months. Just throwing it out there.

What husbandry practice are you speaking of?

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Jeff
7/27/2013 08:25:00 am

Another good example of my over optimistic forecasting. It's really hard to be so conservative!

The practice I was speaking of was buying weaned steers in the spring and slaughtering in late fall. That practice doesn't require me to make any infrastructure investments and taps into a ready supply from the dairy industry (I'd also consider bottle feeding fall born steers myself). Overwintering adds a whole other layer of costs and equipment needed to the mix.

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bruce king link
7/27/2013 06:35:14 am

Some data for your steer prices; Holstein steers at auction, 1000-1300lbs, go for between $0.61 and $0.75/lb live weight.

Lighter steer prices are variable; ranging from $0.80 to $1.00/lb. Contrasting that to beef cattle of the same weight class at $1.30 to $1.70/lb

over 900lb cows are sold primarily for slaughter. 300 to 600lb cows are sold primarily to feedlots.

900lbs at .60 = $540
900lbs at 1 = $900

600lbs at $1.50 = 900

Black cows sell for the highest prices, usually a $0.20 per lb bonus.

These are wholesale prices; basically your floor price for beef if you can't sell it some other way. Retail prices for grass fed beef in this area are much higher; $3 or more/lb hanging weight.

So here's the math for a 900lb steer:

900lbs live weight = 540lbs hanging weight (60% conversion)

$3/lb hanging weight = $1620 for this steer direct to consumer.
That same steer would sell at the auction for (900 * 0.65) or $585, a third or so of what you'd get retail - call it $1/lb hanging weight as the wholesale price.

I really, REALLY like beef as a product for this area. We grow great grass, long growing season, and there are few regulations on small beef producers. Direct to consumer means you can make good money with a small herd, and profitable cow/calf guys run 250 cows per employee. Using that sort of math it would seem like a herd of 40 to 60 may be a good part-time job.,


Reply
Jeff
7/27/2013 08:27:33 am

The BIG IF is if you can find that many direct customers. I think we're about to to buy a full share of the North Cascades Meat COOP soon which will at least give me a better wholesale floor--if it ever gets fully funded.

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