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Beef, sheep can provide modest income souce in northern Wisconsin (Research Brief #7)

Posted January 1993

A livestock operation in northern Wisconsin won’t make you rich, but it can provide a source of supplemental income.

That’s one of the findings from a five-year Hayward Agricultural Research Station study that evaluated the feasibility of northern Wisconsin sheep and beef production.

The UW-Madison College of Agricultural and Life Sciences ran the station from 1985 to 1990 to test methods to reduce labor to the point where a family could operate such a livestock farm on its own, with a minimal input of buildings, equipment, or hired help.

Emeritus UW-Madison animal scientist Art Pope directed the project, while Bob Luening, a UW-Madison emeritus professor of agricultural economics, conducted the farm business and financial analysis. Day-to-day operations were carried out by Deb and Bob Huntrods, with consultation from Rudy Erickson of UW-River Falls and UW-Madison emeritus agronomist Dwayne Rohweder. Norman Ackerberg donated the farm to the UW foundation in 1985 to use for agricultural research.

Agriculture is one of northern Wisconsin’s primary industries. The area around Hayward relies heavily on growing forages and converting them into higher-value products such as milk, meat, and wool. Thus, improving forage production and its efficient and effective use is important to the area’s economy.

Project researchers chose a sheep and beef cow/calf operation as an alternative to dairy cows because of the lower investment needed for housing, equipment, and machinery. The combination of sheep and beef also maximizes forage use, helps spread income risk and labor, and could make optimum use of existing equipment and facilities. The researchers decided to maintain 100 beef cows and 300 ewes after analyzing expected costs and returns and potential feed production on the farm. About 65 to 70 beef cows were kept during the last years of the operation.

Overall project goals included:

  1. focusing on labor-saving practices, low-capital investment, and forage-livestock production to maximize profit,
  2. 2. implementing and refining current technology into the production and management of beef and sheep, and
  3. 3. making a thorough economic study of the feasibility of a combined beef cattle-sheep family farm operation.

The farm did not generate enough income to cover the costs of the fixed and variable inputs when those inputs were assigned reasonable market rates. However, it did provide a modest return to the land, labor, management, and capital inputs, Luening says. This confirms observations by many farm management specialists over the past several decades.

“Beef and sheep are excellent supplementary enterprises, but usually are not highly competitive under most Wisconsin conditions,” Luening notes.

Beef and sheep farmers in Wisconsin must manage carefully, resist the temptation to over-invest in machinery and housing, and minimize debt loads, says Luening. They also must be willing to work for low wages, Luening adds.

“The key to improving profits is to adopt efficient and effective labor-saving practices and low-cost management techniques,” he says.

Farmers with limited resources may want to consider renting land since the costs of owning puts a heavy burden on finances, Luening says. He advises beginning farmers to put their money in livestock, feed, seeds, and other resources that bring a higher and quicker return to their investment.

“For most beginning farmers,” he says, “owning real estate may be the poorest way to start out, because returns to land are low and slow.”

Since farms in the Hayward area are quite scattered, another problem farmers there face is higher-than-normal production and marketing costs.

Good management practices were selected and used on the farm, says Luening. For example, machinery investments were held down by renting machinery.

Only two of the project’s five years (1987 and 1989) were considered typical for conducting an economic analysis. That was due to major start-up costs in 1986, a serious drought in 1988, and sale of the farm in 1990. Luening averaged 1987 and 1989 and compared them to a budget. Business and financial records of the project are listed below.

Table 1 shows the cash operating income and expenses adjusted by changes in inventory and capital items. Net farm earnings are the return to unpaid labor, unpaid capital, and equity capital. Actual income was significantly higher than budgeted in 1987 and 1989 because of high livestock productivity and better-than-expected process. About 60 percent of the cash income came from the beef herd and 38 percent came from the sheep flock. Government programs provided about 2 percent of the total.

Expenses for 1987 and 1989 were about equal to the budgeted amount. Purchased feed, fertilizer, and lime and property taxes made up about 44 percent of total operating expenses. All three were significantly higher than the budgeted amount.

Table 2 shows how cash moved in the business. Direct crop and livestock expenses were slightly under budget. But unallocated expenses were higher than expected, due primarily to property taxes. The cash surplus was $21,953 after $20,000 was set aside for living expenses. If $10,000 of the $21,953 cash surplus was allocated to servicing the debt (the other $11,953 being allocated to maintaining physical plant), it would service a $61,463 debt amortized at 10 percent interest over 20 years. Clearly, this would not suffice under most farm situations, Luening notes. As total farm investment was a little over $295,000, he adds, only a debt load of 20 percent could be carried.

Net farm earnings look good at first glance. But when a 6 percent return to equity capital is subtracted, the residual known as labor and management earnings of $9,835 from 1987 and 1989 are very low, Luening says (See Table 3). Net profit margin was negative. The only bright spot when measuring profitability is the asset turnover ratio which, at 29 percent in 1987 and 1989, was good for a beef and sheep enterprise. This reflects the good flow of income from high livestock productivity and favorable prices. Farm management specialists calculate the asset turnover ratio by dividing the adjusted gross receipts by the total farm investment and multiplying by 100.

As there was no debt, solvency measures were all zero. Thus, the farm business did not have to use extra cash to service debt. The residual cash flow could be used for family living, increasing net worth, and maintaining the physical plant.

Liquidity measures show that the farm manager had a modest amount of working capital available. Luening says this was due to lack of debt rather than high profitability. Cash operating costs compared to cash operating income were reasonable, particularly when compared to the budgeted amount.

UW-Madison agricultural economists note that the returns from 1987 and 1989 were based on better-than-average years. They add that the Hayward farm was operated as a short-term project after a transition period, with long-term improvements such as lime applications and building improvements.

In summary, these data indicate that, although the farm showed positive profits and cash available to service some debt, the return on investment was negative. This indicates that: a) the amount that a family could afford would need to be less than the $295,000 investment on this operation; and b) the debt would need to be less than $60,000.

Table 1: Farm
Earnings Statement
Item 1987 and
1989 Ave.
Budget
Cash Operating Income $112,473 $84,000
Cash Operating Expenses $60,960 $60,000
Net Cash Operating Income $51,513 $24,000
Inventory Adjustment ($10,523) Zero
Adjusted Net Operating Income $40,990 $24,000
Capital Adjustment ($12,937) ($7,050)
Net Farm Earnings $28,053 $16,950
Family Living $20,000 $20,000
Calculated Net Worth Charge $8,053 ($3,050)
Table 2: Cash
Flow Report
Item 1987 and
1989 Ave.
Budget
Cash Operating Income $112,473 $84,000
Direct Crop Expenses $15,664 $18,000
Direct Livestock Expenses $19,336 $22,000
Overhead Expenses-
Unallocated Costs
$25,930 $20,000
Total Cash Operating Expenses $60,960 $60,000
Net Cash Operating Income $51,513 $24,000
Capital Purchases $14,148 $7,050
Capital Sales $4,588 Zero
Net Cash Farm Income $41,953 $16,950
Family Living $20,000 $20,000
Net Cash Flow $21,953 ($3,050)
Table
3: Selected Financial Performance Measures
Item 1987 and

1989 Ave.

Budget
Profitability:
Labor and Management

Earnings

$9,835 ($1,650)
% Return to Total Farm

Investment

(0.9%) (4.2%)
% Return to Equity (0.9%) (4.2%)
% Asset Turnover 29.3% 27.1%
Net Profit Margin (2.8%) (15.7%)
Solvency:
As there was
no debt these ratios would be zero for 100% solvency.
Liquidity:
Current liability/

asset ratio

0% 0%
Working capital $41,953 $16,950
Cash operating expense/

cash operating income
(with and without interest)

58.4% 71.4%

For more information on this research, contact:

Art Pope
Department of Meat and Animal Science
University of Wisconsin-Madison
Madison, WI 53706
(608) 263-4315

Published as Research Brief #7
January, 1993