Farm Budget Data Normalisation and Projection

Question 1

What should be normalised projections in budgets?

Answer 1

Technical and financial data used in budgets should be normalised projections

Question 2

Why is it important to normalise price and yield data in profitability budgets ? (3)

Answer 2

–To reflect what we expect to happen under a normal/average year

–Avoid potential anomalies (e.g. using data for a single year might reflect abnormal conditions e.g. poor weather at harvest, disease outbreak, etc.)

–Technical data should reflect what we expect to happen under “normal” conditions

Question 3

Technical performance (yields, replacement rates, input levels, etc)
–If current enterprise what should you identify?

Answer 3

Identify the trend in technical performance over several years

• Sound basis for evaluating typical/normal level of performance
• Expanding? Will performance be reduced due to increased demands on management

Question 4

Normalisation and Projection :
If a new enterprise : use management standards but adjust for expected level of management.

Answer 4

Limited experience -> lower expected performance

Question 5

What should financial data reflect ?

What should it include :

Answer 5

Our conservative but realistic projections for the future period when the plan would be implemented

–Include known policy or market changes that will affect product/input prices

Question 6

Normalisation of Budget Data: (7)

Answer 6

1.Normal yield

2.Expected price

3.Normal use of variable inputs

4.Expected price of variable inputs

5.Changes in methods

6.Change in stocking rate

7.Extension to different quality land

Question 7

What are the levels of yield and input ?

Answer 7

1.Average of past results on farm (the preferred approach)
–Minimum of three years data (management accounts)

2.Most typical levels of past performance
–Leave out abnormal year(s)

3.Standard “typical” enterprise performance data
–E.g. Teagasc Management Data for Farm Planning
–Not recommended but sometimes inadequate farm records available

4.Adjust above for known changes
–Changes in technology, management, etc

Question 8

Price Projections
1- What do they require ?

Answer 8

*Requires analysis of historic price levels/trends and outlook
–Not easy, but don’t just assume last year’s price

Question 9

Lish the 4 things to do for price projections?

Answer 9

1-Requires analysis of historic price levels/trends and outlook
–Not easy, but don’t just assume last year’s price

2- External analysis of the business environment
–Expected policy changes/impacts
–Market outlook (e.g. BordBia reports, Ornua forecasts etc.)
–Consider cyclical price patterns and seasonality
–Critical judgement of the farm manager

3-One approach is to start with the average price over the previous 2-3 years then adjust to reflect your best estimates of future outlook

4-Uncertainty! Can use formal approach based on probabilities
–Range of possible outcomes and subjective probability of each
–Good idea to subject budget calculations to sensitivity analysis