Gross Profit Analysis
Which enterprise, or action, will contribute the most money to covering overhead expenses? Like marginal reaction, the gross profit analysis is an effective tool for comparing separate actions (Figure 12.1).
In traditional cost accounting, fixed costs (see chapter 13 for an explanation of these) are apportioned to various enterprises: If half your land base is maintained as a hay crop, you would assign half your land expenses to hay production. Although this may be appropriate after the end of the year, when figuring cost of production, it doesn’t provide an effective way for you to compare options before you begin production. By using gross profit analysis, you can figure out which of several options is likely to return the most surplus money, which can then be applied to reducing fixed costs.
Figure 12.1. In comparing two different enterprises, the one that makes the most income doesn’t necessarily make you the most money. Although Enterprise 2 brings in less income, it yields a greater gross profit because of lower variable costs.
(Modified from Sam Bingham, Holistic Resource Management Workbook. Covelo, CA: Island Press, 1990, p. 10.)
Simply stated, a gross profit analysis takes all potential income from a given project, subtracts the variable expenses for that project, and results in a gross margin, or profit, between the two. Gross profit analysis can be used to compare the straight dollar reactions of various enterprises or ideas.
Gross profit analysis is a handy tool for making other comparisons as well. For example, if manpower is a limiting factor in your operation, you might choose to study the profit margin in dollars per man-hour for various enterprises.
Once you narrow your options down to a chosen enterprise, gross profit analysis can also be applied to that enterprise under varying conditions — say, to look at a worst-case, an expected-case, and a best-case scenario. This approach gives you a feel for what happens when cattle prices drop, or when high death loss hits your broiler operation.
Energy/Money Source and Use
Is the energy or money used in conjunction with this action derived from the most appropriate source? Will the way in which the energy or money is used move me toward my goal? Energy from a renewable source (solar power, wind power, and the like) is more appropriate, we feel, than fossil fuel or nuclear energy. So our first choice is to use the most appropriate form when possible. Still, at times we all must use gasoline or piped-in electricity. When using these less appropriate forms of energy, ask yourself if they are being used the best way possible. Are you consolidating errands when you go to town, so you use less gas? Or if you are using a less appropriate source of energy, are you working toward a system that allows you to move to a renewable source of energy? When we purchased our place here in Colorado, the house was “off the grid.” It came equipped with a gasoline generator, which is powering my computer as I write this, but we are working on installing a solar-energy system.
Money can be derived from the conversion of solar energy to grass, grass to animal, animal to marketable product, and marketable product to paper dollars. The internal dollars on a farm, or solar dollars, are those that come directly from this conversion process; these are the most appropriate dollars for a farm to use. Paper dollars are derived from off-farm sources. The more solar dollars you can use, the better, but at times paper dollars either become necessary or look like a good deal. For example, a government employee may tell you that you are eligible for cost share on some kind of on-farm project. It looks like “free money,” but if it doesn’t actually move you toward your goal and meet all the tests, it’s best left to someone else. All free money has a string attached and what you find at the other end may be a very unpleasant surprise.
Society and Culture
Will this action lead to the quality of life I am seeking? Will it adversely affect the lives of others? This last testing guideline is fairly self-explanatory. Something that does not benefit society as a whole probably won’t benefit you for very long either.
Nay-Sayers
Over the years I’ve met many a person who has said that planning in general, and holistic planning in particular, is unnecessary. Their argument usually goes something like this: “Heck, this stuff is just common sense. All this goal writing and planning, who needs it? We know our goals. We work toward ’em. And this is just gonna take up valuable time I could be using to get the hay into the barn.”
I’ve got to agree that a lot of this is just plain common sense. So is planning a trip — say, from Bangor, Maine, to Los Angeles, California, with a stop at Liberal, Kansas, to visit Cousin Bob and a side trip to the Grand Canyon along the way. Common sense says that all of these destinations are southwest of Bangor, so if you just head on out driving southwest, sooner or later you might complete the whole trip. But the odds of completing your trip, in a timely fashion, with minimal wrong turns and extra miles, are greatly increased if you purchase a map and plot out your course. Well, planning is like using the map: It is common sense and it enhances the trip, increases the likelihood that you’ll arrive at the spot you set out for in the first place, decreases expenses, and just makes life on the road a sight simpler!
Tom Frantzen tells the story of how, after beginning formal planning, he figured out that every time he started a tractor, it cost him $17 per hour for fuel, maintenance (including his labor), tires, and so on. “Once I had that dollar figure in my mind, my tractor use went down considerably. When I did have to start the tractor, I’d try to have multiple jobs already lined out, so that it was used efficiently.” The planning process may have been “just common sense,” but by going through the exercise Tom was able to clarify in his own mind the effect of his actions on his ability to reach his goal.
FARMER PROFILE
Kerry and Barb Buchmayer
After years of dairy farming in New York State, Kerry and Barb Buchmayer decided to sell. They were concerned with the high taxes and the lack of a future in farming for their children in New York.
Winter feeding also took a great deal of their energy, time, and money. “In New York, with its long, hard winters, we might get 6 months of decent grazing, but the remainder of the year we had to feed stored feeds. The work of milking was intense enough without the extra effort that winter feeding entailed,” Kerry explains. “We began looking at areas of the country with longer grazing seasons, and settled on Missouri.” The Buchmayers relocated in 1996.
When they first moved to Missouri, Kerry and Barb didn’t plan on milking; their first thought was to raise replacement dairy heifers. But after a time, they decided milking might not be so bad in this climate, particularly if they did a few things differently this time around.
“We studied holistic management,” Barb says, “and we realized our weak link was in the marketing.
“In New York, we sold milk that won all kinds of quality awards from our processor, but then it was just mixed with all the other milk. We were paid a slight premium, but not much of one. We knew if we were going to milk again, we had to improve the marketing of our product. And we also knew we were going to have to do it with a modern parlor.”
In New York, the Buchmayers had milked in an old flat barn, and the milking chores took 6 hours per day. When they began reconsidering milking in Missouri, they visited several farms with “swing-over” parlors. The swing-over design allows the person doing the milking to work standing straight up; one person can milk seventy cows per hour.
The Buchmayers installed a swing-over 10-cow parlor constructed from used equipment on their farm, then began working toward the second part of their plan: direct-marketing. Kerry and Barb decided to go for organic certification, and to bottle milk on the farm.
“This was like something that was meant to be,” Barb says. “It was the culmination of all our skills over the years and all our dreams.”
They began the long and sometimes intense process of learning what it would take to bottle their own milk. “We had to find an organic certifying organiz
ation that we felt comfortable with; we had to find and purchase the equipment; we had to learn about the legalities of processing and selling our milk; we had to develop marketing plans, and obtain financing,” Kerry says.
For the Buchmayers, the financing became a real stumbling block. Despite the fact that they had high equity, “the local banks just couldn’t understand how we could hope to sell milk for $5 per gallon. They didn’t understand that the markets for organic products are one of the fastest-growing segments in the food economy, and that in larger communities the demand is there,” he explains.
And their preliminary contacts with grocers and consumers in Columbia, Missouri (a college town about two hours away), indicated that the demand definitely was there. “People really wanted our product to become available,” Barb says. They were already purchasing organic milk, but it was being shipped in from Utah. There was interest in a local supplier.
Financing finally came from the local, rural electric co-op, which had a revolving loan program for helping small businesses in the area. “At first, the co-op staff said we had to get a cash-flow analysis from a commercial ag-economist at the university. The person we were supposed to deal with was very negative. He came from the ‘get big or get out’ paradigm, and he said that he thought organic foods were unnecessary. He came up with a cash-flow analysis that was lacking in basic economic principles and said we were going to lose our shirts, even though there were stores, and consumers, who wanted our product.” Finally, Kerry and Barb told the staff at the electric co-op that they couldn’t work with the economist, and wouldn’t. “The staff passed the application on to the board without the cash-flow analysis. It turns out the board was much more interested in our equity position than what an economist at the university had to say, and they approved the financing.”
Both Kerry and Barb indicate that they got more support, assistance, advice, and information from other producers and processors than from places like the university or extension service. “There were a few really helpful people in the sources where farmers traditionally turn for help and support, but for the most part the bureaucrats and specialists didn’t want to be bothered with us. We had to develop our own network.” They did that by contacting sustainable agriculture groups and attending grazing conferences. “Once we found a network of individuals who had done some of the things we were trying to do, we knew we were on the right track, and that we could succeed,” Kerry says.
The Buchmayers offered a word of advice for anyone trying to start up an alternative enterprise: “Plan how long you think it will take you to develop your project, and then double your projection. We found that everything took longer than we thought it would.”
Setting a goal is crucial to planning. The trip in the above analogy has a goal: Bangor to Los Angeles, with two stops in between. Sometimes heading out on a trip without a destination is an adventure, but it tends to cost more money and cause more stress than a trip with a set destination. Establishing a holistic goal gives you the destination. It will help you get to where it is you want to go.
Example Farms
Throughout the next three chapters I will discuss four example farms. Although these are fictional farms (I don’t think anyone wants to share their personal financial information, in the level of detail I need here), they are fairly realistic examples. The box (at right) tells the story of our example farms.
Computers
Although not absolutely necessary, computers really come into their own for planning. A word processor will enable you to keep notes from brainstorming sessions, to keep a monitoring journal, and to complete other writing projects. Spreadsheets make financial planning much easier, allowing you to both record data and play with various scenarios, such as calculating gross profits under varying circumstances: worst case, expected case, and best case.
As I noted in part III, we also use our computer (with the help of a drawing program) to develop labels and advertisements. In this way we’ve been able to develop ads that are both eye catching and inexpensive.
Computers have become far cheaper in the past few years. One that can do everything you’ll need can be purchased brand new for less than $1,500. And if that is too much for your current budget, shop around for a used model. The computer I use now is the first new one that I’ve ever owned, and it’s my fourth. My fifth computer, a laptop I can take with me wherever I go, was also purchased used.
Computers get sold while still in good working order for next to nothing, because lots of “computer geeks” upgrade every year or two. Nothing is wrong with their old computer; they just want a new one that is faster and has more bells and whistles. You don’t have to have the newest, fastest model for farm use.
The Example Farms
The Blacks. Miles and Gail Black are third-generation ranchers who have never known anything other than the mountain ranching community of central Colorado. The 2,800 deeded acres (114.8 ha) they now run, was homesteaded by Miles’s great-grandfather at the turn of the century. Now in their mid-40s, they are trying to figure out how to accommodate their son, Mark, and his fiancée, Laura, who want to stay and ranch with Miles and Gail.
As well as running their deeded land, the Blacks also lease 20,000 acres (8,100 ha) of Bureau of Land Management land from the federal government. The lease entitles them to run 100 cow-calf pairs for 5 months of each year, if the grass holds out.
The Blacks have a relatively small line of equipment relative to the size of their spread — they keep one older tractor and some haying equipment, as well as a few older four-wheel-drive pickup trucks, two fifth-wheel stock trailers, and a stock truck.
The Joneses. Gil and Jenny Jones are family farmers who have run a 240-acre (98-ha) farm in central Wisconsin since their marriage in 1977. They both grew up on dairy farms in the area. They have two teenage boys and one teenage daughter: Gabe, age 17; Mike, age 14; and Cindy, age 15.
Until 1990, all the tillable ground (even some steep ground that was highly erosion prone) was planted to crops. They maintained a small beef cow-calf herd of about fifteen mother cows to graze in the low ground. Jenny had to work off the farm as a secretary in a local insurance office, and they were going deeper into debt each year. They were seriously thinking about selling the farm.
In the winter of 1990, they decided it was time to either sell or change their operation. They attended some workshops put on regionally by a sustainable farming organization. They began participating in a grazing group, they attended workshops on holistic management, and they began using planning and monitoring procedures like those outlined in the next three chapters. During the next decade, they were able to turn their operation around. In 1996, Jenny quit her job in town to work full time on the farm with Gil and the children.
Today, the Jones run a grass-based livestock farm, incorporating both cattle and sheep. The whole farm has been developed into pastures and hay fields. They use workhorses for cutting and raking hay, as well as in their garden. In 1997, they were able to begin working on direct-marketing some of their animals.
The Millers. Gary and Michelle Miller purchased their 60-acre (24-ha) farm in western Massachusetts in 1988. The Millers have no children. Neither Gary nor Michelle came from a farming background, but they saved their money for several years to be able to purchase their dream farm.
The land the Millers purchased was half open, half wooded with a mix of maples, oaks, and pines. The buildings were old and in need of repair, but Gary had the basic carpentry skills to do the job himself. The first 3 years that they owned the farm, the Millers kept working in Boston, commuting to the farm on weekends and for their vacations. They worked on the buildings, put in a large garden, and kept a pair of draft horses.
In 1991, the Millers made the jump, quitting their jobs and moving to the farm full time. They market garden produce, herbs, and flowers at a local farmers’ market during the summer; sell firewood and maple syrup in winter; and raise chickens, cattle, and sheep to direct-market
through the farmers’ market and to a mailing list of customers. They currently rent an additional 40 acres (16 ha) of pasture from a neighbor. Their only equipment is one older tractor with a loader for moving manure and snow, and an older rototiller.
The Wilsons. Tom and Karen Wilson and their three sons — Rick, age 14; Jeff, age 12; and Byron, age 7 — live on a 200-acre (81-ha) farm in western Tennessee that has been in Karen’s family for more than 200 years. The Wilsons returned to the farm from Nashville 7 years ago, when Karen’s dad decided to retire. Tom was an engineer and Karen a high school English teacher, but they were both happy to give up their jobs for a life in the country, working the land. Getting their children out of city schools was also important to them.
Karen’s parents wanted to buy a house in town and spend the winter traveling to southern Texas, so they had to sell the farm to Tom and Karen. The sale included all equipment and livestock. They also felt this sale would make their estate clearer when they died, so Karen wouldn’t need to fight it out with her siblings. She and Tom would owe the estate payments on the loan, just as they now owed her parents.
During the years that Karen’s dad farmed, he kept a few beef cows on the hilly pastures that couldn’t be tilled, but primarily he raised crops on about 120 acres (49 ha) of the farm. He had a 30-acre (12-ha) tobacco allotment; the remainder was grown in a corn and bean rotation. Tom and Karen kept farming much the way her dad had done before them, but Karen still has to work as a teacher in the local school district, and each year they have to dip deeper into their savings just to live.
Small-Scale Livestock Farming Page 25