Question

Assume your grandparents have a Conservation Reserve Program (CRP) contract for 100 acres which will expire next year. They can renew the contract for another 10 years and receive a payment of $85/acre each year, but they are wondering if it would be more profitable to put the 100 acres into hay production and have it custom farmed. Since you are taking college classes, they want you to determine the optimal decision.

Your grandparents gave you the following information to help you make this decision.

• The expected hay yield is 5 tons per acre, and the long-run expected selling price for hay is $70/ton.
• Variable costs of production are $120 per acre EVERY 4 years to establish a seeding, plus fertilizer costs of $50/acre each year.
• You can hire a custom operator to harvest and store the hay crop for you for $25/ton.
• If you take the land out of the CRP program, you will no longer have to spend

$600/year on weed control, but you will give up the $85/acre annual payment from USDA.

1. Using the information provided, generate a partial budget. Make sure to properly title the budget and show your calculations in a spreadsheet. (25points)
2. Should your grandparents take their 100 acres out of the CRP program and plant it in hay? Why or Why not? (5 points)
3. Should a land charge be included in your partial budget? Why or why not?(5 points)
4. What would the expected yield have to be to make the two choices just equal in potential profit? Hint. Calculate the break-even yield--you will need to use algebra to solve this problem. (5 points)
5. Would your decision change if the CRP payment price was $155/acre? Explain why or why not. (5 points)

Question 3

How does a partial budget differ from an enterprise budget? Under what scenarios would you use a partial budget compared to an enterprise budget? Should a partial budget be used in conjunction with an enterprise budget and/or vice versa?

Answer 1

A	Partial Budgeting: Switch from CRP Prgram to Hay Harvesting
	Particulars	Amount in $	Particulars	Amount in $
	Added Income due to Change		Added Cost Due to Change
	Income from Hay Production	35,000	Variable Cost of Production	3,000
	(Production per ton * No. of Acres* Selling price per ton)		( $120 acre per four year / 4 years) * 100 Acres
			Fertilizer Cost	5,000
	Reduced Cost Due to Change		(Cost per Acre * No. of Acres)
	Cost of Weed Control per annum	600	Cost of Custom Harvestor	12,500
			( Cost per ton * total production per annum)
			Reduced Income due to Change
			Annual Income from CRP	8,500
	A	35,600	B	29,000
	Net Change	6,600
B	Grandparents should take out their land from CRP program and should plant it in Hay. Since, the net change shown in Parial Budget as above in positive, which means income from Hay production is much better than CRP program
C.	Since, Land Charges is fixed cost of the land. Therefore, whether or not same is included in partial budget the outcome will not be different. Since, for all type of options the land charge cost will be same
E.	If CRP program annual payment if $ 155
	Partial Budgeting: Switch from CRP Prgram to Hay Harvesting
	Particulars	Amount in $	Particulars	Amount in $
	Added Income due to Change		Added Cost Due to Change
	Income from Hay Production	35,000	Variable Cost of Production	3,000
	(Production per ton * No. of Acres* Selling price per ton)		( $120 acre per four year / 4 years) * 100 Acres
			Fertilizer Cost	5,000
	Reduced Cost Due to Change		(Cost per Acre * No. of Acres)
	Cost of Weed Control per annum	600	Cost of Custom Harvestor	12,500
			( Cost per ton * total production per annum)
			Reduced Income due to Change
			Annual Income from CRP	15,500
	A	35,600	B	36,000
	Net Change	-400
	If CRP program pay $155 per annum for single acre then it is not feasible for Grandparents to take out their land from CRP. Since, as per above Partial Budget the net change is negative, which reflects the income from option to harvest in hay is less than CRP program