US DEPARTMENT OF AGRICULTURE

NATRUAL RESOURCES CONSERVATION SERVICE

NEW MEXICO OFFICE

ECONOMIC REFERENCE MATERIAL

This Economic Reference Material is intended to be a data source and
supplement for the New Mexico Field Office Technical Guide (NM FOTG),
and serve as a "self help" instructional guide to NRCS related economic
analysis. This material is prepared primarily for field office personnel
to illustrate the use of economic principals, provide basic economic
data, and help land users in identifying economic impacts of
conservation practices, and in formulating conservation management
systems. This material may be used as a reference source to support and
reinforce formal training activities on the economics of soil and water
conservation. It can also be used to analyze the economic feasibility of
RC&D projects.

The reference material is organized to encourage frequent use and
updating as needed. New material can be easily added, and outdated or
irrelevant material can be easily discarded. This is your reference
material. Make it useful to you: write in it or add notes to facilitate
your use of the manual.

Please contact the New Mexico State Office economist with any
recommended changes or updates.

ECONOMIC REFERENCE MATERIAL

**1.0 Introduction [1](#introduction)**

1.1 Benefits of Conservation [1](#benefits-of-conservation)

1.2 Costs of Conservation [3](#costs-of-conservation)

1.3 How the Overall Agricultural Environment Affects Conservation
Purchases
[4](#how-the-overall-agricultural-environment-affects-conservation-purchases)

1.4 Economics and the Planning Process
[4](#economics-and-the-planning-process)

2.0 Basic Considerations and Economic Principles
[6](#basic-considerations-and-economic-principles)

2.1 Time Value of Money and Opportunity Cost
[6](#time-value-of-money-and-opportunity-cost)

2.2 One-Time Values, Annual Flows (Annuities), and Lags
[7](#one-time-values-annual-flows-annuities-and-lags)

2.3 Interest Rate Selection Advice [10](#interest-rate-selection-advice)

3.0 Budgeting [12](#budgeting)

3.1 Types of Budgets [12](#types-of-budgets)

3.2 Using the Cost and Return Estimator (CARE)
[13](#using-the-cost-and-return-estimator-care)

4.0 Sample Analysis [15](#sample-analysis)

4.1 Example 1: Maximizing Profit with Input Management (e.g. Fertilizer)
[16](#example-1-maximizing-profit-with-input-management-e.g.-fertilizer)

4.2 Example 2: Cost Analysis (e.g.. Brush Control)
[18](#example-2-cost-analysis-e.g..-brush-control)

4.3 Example 3: Partial Budgeting (e.g., Conservation Cropping Systems)
[19](#example-3-partial-budgeting-e.g.-conservation-cropping-systems)

5.0 Estimating Farm Machinery Costs
[21](#estimating-farm-machinery-costs)

6.0 Glossary [22](#glossary)

# Introduction

How do we decide to spend our money? Normally we compare the benefits of
the purchase or investment to its costs. Someone considering the
purchase of a new car might see better gas mileage and fewer repairs as
benefits. Costs might include higher car payments and higher insurance
premiums. Someone wanting a computer might be comparing benefits that a
computer would give them in business and at home to the cost of giving
up other activities or items currently enjoyed.

Agricultural producers, when deciding whether to purchase or invest in
conservation, go through much the same thought process. Will the
benefits from conservation outweigh the costs? Because the producer is
the principal Natural Resources Conservation Service (NRCS) client, it
is important that we understand the benefits and costs of conservation
so we can inform our clientele. Economics is just one more tool to help
us do a better job and to help the land user make more informed
decisions.

## Benefits of Conservation

Benefits from conservation are numerous and can occur offsite as well as
onsite. These two types of benefits are described briefly below:

### Onsite Affects

This material examines onsite benefits in three parts:

1.  productivity maintenance,

2.  decreased production costs and offsite benefits as a whole, and

3.  changes in yields.

Much more detailed records of conservation effects can be found in Field
Office Technical Guide (FOTG).

#### Productivity Maintenance {#productivity-maintenance .unnumbered}

When we speak of maintaining productivity we're really referring to
preserving existing resources to allow sustained use of the land. For
example, protecting soil from erosion sustains crop production. To
maintain yields crops need sufficient nutrients and water. Crops also
need a soil profile that allows adequate root growth with sufficient
tilth and organic matter to allow the passage of nutrients and water.

When erosion occurs crops are denied these basic needs to some extent.
Wind erosion causes loss of soil moisture and degradation of the soil
profile through removal of topsoil. Water erosion causes loss of topsoil
that reduces the quality and quantity of the soil and causes loss of
nutrients. Water erosion can also cause onsite crop damage through
gullies and sediment deposits within the field. Both voided areas and
sediment deposits lower productivity by reducing or even eliminating
crop stands in certain areas.

Productivity maintenance occurs as conservation measures are used to
reduce soil loss and conserve moisture. Yields are maintained and
sometimes enhanced with conservation. These measures serve to sustain
the basic needs of the crop by keeping soil, nutrients, and water where
they are needed.

#### Decreased Production Costs {#decreased-production-costs .unnumbered}

Some conservation measures are beneficial to the producer because they
reduce production costs. For example, a resource management system (RMS)
which reduces the costs of growing a crop offer the farmer "decreased
production costs." Certain tillage practices like conservation tillage
and no-till reduce the number of trips over the field, allowing farmers
to save time, fuel, and machinery wear. Other measures that convert row
crops to other land uses allow the farmer to use less fertilizer and
chemical inputs on these areas. Examples of this type of measure are
field borders and grassed waterways. Both measures involve converting
low yielding row crop areas (end rows and watercourses) into grass. The
farmer saves production costs because these converted areas usually
require less inputs than do row crops.

#### Changes in Production {#changes-in-production .unnumbered}

Many current residue management techniques provide changes in potential
yield due to increased snow catch, earlier planting, and microclimate
changes. Other conservation measures, such as the grassed waterways and
field borders, take some cropland out of production. Often, since these
areas were low producing to begin with, the decrease production costs
and increased yields on the rest of the field more than outweigh the
lost production from the waterway.

In analysis of deferred or rotational changes in range management,
production changes provide the major economic changes. Often an early
loss of production due to deferment is balanced against later increases
in weight gain per cow.

### Offsite Affects

Offsite benefits of the implementation of improved conservation
management are most easily understood in the context of damages avoided
via the prevention of resource degradation and other adverse
environmental impacts. Offsite affects are generally more difficult to
understand than onsite affects, and are generally not considered in
detail at the farm level.

Offsite damages, which include deposition and reduced water quality,
result as eroded sediment is carried off the field by the actions of
wind or water. The sediment can fill ditches, plug culverts, reduce the
useful life of ponds, and destroy fences. Sediment is also a carrier of
farm pesticides and fertilizers. These substances travel on their own or
with the sediment to creeks, streams, rivers, and lakes. The chemical
substances pollute the water and reduce its usefulness for human
consumption, recreation, and fish habitat.

By keeping soil (and chemicals) on the field where they are applied (and
needed) these off-site damages are avoided, and avoided costs can be
counted as a benefit. Any measure that helps to reduce soil loss and
thus reduce the runoff of sediment and chemical pollutants is useful in
maintaining or improving surface water quality.

## Costs of Conservation

Given the broad benefits of conservation, why isn't its adoption more
widespread? One reason is the cost involved with any investment.
Conservation generally has costs associated with its implementation.

The most obvious cost is in installing the measure. This cost includes
all material, labor, and equipment needed to get the measure on the
ground. This cost is "up front" as it occurs when the items or services
are purchased. USDA offers cost share programs in part to off-set the
initial expense of cost share measures. Cost share payments can help the
producer justify the installation of conservation practices which,
despite sometimes substantial public benefits, might otherwise not offer
the producer sufficient economic justification for implementation.

Operation, maintenance, and replacement (OM&R) are costs that occur
throughout the life of the measure. These costs insure that the measure
continues to function properly. Fertilization of a waterway, replacing a
pipe, or reseeding a terrace backslope are examples of OM&R.

A third cost of some conservation measures is the cost of lost
production. When certain measures are installed previous production from
the area is diminished or foregone completely. For example, windrows can
take land out of crop production. If the yields from these areas were
low initially, the lost production is small and there might be a
production cost savings. If previous yields were high, the cost of
putting in windrows would also be high in terms of lost production.

Another cost occurs with some tillage practices. It is possible that
applications of fertilizers and chemicals must be increased in some
soils when switching to conservation tillage or no-till. Increased
production costs must be accounted for in these situations.

## How the Overall Agricultural Environment Affects Conservation Purchases

Now that some benefits and costs of conservation have been discussed,
how does the agricultural environment (interest rates, the farm program,
politics, etc.) affect a farmer's decision to apply conservation? During
times of prosperity, farmers can invest in long term conservation. In
fact, in years of high profit, farmers sometime search for ways to
reduce their tax burden. Under current tax laws, conservation is an
intelligent investment for this purpose. In bad times, taxes are not a
problem because profits are low. Since benefits from conservation
sometimes take time to materialize while most costs are up front, lack
of cash flow becomes a major problem for many farmers.

We need to be aware of a farmer's economic situation as we make our
recommendations. Measures with high installation costs and benefits that
take time to appear may be a good alternative from an purely analytical
standpoint but not feasible for the farmer. In times of economic stress,
applying part of a system, although it will not completely solve the
resource problem, is better than not applying any measures at all. At
least the door remains open for the farmer when times get better to
apply remaining practices of the resource management system and reap the
full benefit of conservation.

## Economics and the Planning Process

The National Conservation Planning Manual (NCPM) describes planning as a
flexible, continuing process of identifying problems and opportunities,
determining objectives, inventorying resources, analyzing resource
information, and developing and evaluating alternatives to help land
users make and carry out informed decisions in the management of their
soil, water, and related resources. This planning process is used in all
instances where assistance is provided to decision makers whatever the
expected outcome or scope of the planning effort, whatever the type of
conservation treatments that are expected to be accomplished, and
whatever the source of funding to be used for implementation.

The degree of detail used in the planning process will vary with the
type, method, scope of assistance, complexity of the planning situation,
and the recipient of assistance. Appropriate implementation of the
planning process creates a consistent method of providing assistance
nationwide. The key elements in planning and implementation are:

1\. Identify the problem

2\. Determine the objectives

3\. Inventory the resource data

4\. Analyze the resource data

5\. Formulate alternative solutions

6\. Evaluate alternative solutions

7\. Client determines a course of action

8\. Client implements the plan

9\. Evaluation of the results of the plan

This process requires the use of interdisciplinary skills to achieve the
highest quality of assistance. Economics can and must play an important
role in the planning process.

# Basic Considerations and Economic Principles

Modern American agriculture is a complex business. As farms get bigger
and investments higher, more knowledge is required to figure out costs
and returns and analyze alternatives. An understanding and proper use of
interest and annuities is necessary in analyzing and comparing the many
investments and alternatives available.

Money can be used either to satisfy immediate wants or be invested in
capital goods with present or future productive capacity. Rates of
interest (payment for the use of money) are determined by demand, time,
and risk. If funds are borrowed, the rate must be applicable to the type
and length of loan needed. If funds are not borrowed, the rate used will
depend on the desire for and opportunity of obtaining returns from using
the funds in other productive uses (opportunity cost).

The intent of this chapter is to provide a basic understanding of
interest and annuities and how they can be used to compare and analyze
investments and alternatives. This chapter described calculates which
are relatively simple to complete using EXCEL and tools included in the
FOTG. Contact the NM State Office economist if you need additional
information or assistance using these tools, or apply other economic
principals. This chapter also gives formulas and examples for
calculating the interest factors. To help put things in proper
perspective, it is sometimes helpful to draw a sketch or diagram of the
situation being analyzed.

## Time Value of Money and Opportunity Cost

Money can be invested and used to make more money over time. Thus, a
dollar received today (and not spent) could be put into a bank or
invested elsewhere. If banked or invested, it would be worth more than
one dollar a year from now. This concept is called the time value of
money; we are accustomed to dealing with it in home and business finance
every day. For example, land users may make decisions about purchasing
one piece of equipment versus another or no purchase at all, based on
the use of money over time.

The time value of money can be thought of in two ways. First, if the
land user borrows money for a purchase, the time value of money is the
interest paid on the loan. If the land user uses his own money for a
conservation measure, the time value of money would be the return he
gave up from another investment (savings account, certificates of
deposit (CD), IRA, etc.). He has an "opportunity cost." The interest he
could have received from a CD is now a lost opportunity because he used
the funds for conservation.

When a landuser considers purchasing conservation, the idea of time
value of money applies. There is a cost above and beyond the purchase of
the conservation measure. If the landuser borrows to pay for the
measure; that additional cost will be equal to the interest he must pay
on the loan. If he uses his own money, the additional cost is equal to
the return that money would have earned in another investment.

## One-Time Values, Annual Flows (Annuities), and Lags

The benefits and costs of conservation do not necessarily occur
simultaneously. Certain costs and benefits may occur at one point in
time while others occur over several years. Some occur today while
others occur in the future. Those values that occur at one point in time
are called one-time values. Installation costs are an example of a value
that occurs at one time. Values that occur over time are called annual
flows or annuities. Annuities can be generalized into constant,
decreasing, and increasing over time, depending on their
characteristics. Many benefits from conservation fall into the annuity
category.

A one-time value can occur today or at some point in the future. If it
occurs at some point in the future it is said to be "lagged" or delayed.
The replacement cost of a practice is a good example of a lagged one
time value. Annuities too can be lagged. If benefits from a terrace do
not start until one year after installation, then those benefits are
said to be lagged one year. The benefits from deferred grazing following
range seeding is another common occurrence of a lagged annuity. Table 1
illustrates examples of one-time values, annual flows, and lags.

  ----------------------- ----------------------- -----------------------
  **Table 1: One-time                             
  Values, Annual Flows,                           
  and Lags.**                                     

  **One-Time Values**     **Annual Flows**        **Lagged Values**

  Installation Costs      Conservation Benefits   Replacement Costs

  Replacement Costs       Average Returns and     Other values not
                          Average Costs           starting in the
                                                  installation year

                          Average O&M Costs       
  ----------------------- ----------------------- -----------------------

### Determination Of Average Annual Costs and Benefit Cost Ratios

Average annual cost is useful in evaluating individual alternatives, or
comparing alternatives with different expected lifetimes, costs and
benefits. For example, assume the following: the installation cost of
the alternative is \$ 42,500; it has an expected life of 50 years;
operation and maintenance costs are expected to be 3% of installation
cost annually; the interest rate is 8 7/8%.

To determine the average annual cost the capital cost must be amortized.
The amortization factor for 50 years is 0.09003 (amortization reference
card available on NRCS FOTG web site). Thus, the average annual capital
cost of the alternative is \$42,500 x.0.09003 = \$3,826. No amortization
is necessary to calculate annual average operation and maintenance,
which are expected to entail a recurring annual cost of \$42,500 x 0.03
(from assumptions above) = \$1,275. The total average annual cost is the
sum of all of the annualized costs, in this example, it includes the
annualize installation cost plus the O&M costs or \$5,101. The "Net
Return Cost Benefit Spreadsheet" (also available on the NRCS FOTG
website) will automatically calculate this same answer, eliminating the
necessity for looking up the amortization factor and manually
calculating individual costs.

The spreadsheet will also perform the calculations necessary to complete
more complicated analyses with lagged values, benefits (as well as
costs), calculating many of the values described below "behind the
scenes" eliminating the necessity for the user to perform complicated
manual calculations.

In a continuation of the example above, we calculate the "Benefit Cost
Ratio" of the proposed improvements by dividing Average Annual Benefits
by Average Annual Costs: \$5,520/\$5,100=1.08. In most analyses, a
practice with an benefit cost ratio greater than one (1.0) is justified,
however it is necessary to consider other factors listed in Section 3 of
the FOTG in determining the economic feasibility of a given RMS or
practice.

The following figure depicts the most common types of values. The most
commonly occurring types can be readily calculated using the "net return
cost benefit analysis" spreadsheet, including lagged and non-lagged one
time values and constant annuities. Increasing and decreasing annuities
can also be estimated in the spreadsheet by estimated annual value for
each year of a practice. More exacting calculations are also possible;
consult the NRCS NM State Office economist for additional information.

![](media/image1.png){width="6.402083333333334in"
height="7.902777777777778in"}

## Interest Rate Selection Advice

The biggest single factor in any long-term economic calculation is the
selection of which interest rate to use. The interest rate to be used
should correspond to an opportunity cost equal to the best current
investment available, plus any added risk charge, minus expected
inflation in the price of the product.

Here is an example describing the installation of a \$10,000 well to
better utilize rangeland. Assume that this will create an additional
\$1,000 of income per year over the next 25 years. The example
illustrates the cash flow, net return, and benefit/cost ratio at various
interest rates. At first glance, one might conclude that the practice is
readily justified: it is expected to cost \$10,000 and generate
\$25,000. However, comparing these numbers directly ignores the time
value of money, and does not adequately account for alternate uses of
the \$10,000 initial invest, or O&M, or other costs. Consider the more
detailed analysis below, which for the sake of simplicity assumes that
no risk premium is included.

-   Rancher A has the \$10,000 sitting in a 6 percent CD. He figures
    that cattle prices will increase over time by four percent annually.
    He calculates his opportunity cost as six percent interest minus the
    four percent expected increase in cattle prices for a net two
    percent opportunity cost.

-   Rancher B has the \$10,000 sitting in a 7 percent CD. However, he
    does not assume any increase in the price of cattle nor increased
    production efficiency over the next 25 years. He uses the seven
    percent interest rate.

-   Rancher C will borrow the money at a 10 percent interest rate. He
    balances the risk premium against probable long-term increases in
    cattle prices.

-   Rancher D really wants to develop the well. However, he is mortgaged
    to the hilt. He borrows the \$10,000 on his credit cards at 20
    percent.

Finally, we will calculate the net internal rate of return, that
interest rate at which the investment will break even. The Net Internal
Rate of Return is only 8.78 percent for this example, despite delivering
\$25,000 of income for a \$10,000 investment. That is a 2.5:1 B/C ratio
without considering interest; 1.95:1 B/C with a low 2 percent interest
rate; but the investment does not break even at a 10 percent interest
rate. Most of these calculations (and those bulleted above) can be
simplified by using the Net Benefit Cost Analysis Tool or other computer
software.

Although NRCS personnel can recommend an appropriate interest rate for
use in the analysis of conservation practices, agency personnel should
not necessarily make the final determination of an appropriate interest
rate. Generally, the interest rate should be determined by the producer,
so that it rate can be used to incorporate a producer's often times
intuitive opinion about risk and resource preservation into economic
analyses. For example, a producer who does not expect historic rates of
technological innovation to continue, or one who has a strong belief in
the non-economic value of resource improvement, may choose to use a
lower than market interest rate to give greater than normal emphasis to
resource improvement. However, some NRCS endeavors, including Water
Resource Projects, have mandated or programmatically determined rates;
in these cases the appropriate rate must be used.

![](media/image2.wmf){width="5.5in" height="7.029166666666667in"}

# Budgeting

This chapter contains a description of crop budgeting techniques.
Specific budgets and the Cost and Return Estimator (CARE) crop budget
program are available from NMSU Extension personnel.

Budgets are used to project a flow of resources over a period of time.
They are like a proposed income statement as contrasted with a balance
sheet. They are essential tools for planning.

## Types of Budgets

There are three basic types of budgets that may be useful in examining
conservation practices or other farm operations. Each can be formed at
varying degrees of detail, from simple cash flow budgeting, adding
depreciation and inventory changes, to loss of soil productivity due to
erosion from a given crop. These budgets can be run for one year or
through the length of a rotation.

#### Whole Farm (Ranch) Budgets  {#whole-farm-ranch-budgets .unnumbered}

Whole Farm (Ranch) Budgets show the proposed income and expenses for the
operation. It includes changes in the inventory of all resources. It can
include both cash and non-cash expenses like depreciation.

Note that for whole farm budgets you must have detailed information on
every operation, including non-farm income and expenses. Running a whole
farm budget may be recommended for operators considering long-term
agreements, or animal waste management facilities where a major
systematic decision would affect the entire farm operation. Extension
farm management specialists, financial consultants and the adult farm
and ranch management instructors at technical institutes routinely
handle whole farm budgets.

#### Enterprise Budgets {#enterprise-budgets .unnumbered}

Enterprise Budgets include any budget containing all of the income and
expenses associated with a specific enterprise. Examples of enterprise
budgets are livestock budgets, crop budgets, field budgets, pasture
budgets, and district tree planting budgets. Enterprise budgets should
have all the physical qualities included with the costs and incomes of
the enterprise. They need to include items like number of cattle, tons
of hay, seeding rate, and type planter used. For crops, the CARE model
included in each NRCS field office computer provide a quick, detailed
crop budget for a field in a year. CARE is the crop budget program
currently supported by NMSU Extension. Annual budgets for a given crop
can be combined in a rotation or fields combined into a farm operation
using a more complex model as necessary.

#### Partial Budgets  {#partial-budgets .unnumbered}

Partial Budgets look only at the change in costs and returns that would
occur if the proposed changes were adopted. In many of our evaluations a
complete crop budget analysis is not necessary. Partial budgeting works
very well when measuring the effects of changing a management or
production system.

One fast and simple way to create a detailed but short partial budget is
to produce a Quick Budget Comparison Report using CARE and save it as a
computer file instead of a printout. Then use Microsoft WORD to edit out
the budget items that do not change, leaving only the changes to
concentrate on.

## Using the Cost and Return Estimator (CARE)

CARE is the primary crop budget generator used by NRCS. The CARE program
will function as a stand alone program in a DOS window.

Several budget output formats are available from the CARE program:

-   Quick Budget Report;

-   Quick Budget Comparison Report;

-   Summary Budget Report;

-   Detailed Budget Report; and,

-   Operation Budget Report.

An appropriate level of output can be selection based on the need for
various degrees of detail. A simple yet quite detailed format that will
likely meet the needs in most field office applications is the Quick
Budget Report. For more detail analysis, as may be used by farmers for
their on-farm budgeting, stay in the main program.

Anyone interested in applying the analysis methods should start with the
closest budget to the farmer's crop and tillage methods as a base and
then modify that budget to match the farmer's own operations. This can
be done either in the main program or in Quick Budget.

The Detailed Budget Report provides six pages of output showing every
possible budget report: machinery costs report, detailed interest
budget, labor requirements by month, capital requirements by month, and
other reports. It is of value to a farmer analyzing every aspect of his
field operations. Note that this report is produced by the main CARE
program not the Quick Budget options. Any Detailed Budget can be
converted into a Quick Budget. However, a Quick Budget cannot be
converted back into a Detailed Budget.

The Summary Budget Report is a two-page summary of the Detail Budget
Report. An Operations Budget can also be produced showing every detail
on the machinery used in a CARE budget. This can be very valuable to
individual farmers monitoring their machinery operations.

# Sample Analysis

This chapter includes examples illustrating several of the previously
described approaches to economic analysis in a variety of specific
scenarios. The examples are intended to suggest the range of analyses
that are possible rather than indicate a definitive type of analysis
that ought to applied a particular situation. The necessity and ideal
extent of economic analyses for any given situation is best determined
by the available data, the producer\'s level of interest and data needs,
and program requirements.

## Example 1: Maximizing Profit with Input Management (e.g. Fertilizer)

#### Background {#background .unnumbered}

In the past, the importance of "maximizing yields" has been promoted
through friendly neighbor competition, college agronomy courses, Master
Grower Contests, etc. This is justified if the extra yield is sufficient
to pay for the extra fertilizer (assuming water and other inputs are
held constant). Maximum yield does not guarantee maximum profit. In
fact, the higher the fertilizer/crop price ratio, the lower the
fertilizer rates should be. A producer maximizes profit by adding
fertilizer only to the point where the extra yield will pay for the
extra fertilizer. More is not always better.

#### Tools Needed {#tools-needed .unnumbered}

To convince a producer to add fertilizer only to the point where the
extra yield will pay for the extra fertilizer, he/she must be shown to
what degree extra increments of fertilizer increase yields. This yield
"response" must then be compared to the price of the crop and the price
of the fertilizer to estimate changes in net returns (profits).

#### Approach {#approach .unnumbered}

Data must be obtained on fertilizer/yield response and fertilizer/crop
prices.

  ----------------------------------- -----------------------------------
  **Sources of Response Data**        **Sources of Cost Data**

  County Extension Agent              Market Reports

  Local Producers                     Local Dealers

  Experiment Station Bulletins        Local Producers

                                      NRCS State Economist
  ----------------------------------- -----------------------------------

Consider the following numerical example:

+---------+-------+------+-------+---------+---------------+---------+
| Input:  | Inc   | Yi   | Incr  | Cost:   | Additional    | Net     |
|         | rease | eld: | eased |         | Income:       | Change  |
| [       |       |      | Y     | [0.2    |               | in      |
| Nitroge | in    | (    | ield: | 0]{.und | [2.00         | Return: |
| n]{.und | I     | [bu/ | (     | erline} | ]{.underline} | (\$)    |
| erline} | nput: | ac]{ | [bu/a | (\$/    | (\$/          |         |
|         |       | .und | c]{.u | [lb     | [bu           |         |
| (       | ([    | erli | nderl | ]{.unde | ]{.underline} |         |
| [lbs/ac | lbs/a | ne}) | ine}) | rline}) | ) \* Change   |         |
| ]{.unde | c]{.u |      |       | \*      | in Yield      |         |
| rline}) | nderl |      |       | I       |               |         |
|         | ine}) |      |       | ncrease |               |         |
|         |       |      |       | in      |               |         |
|         |       |      |       | Input   |               |         |
+---------+-------+------+-------+---------+---------------+---------+
| 50      | \--   | 100  | \--   | \--     | \--           | \-\--   |
+---------+-------+------+-------+---------+---------------+---------+
| 100     | 50    | 120  | 20    | \$10    | +\$40         | +\$30   |
+---------+-------+------+-------+---------+---------------+---------+
| 150     | 50    | 130  | 10    | \$10    | +\$20         | +\$10   |
+---------+-------+------+-------+---------+---------------+---------+
| 200     | 50    | 135  | 5     | \$10    | +\$10         | \$0     |
+---------+-------+------+-------+---------+---------------+---------+
| 250     | 50    | 138  | 3     | \$10    | +\$6          | -\$4    |
+---------+-------+------+-------+---------+---------------+---------+

Given the response and cost information, it is easy to calculate changes
in net returns as fertilizer rates increase. In this case, the producer
should not apply more than 200 pounds of nitrogen per acre. If he/she
does, the increased yield will not pay for the increased nitrogen. Added
nitrogen will also increase the chances of water quality degradation.
This technique can be applied to any input (including pesticides) and
any crop (including pasture and range).

WORKSHEET 1

Maximizing Profit with Input Management

Producer's Name[: .]{.underline}

Project[: .]{.underline}

Data Needed:

1\. Input data: prices and quantities.

2\. Corresponding changes in yield.

3\. Increasing input amounts (record below).

4\. Crop price \$.

Record the units of measurement (lbs/ac; \$/bu; etc.) at the top or each
column. Complete quantities within each cell.

+---------+-------+------+-------+---------+---------------+---------+
| Input:  | Inc   | Yi   | Incr  | Cost:   | Additional    | Net     |
|         | rease | eld: | eased |         | Income:       | Change  |
| [       |       |      | Y     | [\_\_\  |               | in      |
| Nitroge | in    | (    | ield: | _]{.und | (\$/ ) \*     | Return: |
| n]{.und | I     | [/]  | (\    | erline} | Change in     | (\$)    |
| erline} | nput: | {.un | _\_\_ | (\$/ )  | Yield         |         |
|         |       | derl | [/]{. | \*      |               |         |
| (       | (     | ine} | under | I       |               |         |
| [       | [/]{. | )    | line} | ncrease |               |         |
| /]{.und | under |      | )     | in      |               |         |
| erline} | line} |      |       | Input   |               |         |
| )       | )     |      |       |         |               |         |
+---------+-------+------+-------+---------+---------------+---------+
|         |       |      |       |         |               |         |
+---------+-------+------+-------+---------+---------------+---------+
|         |       |      |       |         |               |         |
+---------+-------+------+-------+---------+---------------+---------+
|         |       |      |       |         |               |         |
+---------+-------+------+-------+---------+---------------+---------+
|         |       |      |       |         |               |         |
+---------+-------+------+-------+---------+---------------+---------+
|         |       |      |       |         |               |         |
+---------+-------+------+-------+---------+---------------+---------+

## Example 2: Cost Analysis (e.g.. Brush Control)

#### Background:  {#background-1 .unnumbered}

When a landuser is deciding whether or not to apply conservation to
improve water quality, the outlay or cost of that system is of utmost
importance. The landuser needs this information to make sound economic
and financial decisions. A conservationist should always be able to
supply the needed conservation cost information.

*Tools Needed:*

The costs of conservation practices which improve water quality vary
according to whether the practice is enduring (structural) or based on
the land user's improved management (nonstructural). Enduring practice
costs include installation, operation, maintenance, and sometimes
replacement. Costs of management include crop budget item costs like
increased labor and management.

*Approach:*

A landuser needs to have "up-front" installation costs of alternatives
amortized (spread out on an annual basis) to fit into his/her annual
production records. The up-front costs of each alternative should be
amortized (spread out) over some logical time period, like life of the
practice or loan period, so that total annual costs of each alternative
can be developed.

Generally, annual operation and maintenance (0&M) costs are added to
amortized installation costs to find total costs on an annual basis.
Replacement costs should be considered when comparing alternatives with
unequal life spans, and the method used here automatically accounts for
replacement of short-lived alternatives.

*Example:*

A rancher is trying to determine the annual costs of brush control under
three alternative methods: (a) mechanical control, (b) aerial applied
chemical control, and (c) basal applied chemical control. Assume he/she
can borrow money at 9 percent interest. Use the Net Return Benefit Cost
Calculator spreadsheet to compare the three alternatives:

The following format can be used to organize alternatives and their
costs, and to record annualized data from the spreadsheet:

  ---------------------------- -------------- ---------------- --------- --------------
  **Practice**                 **Lifetime**   **Installation   **O&M**   **Annualized
                                              Cost**                     Costs^1^**

  Mechanical Treatment         20             \$6,500          \$65      \$777

  Chemical Treat., Aerial      5              \$2,500          \$125     \$768
  Application                                                            

  Chemical Treat., Basal       10             \$4,000          \$40      \$663
  Application                                                            

  ^1^ The annualized costs                                               
  presented here are                                                     
  calculated with the Net                                                
  Return Benefit Cost Tool.                                              
  ---------------------------- -------------- ---------------- --------- --------------

The annual cost of the two alternatives least likely to degrade water
quality (mechanical and basal/chemical) are essentially of equal to or
lesser cost than the aerial method. Thus, the rancher's goals of least
cost conservation and maintaining water quality can be met
simultaneously. If the aerial/chemical method was least expensive, the
rancher would at least be able to see to what degree the goals differed.

## Example 3: Partial Budgeting (e.g., Conservation Cropping Systems)

#### Background:  {#background-2 .unnumbered}

The partial budget is another simple means of evaluating conservation
practices and systems of practices. The partial budgeting technique is
basically a weighing of the benefits and costs that change as
alternatives are considered. This technique simplifies data collection
while examining how benefits and costs change.

#### Tools Needed:  {#tools-needed-1 .unnumbered}

Two main tools are needed to employ the partial budgeting technique.
First, the conservationist and the producer must estimate the
operational changes that the proposed conservation practice(s) will
dictate and any changes in yield that might occur. Second, a format by
which to compare these changes must be used, i.e., some sort of partial
budgeting form must be used.

#### Approach: {#approach-1 .unnumbered}

Any change caused by the adoption of a conservation practice(s) can be
classified into one of four categories: (a) Added returns, (b) added
costs, (C) reduced returns, or (d) reduced costs. Once the changes are
classified on the partial budget form, they can be estimated in dollar
terms and then analyzed in total to develop the net effects. If the net
returns benefit analysis spreadsheet is to be used, added return and
reduced costs are grouped as benefits, and added costs and reduced
returns are groups as costs.

#### Example: {#example .unnumbered}

The employment of a conservation cropping system may result in a number
of changes in the way a farmer operates. Examples of the changes for a
particular situation might include:

-   increase in hay production worth \$55/acre,

-   increase in water quality (complex evaluation procedures could be
    used to evaluate the monetary effects; however, in this example the
    monetary benefits of improved water quality were not evaluated
    because there very complex and at least partially external to the
    producer's operation

-   reductions in herbicides and pesticides worth \$5/acre,

-   decrease in fertilizer usage worth \$25/acre,

-   incentive payment worth \$5/acre,

-   increase in labor worth \$4/acre, and

-   decrease in corn production worth \$75/acre.

Categorizing these changes in a partial budgeting format yields the
following:

**Part A: Benefits**

1\. Added returns

\(a\) Increase in hay production \$55

\(b\) Increase in water quality not evaluated

2\. Reduced costs

\(a\) Less herbicide and pesticide \$ 5

\(b\) Less fertilizer \$25

\(c\) Incentive payments (cost share) \$5

Subtotal A (gains to the landuser) \$90

**Part B: Costs**

1\. Added costs

\(a\) Increased labor costs \$ 4

2\. Reduced returns

\(a\) Decrease in corn production \$75

Subtotal B (losses to the landuser) \$79

**Estimated change in income** \$11/acre gain

Without estimating the water quality benefits, net income rises \$11
/acre, and the system is justified. In this example, all costs are
already expressed as annual costs, and the net benefit cost analysis
tool is not really necessary, however, it may be used a s a simple way
of tracking inputs and outputs if so desired, and it does allow for more
complicated analysis if appropriate.

# Estimating Farm Machinery Costs

A producer\'s investment in machinery and equipment is a major capital
input in the farm business. Historically, machinery and power costs per
acre of crop production have been increasing as farmers substitute
machinery for labor. As farms and machines increase in size, as energy
prices increase, and as inflation causes repair parts, fuel and new
machinery to increase in cost, machinery and power costs per acre will
continue to rise. But good machinery managers will have a smaller
increase in machinery and power cost per acre by making decisions that
will improve productivity per person and machine and decrease operating
costs per acre. They will be able to analyze various machinery system
alternatives to decide which will be most profitable, whether they
should lease, custom-hire, or buy, what the costs per unit of output
might be, and how to reduce them. They will know how to estimate the
costs of owning and operating a machine before investing capital.\
\
The costs of owning and operating farm machinery can be divided into two
categories - annual fixed costs, which occur regardless of machine use,
and variable costs, which are related to the amount of machine use.
Fixed (ownership) costs include depreciation, interest (opportunity
cost), taxes, insurance, and housing and maintenance facilities.
Variable (operating) costs include repair and maintenance, fuel,
lubrication, operator labor, and tractor cost (if the machine is not
self-propelled).\
\
The true amount of these costs will not be known until the machine has
been disposed of, and then only if accurate records were kept throughout
the machine\'s life. But the costs can be estimated if a few assumptions
about machine life, salvage value, annual use, and the future rate of
inflation are reasonably accurate.\
\
For additional discussion of this topic, you may refer to [Iowa State
University Extension Publication \#
PM-710](http://www.ae.iastate.edu/pm710.htm) available on the worldwide
web (<http://www.ae.iastate.edu/pm710.htm)>, upon which this brief
summary is based.

# Glossary

The following definitions are set up as a table (to simplify sorting and
alphbetization), and can be searched (as can the rest of the document)
using the Microsoft Word search function: under the the \"Edit\" menu,
click on \"Find\" (or press Ctrl+F), and type in the word of interest.

+----------------------------------------------------------------------+---+
| **Alternative cost.** Expenditures for achieving a like goal or      |   |
| objective by another means.                                          |   |
+----------------------------------------------------------------------+---+
| **Amortization.** Converting capital or initial costs to annual cost |   |
| by finding the size of annual payments needed to pay off a debt over |   |
| a given period at a given interest rate. Formula:                    |   |
|                                                                      |   |
| [i (1+i)^n^]{.underline}                                             |   |
|                                                                      |   |
| (1+i)^n^-1                                                           |   |
+----------------------------------------------------------------------+---+
| **Amount of an annuity of one per year.** How much an annuity        |   |
| invested each year will grow over a period of years. Formula:        |   |
|                                                                      |   |
| [i (1+i)^n-1^]{.underline}                                           |   |
|                                                                      |   |
| i                                                                    |   |
+----------------------------------------------------------------------+---+
| **Annuity.** A series of equal payments at equal intervals of time.  |   |
| An annuity may be a benefit or a cost.                               |   |
+----------------------------------------------------------------------+---+
| **Assessed valuation.** Estimated worth of property for general      |   |
| property tax purposes.                                               |   |
+----------------------------------------------------------------------+---+
| **Average annual cost (or annual average equivalent).** A uniform    |   |
| yearly sum of money, i.e., costs spread over the life of a facility  |   |
| so it is equal to its initial cost plus interest (see also           |   |
| amortization).                                                       |   |
+----------------------------------------------------------------------+---+
| **Average product.** Ratio of total output (total product), to the   |   |
| quantity of input used in producing that amount.                     |   |
+----------------------------------------------------------------------+---+
| **Base period.** Point in time to which other index numbers are      |   |
| compared.                                                            |   |
+----------------------------------------------------------------------+---+
| **Benchmark.** Resource setting from which options are evaluated. A  |   |
| benchmark is commonly thought of as representing the current         |   |
| resource setting, but this does not have to be the case.             |   |
+----------------------------------------------------------------------+---+
| **Benefit-cost ratio.** Mathematical computation by which benefits   |   |
| accruing from some alternative action are divided by the costs of    |   |
| installing such an alternative.                                      |   |
+----------------------------------------------------------------------+---+
| **Breakeven point.** Where the proceeds from total output of an      |   |
| alternative plan Exactly equals the costs of all inputs associated   |   |
| with that alternative.                                               |   |
+----------------------------------------------------------------------+---+
| **Capital.** All resources except land and labor that contribute     |   |
| toward the production of goods and services.                         |   |
+----------------------------------------------------------------------+---+
| **Capital-investment.** Monetary expenditures for initial            |   |
| installation of a practice or system.                                |   |
+----------------------------------------------------------------------+---+
| **Capital-recovery period** (see also evaluation period). Length of  |   |
| time an individual or group may chose to retire a debt.              |   |
+----------------------------------------------------------------------+---+
| **Cash-flow budget.** A projected listing of all sources and uses of |   |
| cash. A projection of the checking account, the cash-flow budget is  |   |
| extremely useful and necessary to short-term planning.               |   |
+----------------------------------------------------------------------+---+
| **Cash-outlay.** Direct expenditures for purchase of farm supplies,  |   |
| hired labor, services, etc., during the growing season.              |   |
+----------------------------------------------------------------------+---+
| **Complimentary.** Where an increase in the production of one        |   |
| activity will cause an increase in production in another.            |   |
+----------------------------------------------------------------------+---+
| **Composite acre.** Weighted unit showing the same percentage or     |   |
| proportion of each crop as the total cropland acreage.               |   |
+----------------------------------------------------------------------+---+
| **Compound interest and annuity tables.** Collection of factors used |   |
| to express the functions of interest rate and time. Formula:         |   |
|                                                                      |   |
| (1+i)^n^                                                             |   |
+----------------------------------------------------------------------+---+
| **Compound interest.** Interest that is earned for one period and    |   |
| immediately added to the principal, thus resulting in a larger       |   |
| principal on which interest is computed for the following period.    |   |
+----------------------------------------------------------------------+---+
| **Cost and Return Estimator (CARE).** Software program designed for  |   |
| use on a microcomputer to create and adjust cost and return          |   |
| estimates (crop budgets).                                            |   |
+----------------------------------------------------------------------+---+
| **Crop budget system.** Computerized system designed to create and   |   |
| adjust cost and return estimates.                                    |   |
+----------------------------------------------------------------------+---+
| **Crop budget**. Systematic listing of resources used, their cost    |   |
| for specified yield levels, and the value of the output by           |   |
| individual crops or enterprise.                                      |   |
+----------------------------------------------------------------------+---+
| **Custom rate.** Usual fee for farm services rendered generally for  |   |
| machine hire.                                                        |   |
+----------------------------------------------------------------------+---+
| **Demand.** Quantity of a good (or service) which consumers will buy |   |
| at a certain price.                                                  |   |
+----------------------------------------------------------------------+---+
| **Depreciation expense.** Annual allowance for the deterioration of  |   |
| an asset whose productive life is more than one year. Depreciation   |   |
| is not paid in cash, but it is an expense to the business since the  |   |
| purchase price of a long-lived asset is not typically deducted in    |   |
| any one year.                                                        |   |
+----------------------------------------------------------------------+---+
| **Depreciation.** Decrease in the value of property through wear,    |   |
| deterioration, or obsolescence.                                      |   |
+----------------------------------------------------------------------+---+
| **Diminishing returns.** Condition where each successive unit of     |   |
| input adds less to total output than the previous unit.              |   |
+----------------------------------------------------------------------+---+
| **Economics.** Allocation of limited resources among potentially     |   |
| unlimited human wants.                                               |   |
+----------------------------------------------------------------------+---+
| **Economies of scale.** Ability of business firms to spread their    |   |
| fixed costs over larger quantities of output.                        |   |
+----------------------------------------------------------------------+---+
| **Effective economic life.** Point in time where the present worth   |   |
| of expenditures for extending the life of a facility or replacing it |   |
| to exceed the present worth of the benefits.                         |   |
+----------------------------------------------------------------------+---+
| **Efficiency.** Provides a "measuring stick" for evaluating choices. |   |
| In general, efficiency refers to the ratio of output to input.       |   |
+----------------------------------------------------------------------+---+
| **Enterprise budget.** A detailed full-cost listing of all returns   |   |
| and costs (whether paid or unpaid) associated with a particular crop |   |
| or livestock enterprise.                                             |   |
+----------------------------------------------------------------------+---+
| **Evaluation period.** Beginning at the end of the installation      |   |
| period with the period based on the expected useful economic life of |   |
| the facility.                                                        |   |
+----------------------------------------------------------------------+---+
| **Factors of production.** Resources, either human (labor and        |   |
| management) or nonhuman (land and capital), used for producing goods |   |
| that in turn are used to satisfy wants. The four factors of          |   |
| production commonly identified are land, labor, capital, and         |   |
| management.                                                          |   |
+----------------------------------------------------------------------+---+
| **Fair market value.** Price at which a willing seller will sell to  |   |
| a willing buyer.                                                     |   |
+----------------------------------------------------------------------+---+
| **Family labor.** Non-hired labor inputs from an individual or from  |   |
| his household.                                                       |   |
+----------------------------------------------------------------------+---+
| **Fixed costs.** Expenses that do not vary with the level of         |   |
| production, such as depreciation and personal property taxes. For    |   |
| example, personal property taxes are the same on a tractor           |   |
| regardless of whether that tractor is used on one acre or 300 acres. |   |
+----------------------------------------------------------------------+---+
| **Future Value** (or future worth). Past, present, and future costs  |   |
| or benefits discounted to show their future value at the end of the  |   |
| period of analysis.                                                  |   |
+----------------------------------------------------------------------+---+
| **Gross margins.** Returns minus variable costs; the most important  |   |
| short-run planning figure.                                           |   |
+----------------------------------------------------------------------+---+
| **Gross returns.** Total cash receipts from a crop, i.e. total yield |   |
| times price.                                                         |   |
+----------------------------------------------------------------------+---+
| **Interest rate.** Cost of using borrowed capital or the value       |   |
| placed on using owned capital determined by demand, time, or risk.   |   |
+----------------------------------------------------------------------+---+
| **Interest.** Earning power of money or the price for the use of     |   |
| money.                                                               |   |
+----------------------------------------------------------------------+---+
| **Internal rate of return.** Interest rate money will earn as the    |   |
| total investment is repaid by its revenues.                          |   |
+----------------------------------------------------------------------+---+
| **Lagged.** Value that takes place sometime in the future is called  |   |
| lagged.                                                              |   |
+----------------------------------------------------------------------+---+
| **Land voiding.** Stage of land deterioration generally through      |   |
| gully erosion where the remaining productive capacity of the land is |   |
| almost zero.                                                         |   |
+----------------------------------------------------------------------+---+
| **Least costly alternative.** Lowest expenditure for installing,     |   |
| operating, and maintaining a system or systems of conservation       |   |
| measures to achieve a specified objective.                           |   |
+----------------------------------------------------------------------+---+
| **Linear programming.** Technique to predict an optimum level of     |   |
| production or the best combination of production activities given    |   |
| specific linear relationships and mathematical inequalities.         |   |
+----------------------------------------------------------------------+---+
| **Management.** Decision making process of figuring out how land,    |   |
| labor, and capital will be combined into an enterprise or            |   |
| organization for obtaining one's objective.                          |   |
+----------------------------------------------------------------------+---+
| **Marginal analysis.** Finding the level of production where         |   |
| marginal costs are equal to marginal benefits and net benefits are   |   |
| maximized.                                                           |   |
+----------------------------------------------------------------------+---+
| **Marginal benefits.** Additional benefit of producing one more unit |   |
| of output.                                                           |   |
+----------------------------------------------------------------------+---+
| **Marginal costs.** Additional cost of producing one more unit of    |   |
| output.                                                              |   |
+----------------------------------------------------------------------+---+
| **Marginal rate of substitution.** Amount of one commodity or        |   |
| product a consumer is willing to give up to get an additional unit   |   |
| of another commodity or product.                                     |   |
+----------------------------------------------------------------------+---+
| **Maximum net benefit.** Level of development where the value of the |   |
| total output, minus the value of the total required input, is the    |   |
| greatest.                                                            |   |
+----------------------------------------------------------------------+---+
| **Mean.** Mathematical average obtained by dividing the sum of two   |   |
| or more quantities by the number of those quantities.                |   |
+----------------------------------------------------------------------+---+
| **Median.** Designating the middle number or the middle between two  |   |
| numbers in a long series of ordered numbers or values.               |   |
+----------------------------------------------------------------------+---+
| **Net farm income.** Returns to labor management, capital, land and  |   |
| risk, i.e., gross returns minus purchased inputs, fuel oil           |   |
| lubricants, repairs and fixed costs.                                 |   |
+----------------------------------------------------------------------+---+
| **Net operating profit.** Gross returns minus total operating        |   |
| expenses.                                                            |   |
+----------------------------------------------------------------------+---+
| **Net returns.** Residual value of production after total cost of    |   |
| production is subtracted from the gross returns.                     |   |
+----------------------------------------------------------------------+---+
| **Number of years (or periods) hence.** Number of years (or periods) |   |
| into the future for which the calculations are being made.           |   |
+----------------------------------------------------------------------+---+
| **Objective.** Qualified goals or achievements to answer or solve    |   |
| projected needs as expressed by a person or group of persons.        |   |
+----------------------------------------------------------------------+---+
| **Offsite benefits.** Benefits accruing to areas or persons that do  |   |
| not occur on the producer\'s property, often public goods for which  |   |
| there is a minimal individual benefit, but which society may be      |   |
| willing to pay. One of the rational for cost sharing of conservation |   |
| practices.                                                           |   |
+----------------------------------------------------------------------+---+
| **Onsite benefits.** Benefits accruing at the general location to    |   |
| the of the control measure that are typically directly experienced   |   |
| by the producer.                                                     |   |
+----------------------------------------------------------------------+---+
| **Operating expenses (or operating capital).** Operating expenses    |   |
| minus fixed costs, i.e. the amount of cash required for all          |   |
| purchased inputs (including labor, fuel oil and repairs) to produce  |   |
| a crop, without regard to machinery, equipment and land investments. |   |
+----------------------------------------------------------------------+---+
| **Operation, maintenance, and replacement.** Actual expenditures and |   |
| donated services to insure proper functioning of the facility or     |   |
| measure throughout its intended life.                                |   |
+----------------------------------------------------------------------+---+
| **Opportunity cost.** The cost of using a resource in one enterprise |   |
| when it could be used in alternative enterprises or investment       |   |
| opportunities measured by the return that could be obtained from     |   |
| using the resource in the alternative in investment. For example, if |   |
| cash used in crop production could be placed in the bank at a 10%    |   |
| rate of interest the opportunity cost of cash to the crop would be   |   |
| 10%.                                                                 |   |
+----------------------------------------------------------------------+---+
| **Opportunity costs.** Earning capabilities of money for use in      |   |
| alternative investments having similar risk and time frames.         |   |
+----------------------------------------------------------------------+---+
| **Overhead costs.** Expenditures associated with the farm            |   |
| organization not generally influenced by levels of production or     |   |
| kinds of crops grown. Examples include most utilities, machine shop  |   |
| and related shop tools, accountant or management fees, etc.          |   |
+----------------------------------------------------------------------+---+
| **Overhead Expenses.** Expenses not directly associated with         |   |
| production, such as insurance, employee benefits, land taxes, and    |   |
| utilities. The costs occur without regard to level of production, or |   |
| whether production exists at all.                                    |   |
+----------------------------------------------------------------------+---+
| **Ownership costs.** Costs unrelated to rate of annual use, such as  |   |
| expenditures for depreciation, taxes, interest on investment,        |   |
| insurance, and housing.                                              |   |
+----------------------------------------------------------------------+---+
| **Partial budgeting.** A planning procedure which analyzes only      |   |
| items of receipts and expenses that are affected by a particular     |   |
| change in procedure or organization.                                 |   |
+----------------------------------------------------------------------+---+
| **Perennial crops.** Those crops having a life cycle of more than    |   |
| two years.                                                           |   |
+----------------------------------------------------------------------+---+
| **Performance rate.** Rate of accomplishment based on machine width, |   |
| tractor speed, and the percent efficiency.                           |   |
+----------------------------------------------------------------------+---+
| **Perpetuity.** Indefinite or extremely long period of time.         |   |
+----------------------------------------------------------------------+---+
| **Planning horizon.** Time period within which a business person,    |   |
| farmer, or rancher formulates his activities.                        |   |
+----------------------------------------------------------------------+---+
| **PMT.** Dollar value of each periodic payment or benefit in a       |   |
| financial analysis. All payments are equal and no payments are       |   |
| skipped. PV, initial payments/income and FV, final payment/income    |   |
| can be included.                                                     |   |
+----------------------------------------------------------------------+---+
| **Present value** (or present worth). Future costs or benefits       |   |
| discounted or lagged to show their current value.                    |   |
+----------------------------------------------------------------------+---+
| **Present value of a decreasing annuity.** Today's value of an       |   |
| annuity that is not constant but decreases uniformly over a period.  |   |
| Formula:                                                             |   |
|                                                                      |   |
| [(n(i)-1) + \[1/(1+i)^n^\]]{.underline}                              |   |
|                                                                      |   |
| i^2^                                                                 |   |
+----------------------------------------------------------------------+---+
| **Present value of an annuity of one per year.** Discounted or       |   |
| lagged value of a series of equal payments to be covered over a      |   |
| period of years. Formula:                                            |   |
|                                                                      |   |
| [(1+i)^n-1^]{.underline}                                             |   |
|                                                                      |   |
| i(1+i)^n^                                                            |   |
+----------------------------------------------------------------------+---+
| **Present value of one.** Amount that must be invested now at        |   |
| compound interest to have a value of one in a given length of time   |   |
| or what \$1 due in the future is worth today. Also known as the      |   |
| discount factor or the reciprocal of the compound interest factor.   |   |
| Formula:                                                             |   |
|                                                                      |   |
| [1 .]{.underline}                                                    |   |
|                                                                      |   |
| (1+i)^n^                                                             |   |
+----------------------------------------------------------------------+---+
| **Price base.** A common level of prices generally adjusted through  |   |
| price indexes.                                                       |   |
+----------------------------------------------------------------------+---+
| **Price indexing.** Procedure to reflect changes in prices relative  |   |
| to prices in some base period.                                       |   |
+----------------------------------------------------------------------+---+
| **Price.** Exchange value for commodities usually determined through |   |
| the market system.                                                   |   |
+----------------------------------------------------------------------+---+
| **Principal.** The initial investment exclusive of interest.         |   |
+----------------------------------------------------------------------+---+
| **Production costs.** Expenditures, both fixed and variable, for all |   |
| items required for specified levels of crop or livestock production. |   |
+----------------------------------------------------------------------+---+
| **Projections.** Best estimates of future development, based upon    |   |
| historical trends, analysis of current relationships, and an         |   |
| evaluation of foreseeable conditions.                                |   |
+----------------------------------------------------------------------+---+
| **Quality differential.** Changes in quality of harvested crop that  |   |
| affects per unit prices received and is typically used to compare    |   |
| alternative resource management systems.                             |   |
+----------------------------------------------------------------------+---+
| **Rate of return on investment.** Net operating profit divided by    |   |
| the total machinery, equipment and land investment. A measure of     |   |
| profitability of assets in percentage terms.                         |   |
+----------------------------------------------------------------------+---+
| **Rent (pure economic).** Price paid for the use of land and other   |   |
| natural resources that are completely fixed in total supply.         |   |
+----------------------------------------------------------------------+---+
| **Return to capital, labor, land and risk.** Charges for the listed  |   |
| factors of capital labor and land have not yet been subtracted from  |   |
| gross returns. Typically, these three factors are owned.             |   |
+----------------------------------------------------------------------+---+
| **Return to land and risk.** Net operating profit minus the interest |   |
| charge on the use of machinery, equipment, and operating capital.    |   |
| This return figure shows the final return before a land charge is    |   |
| calculated.                                                          |   |
+----------------------------------------------------------------------+---+
| **Return to risk.** Return to land and risk minus a charge for land  |   |
| investment; the amount of gross returns left over after charges are  |   |
| made for every factor of production.                                 |   |
+----------------------------------------------------------------------+---+
| **Salvage value.** Monetary value of an investment at the end of its |   |
| economic life, usually the trade-in value as new equipment is        |   |
| purchased.                                                           |   |
+----------------------------------------------------------------------+---+
| **Simple interest.** Money earned on the principal only and not on   |   |
| accumulated interest. Formula:                                       |   |
|                                                                      |   |
| i = (p)(r)(n) and i = interest                                       |   |
|                                                                      |   |
| p = principal                                                        |   |
|                                                                      |   |
| r = interest rate                                                    |   |
|                                                                      |   |
| n = number of periods                                                |   |
+----------------------------------------------------------------------+---+
| **Sinking fund.** A program for capital accumulation over a period   |   |
| of years. The factor gives the amount to be invested annually to     |   |
| accumulate a given amount over a given number of years at a          |   |
| specified compound interest rate (reciprocal of the amount of an     |   |
| annuity of one per year).                                            |   |
+----------------------------------------------------------------------+---+
| **Standard of living.** Necessities of personal consumption which    |   |
| can be provided by current disposable family income.                 |   |
+----------------------------------------------------------------------+---+
| **Substitution of capital.** Replacement of labor or land with       |   |
| capitol improvements. Typically associated with continuing           |   |
| application of new technological innovations to improve production   |   |
| efficiencies over what could previously be provided.                 |   |
+----------------------------------------------------------------------+---+
| **Supplementary enterprise.** Production from one enterprise is      |   |
| increased without increasing or decreasing production of another     |   |
| enterprise.                                                          |   |
+----------------------------------------------------------------------+---+
| **Supply.** Quantity of a good or service a firm is willing to       |   |
| produce to sell at a given price.                                    |   |
+----------------------------------------------------------------------+---+
| **Unit cost.** Monetary value or charge per unit, e.g., cost per     |   |
| cubic yard of concrete, cost per acre of owning a 18-foot self-      |   |
| propelled combine, etc.                                              |   |
+----------------------------------------------------------------------+---+
| **Value added.** Increase in value resulting from doing something    |   |
| to, or with, the product.                                            |   |
+----------------------------------------------------------------------+---+
| **Variable costs.** Expenses which vary with the level of            |   |
| production, such as labor, fuel oil and repairs, fertilizer and      |   |
| seed.                                                                |   |
+----------------------------------------------------------------------+---+
| **Whole-Farm Budget.** Projected crop mix, revenues and expenses for |   |
| a production year. A projected plan and income statement.            |   |
+----------------------------------------------------------------------+---+