Assignment Requirements

# Assessment 2: Farm budgeting exercise

## Objectives

When you have completed this assignment you will demonstrated that you are able to construct a complete budget for a farm business that clearly links and reconciles

- a profit budget based on Gross Margins
- opening and projected closing balance sheets
- a cash flow budget.

#### Due: 23^{rd} May 2014

#### Worth: [20%]

### Tasks

- Construct a budget for the business described using the information below and the spreadsheet template available in Blackboard in the Assessments/Assessment 2 folder.
- Prepare a brief report on the expected performance of the business as outlined below.
- Ensure that you understand fully what you have done; the final examination will require you to replicate the logic of this assessment task.
- Write a two-page report that should not exceed 800 words. You may use bullet points and include summary tables or figures as you deem appropriate. It should include clearly identified sections that address the following points:

## Report

- Discuss the projected profitability, operating return on equity and operating return on total assets in terms of industry standards.
- Discuss the cash flow and the drivers of it and the changes in equity and its implications for the risks facing the business.
- Analyse the contributions the enterprises are making to the business in absolute terms and relative to their land and capital requirements.
- Conduct a sensitivity analysis that examines the sensitivity of the results to changes in key performance assumptions (e.g. what effect does a 30% decline in projected yields have on profit, change in equity, percentage equity and cashflow; or what is the effect of a 20% decline or increase in grain or wool prices have; or what is the effect of ignoring the capital gain on land?).
- Can you suggest a change that may result in a higher profit?

- Include one copy of the initial budget (i.e. a spreadsheet printout) as an appendix. Each page should be clearly numbered (neat handwriting is acceptable). The numbering should follow on from the page numbering of the main text. The footer of each page of the appendix must include your name.
- Feedback criteria are available in Blackboard.

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# Information on Joe and Mary’s Farm

## General introduction

The farm business to be budgeted has been considerably simplified in order to enable the exercise to be completed readily and to remove excessive complications. An outline of the farming resources are given below together with enterprise details and estimates of fixed costs for the 2014 crop harvest year. Information about capital repayments, cash withdrawals, and assets and liabilities as at 1 February 2014 is also given.

## Farm Resources

Joe and Mary’s farm has 3,405 ha of which 2,605 ha is in a cropping rotation and is valued at $2,500/ha and the remainder is sown to annual pasture and is valued at $1,500/ha. These values include fixed improvements. The value of farmland in this area is rising at 0.5% per year. Joe and Mary run a wheat, canola, wheat, oaten hay, lupin rotation on the arable land and has a self replacing ewe flock in which the Cast for Age (CFA) ewes are mated to Prime lamb rams.

At the beginning of the year machinery is valued at $829,000, the livestock equipment at $18,000 and the buildings and fencing at $80,000. The farms own machinery is used for seeding, spraying, fertiliser application and harvest of grain. Contractors are used for grain and hay carting, hay mowing and baling and sheep shearing, crutching, mulesing and wool carting. A permanent farm hand is employed and casuals are hired at seeding and harvest.

## Enterprise details

### Wheat

The plan is to seed 1,100 hectares to wheat. The seeding rate will be 80 kg/ha using seed from last year kept in on farm silos. There is 100 t in store valued at $220/t FG. Cleaning and treatment costs for the seed are $35/t. He will apply 100 kg/ha of Agstar ($910/t), and 120 kg/ha of Flexi-N ($630/t). Chemical application rates and costs are shown in Table 1. CBH fees of $11/t will accrue (for simplicity calculate on the total production). Similarly, grain cartage costs are $8/t. A budgeted yield of 2.5 t/ha and an FIS price of $240 is forecast. Selling costs are estimated at $25/t. It is planned to sell 500t to a Pool and get an 80% harvest payment and the remainder for cash. Plans to put 100 t into store for next year’s seed and to sell any remaining stored wheat after seeding at $215/t FG are in place.

### Canola

Intended canola plantings are 525 hectares; with a seeding rate of 4 kg/ha using seed purchased at $600/t including cleaning and treatment. Fertiliser applications will include the application of 80 kg/ha of Agstar ($910/t), 50 kg/ha of Flexi-N ($630/t) and 60 kg/ha of NS31 ($700). Chemical application rates and costs are shown in Table 1. CBH fees of $11/t will accrue (for simplicity calculate on the total production). Similarly, grain cartage costs are $8/t. A budgeted yield of 1.2 t/ha and an FIS price of $550 is forecast. Selling costs are estimated at $33/t. The plan is to sell 200 t to a Pool and get an 80% harvest payment, while the rest will be sold for cash. No canola will be stored.

### Oaten hay

Plans are to seed 500 hectares of oaten hay; at a seeding rate of 110 kg/ha using seed purchased at $210 including cleaning and treatment. Fertilizer applications will include 100 kg/ha of Agstar ($910/t), 110 kg/ha of Flexi-N ($630/t), and 50 kg/ha of Muriate of Potash ($1,300/t). Chemical application rates and costs are shown in Table 1. Hay cartage costs are $15/t (calculate on total production), mowing costs ($50/ha) and baling cost $31/t. A yield of 6.0 t/ha and a price at harvest of $180/t FG is expected. Joe and Mary plan to put 1,000 t into store after harvest and sell the rest off the baler. Last year’s hay in store is valued at $190/t FG. It is estimated that there will be 100t still in store at the end of the year. Some hay is feed to sheep (see livestock information to calculate how much) and with sales of last year’s and rest out of his storage sheds for an estimated average price of $190/t FG.

### Lupins

The plan is to seed 480 hectares to lupins. The seeding rate will be 100 kg/ha using seed from last year kept in his silos. There is 140 t in store valued at $215/t FG. Cleaning and treatment costs for the seed are $38/t. They will apply 50 kg/ha of Double Phos ($1,150/t). Chemical application rates and costs are shown in Table 1. A CBH fee of $11/t is anticipated (for simplicity calculate on the total production). Similarly, grain cartage costs are $8/t. Yield is budgeting to be 1.5 t/ha and an FIS price of $220. Selling costs are estimated at $24/t. The plan is to put 150 t into store for next year’s seed, to feed livestock (see livestock information to calculate how much) and to sell any remaining stored lupins after seeding at $210/t FG.

### Pasture

The pasture will be fertilised with 50 kg/ha ($460/t) of Superphosphate. Chemical application rates and costs for pasture are shown in Table 1. Pasture costs are divided between the grazing enterprises based on dse (dry sheep equivalent) totals.

Table 1: Chemical application rates and costs for crops and pasture

Chemicals |
Wheat |
Canola |
Oaten hay |
Lupins |
Pasture |
Cost/ unit |

Glyphosate CT (l/ha) | 1.5 | 1.0 | 1.0 | 1.5 | $12.00 | |

Trifluralin 480 (l/ha) | 2.0 | $8.00 | ||||

Logran (kg/ha) | 0.035 | $105.00 | ||||

Dual Gold (l/ha) | 0.5 | $22.30 | ||||

Atrazine &/or Simazine gran. | 2.2 | 1.1 | $9.90 | |||

Brodal (l/ha) | 0.2 | $115.00 | ||||

Verdict 520 (l/ha) | 0.03 | 0.075 | $125.00 | |||

Broadside (l/ha) | 1.0 | $13.00 | ||||

Lemat 290 | 0.10 | $24.00 | ||||

Other chemicals ($/ha) | $6 | $45 | $30 | $34 | $8 |

### Merino self replacing enterprise

At the beginning of the year the merino self replacing flock consists of: 2,000 ewes, 1,650 mixed sex weaners, 40 rams and 600 2T (tooth) wethers. Joe and Mary plan to have the same number of each type at the end of the year. The opening and closing values will remain the same and are budgeted to be: ewes ($55), mixed sex weaners ($45), rams ($350) and 2T wethers ($60). The average micron of the merino wool clip is 19 *u* which is estimated to sell for $13.00/kg clean at auction. The selling costs are $0.40/kg greasy, the yield is 63% and the bale weight is 170 kg. All sheep are shorn (use opening sheep numbers) with the following greasy wool weights: ewes (5.5 kg), weaners (2.5 kg), rams (7.5 kg), and 2T wethers (6.5 kg). The numbers of stock and dse/head for calculating winter dses are at the bottom of the livestock reconciliation.

All ewes are mated and the weaning percentages are 85%. Mortality rates are: ewes (4%), weaners (5%), rams (4%) and weathers (1%). No merino ewes are sold, but the required number are transferred to the prime lamb enterprise to maintain numbers. The required numbers of merino weaners are transferred to ewes and 2T wethers to maintain numbers and the surplus are sold at $45. Twelve rams are purchased at a price of $700/hd and after deaths the appropriate number are sold (at $60/hd) to maintain numbers. Similarly the appropriate numbers of 2T wethers are sold at $90/hd. All transfers occur at the book value of the category they are transferred from.

The merinos receive 4 kg of hay and 8 kg of lupins per dse out of the crop storage. Ewes, weaners and wethers cost $8/hd to shear, while rams cost $16/hd per shearing but are shorn twice. Drenching/health costs for ewes and rams are $0.95/hd per operation, with rams being treated twice, while lambs are treated twice at $1.50/hd per operation. Other sheep costs are $12 per dse. All lambs are mulesed at the cost of $1.10 per head. Wool cartage costs are $11 per bale.

### Prime lamb enterprise

At the beginning of the year the prime lamb flock consists of: 600 ewes, no lambs and 12 prime lamb rams. The plan is to have the same number of each class at the end of the year. The opening and closing values will remain the same and are budgeted to be: ewes ($55) and rams ($400). The average micron of the merino sheep is 19 *u* which is estimated to sell for $11.70/kg clean at auction, while the prime lamb wool from the rams sells at 60% of the ewe price. The selling costs are $0.40/kg greasy, the yield is 63% and the bale weight is 170 kg. All ewes and rams are shorn (use opening sheep numbers) with the following greasy wool weights: ewes (5.0 kg), and rams (4.0 kg). The numbers of stock and dse/head for calculating winter dses are at the bottom of the livestock reconciliation.

All ewes are mated and the weaning percentages are 95%. Mortality rates are: ewes (5%), lambs (3%) and rams (4%). The prime lamb ewes remaining after deaths are sold at $50/hd. All remaining lambs are sold at $100/hd. Three rams are purchased at a price of $800/hd and after deaths the appropriate number are sold (at $60/hd) to maintain numbers.

The prime lambs receive 8 kg of hay and 15 kg of lupins per dse out of the crop storage. Ewes cost $8/hd to shear, while rams cost $16/hd. Drenching/health costs for ewes and rams are $0.95/hd per operation, with rams being treated twice, while lambs are treated once at $1.50/hd. Other sheep costs are $15 per dse. Wool cartage costs are $11 per bale.

## Other costs

### Fixed & unallocated variable costs

Other trading payments include: Fuel & oil ($75,000); Repairs and maintenance of machinery ($70,000); Repairs and maintenance of buildings ($12,000); Labour ($70,000); Insurance ($33,000); and General administration ($65,000).

### Equipment and infrastructure

Machinery is depreciated at 15% per year. While the opening value of all machinery is $829,000, the old header which is part of this has an opening value of $63,000 and is expected to be sold half way through the year. Livestock equipment is depreciated at 10% per year and buildings and fencing at 3% per year.

## Other receipts and payments

Joe and Mary are expecting a bequest from a relative of $50,000, and expect to sell the old header for $80,000 and at the same time buy a new header. They will take out a loan of $200,000 to finance a replacement header which is expected to cost $300,000. They will have Personal expenses of $80,000.

Interest on the overdraft is estimated at 9.5% on the opening balance plus 50% of the Trading payments. Interest on the loan is calculated at 8.5% of the opening balance. They will also make a loan repayment of $70,000.

## Balance sheet information

Opening pool debtors are estimated at $40,000 and they expect to receive all this in the current year. There is $350,000 worth of fertiliser and $50,000 worth of Herbicides/Pesticides in store for the current season and plans to increase these by $30,000 and $5,000 respectively by the end of the year.

Last year’s wool, with an estimated value of $130,000 is in store and will be sold this year, and this year’s wool clip will be unsold and in store at the end of the year.

Finally the opening bank balance is an overdraft of $203,000 and there is a loan of $700,000.

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