Adapting Enterprise Budgets for Organic Crops - Transition to Organic Partnership Program

Deciding what organic products to grow and how to price them is difficult, particularly when markets often are not well established. This publication discusses how to adapt enterprise budgets to organic crops in order to better ensure a producer earns a profit from their crop.
Midwest

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2019

Adapting Enterprise Budgets
for Organic Crops
Deciding what organic products to grow and how to
price them is difficult, particularly when markets often
are not well established.
Prices need to be high enough to generate a profit,
but reasonable based on a producer’s competition
and how customers value (or establish a price on)
the product. However, while all three components of
pricing (cost, competition, and customer) need to be
taken into consideration, cost is the most important.
Why? Because if a producer is not making a profit
on the organic products being sold, the business is
likely to fail – regardless of what the competition is
doing or how much customers may value their product.
So how can a producer ensure a profit? They must
understand and manage costs effectively and then
price the product accordingly. In order to understand
and manage costs, it is important to develop an
enterprise budget. An enterprise budget details the
costs for items such as crop inputs, labor, machinery,
and land, among others.

Steps
It is often easier to adapt existing budgets than develop
one from scratch. Numerous enterprise budgets are
available from land grant universities, but which one
should a producer choose? What adjustments should be
made to a published budget? What makes one budget
better than another (related to comparability)? If three
tomato budgets are found online (one from Michigan,
one from California, and one from Iowa), which one is
best to use?
The first consideration is the scale of the production
system being proposed. For example, 14 one- to twopage budgets for small-farm vegetable growers can

be found from Iowa State University Extension and
Outreach at www.extension.iastate.edu/agdm/crops/html/
a1-17.html. Vegetable farmers growing produce or herbs
on a bed system over a few acres could begin with these
budgets. Researchers and extension workers at other land
grant universities (such as the University of CaliforniaDavis or Oregon State University, among many others)
have developed budgets for commercial operations in
which many acres of a product are grown. If the goal is
to grow, for example, 20 acres of a product or more, then
commercial budgets would be more applicable.
The second consideration is the type of production
system currently being used or proposed. Organic
and conventional budgets differ in managing fertility
and pests. Organic systems often use a different crop
rotation and set of tillage or weed management tools
than conventional systems. Even within conventional
or organic systems, fertility and weed management can
differ. Therefore, it is important to design a multiple-year
cropping pattern prior to developing the first budget.
The third consideration is geography. Soils and pests,
among other things, vary by geographic location.
Once a producer has determined the scale and type
of production system, the budget developed at an
institution closest to their location may allow for the
fewest alterations.
What’s the next step? Assume a producer wants to grow
10-12 different vegetables on a small farm (under five
acres) in Wisconsin for sale at the Madison farmers’
market. They have found the ISU Extension and
Outreach budgets online, and wants to know how to
adapt them to their farm. The first step is to share the
budgets with local growers and University of Wisconsin
Extension personnel.

FFED0023 November 2019

They should ask how the crops they are
proposing would be grown, and how
the costs differ from those presented
in the published budgets. In addition,
they should find out what types of crop
rotations are common in their area, and
what products would sell well for their
chosen marketing outlet. Keep in mind
that a budget should be used only as a
guideline or starting point. No budget template will
represent any individual farm perfectly, because of soil,
climate, and market differences.
The same process would occur if a producer in
Washington is looking at growing tomatoes for
processing. First, they must determine the scale
and production system, find the closest budgets
geographically, and then adapt them to their
specific location.
While complexity varies among budgets, most have
common components. The first component is crop
inputs, such as fertilizer, pesticides, and seed. The
costs usually depict local production recommendations
and prices. A producer should check with a variety of
suppliers to determine costs.
Labor, machinery, and land also are common
components. However, each of these may be handled
quite differently. Labor is normally budgeted based on
Figure 1.
This section of an enterprise budget from the University of California–Davis
(Bolda et al., 2019) illustrates a two-tier labor rate with machine labor, paid at
$22.40 per hour and non-machine labor at $16.80.

an hourly rate common to a producer’s
area for similar work. Some budgets use
multiple rates depending upon whether
labor is manual or involves handling
equipment (Figure 1).
It is assumed that handling equipment
requires more skill and therefore requires
a higher hourly rate to obtain an adequate
supply of laborers to finish the required
tasks. If workers receive employment benefits, the costs
associated with those benefits should be included in the
hourly rate. Unemployment and workers compensation
also should be included.
Remember to include labor charges, regardless of
whether the labor is supplied by the producer, the
producer’s family, or purchased from the outside labor
market. To remain profitable, a producer must get an
economic return for the labor provided. They should
check with local growers and extension personnel to
make sure the amount of labor and wage rate they use
for their budgets are appropriate, given the existing or
proposed production system.
Machinery is handled quite differently from budget
to budget. The ways vary by complexity, and none
is always right or wrong. The important thing is to
account for machinery usage in the budget. In complex
budgets, machinery costs are segmented into variable
(or operating) expenses and fixed (or overhead)
expenses (Figure 2). It is important to review the
budgets carefully to understand what assumptions were
made to determine these costs.

FFED 0023 | Adapting Enterprise Budgets for Organic Crops

For example, a specific field operation
per-acre cost may have assumed an annual
use of 40 hours for an implement (Figure
3). However, if the actual usage of the
implement was 20 hours or 80 hours
instead of the assumed 40, the cost per
acre would be substantially different.
Other budgets may simply use a customhire charge common to your area. The
custom hire charge would cover the cost
of the machinery and often the cost of the machine
operator. If custom charges are used, then changes to
labor hours should be made to eliminate the possibility
of double counting. Regardless of the method used to
allocate machinery expenses to the enterprise budget,
it is important to understand how it was accomplished,
particularly in comparing one budget to another.
Most budgets insert a cost for the land used in
production at its common rental value or a percent
return to land value. If land similar to the producer’s is
renting for $200 per acre in the area, a rental charge of
$200 should be used for budgeting. Because the land
can be farmed by the producer or rented out to someone
else at the common rental rate, this practice allocates a
charge to the land asset.

Some budgets include an overhead
category to cover expenses associated with
buildings, insurance, and interest charges,
among other items. Again, it is important
to understand what expenses are included
and how they were calculated in order to
adapt a published budget to fit.

Summary
Enterprise budgets can be used for a variety of
management decisions including pricing, developing a
product mix, and changing production practices. The
key to using budgets effectively is to develop them as
accurately as possible by reflecting what is going on in
an existing or proposed production system.
Once production scale and production system are
determined, it is often easiest to begin by adapting an
existing published budget. The key to adapting the
budget is to understand what assumptions were made
in developing the budget and make changes to fit each
situation. Producers can contact their local land grant
university or extension office to see what local budgets
have been developed for a given area.

Figure 2.
This budget from University of California–Davis (Bolda, et al., 2019) illustrates a
more complex machinery budget. Both fixed (capital recovery, insurance, and
taxes) and operating or variable (repairs, fuel, and lubricant) costs are detailed
in the total cost-per-hour calculation. Note that each tractor and implement used
in the production of the crop is itemized.

FFED 0023 | Adapting Enterprise Budgets for Organic Crops

Available Organic Enterprise Budgets
Production budgets should be available from the
producer’s closest land grant university. Local research
and extension personnel are a good source of regionspecific crop budgets.

University of California-Davis
https://coststudies.ucdavis.edu

The following is a partial list of the nearly 100 budgets
available.
• almonds
• lettuce

North Carolina State University
http://projects.ncsu.edu/project/arepublication/
AREno31.pdf

• apples

• olives

• asparagus

• onions

• blackberries

• oranges

“North Carolina Organic Vegetable Production Cost
Study,” published in 2003 by Edmund Estes, Tony
Kleese, and Laura Lauffer of North Carolina State
University’s department of agricultural and resource
economics.Includes enterprise budgets for broccoli, kale,
lettuce, peppers, salad mix, summer squash, sweet corn,
and tomatoes based on actual production costs for three
growers in 2001.

• broccoli

• peaches

• cabbage

• pears

• celery

• peppers

• cherries

• plums

• grapes

• strawberries

• lemons
Oregon State University
http://arec.oregonstate.edu/oaeb

The following is a partial list of the nearly 120 budgets
available:

Figure 3.
Estimated machinery costs. The cost estimates below are for on-farm use,
excluding labor. Depreciation is based on current replacement cost, and
interest is based on average market rates. Fixed costs will be greater for newer
machinery. If annual machine use is greater than that assumed, fixed costs per
acre will be lower, and vice versa. Hauling costs are based on a round trip of
one mile. Remember that these are estimates and they should not take the place
of accurate recordkeeping. Diesel fuel is estimated to cost $2.48 per gallon,
delivered to the farm in bulk. This excerpt of estimated machinery costs is from
Iowa State University (Plastina, 2019).

• apples

• pears

• blackberry

• peas

• blueberry

• potatoes

• broccoli

• radishes

• bush beans

• spinach

• cauliflower

• strawberries

• cherries

• sweet corn

• grapes

• watermelon

• leaf lettuce

FFED 0023 | Adapting Enterprise Budgets for Organic Crops