Farm Management

Use your compound table for this next answer. What would be the value of $1,000 invested today with earned interest left to grow at an annual rate of 3% for 10 years?

$1,344

If a farmer/landowner would like to capitalize their dividend of $260 per acre at a 4% rate of return, what is the value of the land?

$6,500/acre

_3__ Enter into contract with local selling point. __2__ Arguablely the most popular marketing method employed by producers to protect a price. __1__ Locks the futures portion of price while basis can continue to change. __2__ Locks both the futures portion and basis portion of price. __3__ Producer must deliver on this contract.

. 1. Hedge to Arrive Contract 2. Forward Price or Forward Cash contract 3. Both Forward Price and Hedge to Arrive

__2__ General office expenses __1__ Feed for hogs __2__ Real estate or property taxes __2__ Full time hired labor __1__ Nitrogen fertilizer for corn __1__ LP gas for drying corn __1__ Seed Corn

.1 Direct Cost or Expense 2. Overhead Expense

__1__ A measure of liquidity from the balance sheet. Total current assets minus total current liabilities equals this. __3__ The ability of a business to repay term debts on time. __2__ A key financial ratio that compares total debt to total farm assets. In other words, Total Debt divided by Total Assets. __4__ Total farm revenue minus operating expenses and depreciation equals this.

.1 Working Capital 2. Debt to Asset Ratio 3. Repayment Capacity 4. Net Farm Income

4__ Moving away from rigid upright silos for feed storage to plastic bags increases options for this method. __1__ Precision agriculture takes advantage of advances in computers and mechancial engineering to make better, more efficient, machines and equipment. __1__ Scientists are developing plant varieties that can withstand environmental stresses such as drought, flood, frost or extreme temperatures. __3__ Can include providing different services such as boarding horses, riding lessons, and group events like trail rides. __4__ Increasing specialization actually reduces this technique for reducing variability. __3__ Generating income from on-farm businesses, custom hire services, off-farm employment, or non ag investments are all examples of this technique to reduce variability in revenue. __2__ "From crate to plate", a popular saying in the swine industry, represents this technique for reducing variability. __3__ Occurs when low income from one enterprise is offset by satisfacotry or high incomes for other enterprises.

1. Apply Technology 2. Integration 3. Diversification 4. Flexibility

_1__ Seed purchase __1__ Full time hired labor __2__ Manure applied on your own crops __2__ Depreciation __2__ Crops fed to livestock __1__ Fuel

1. Cash 2. Non cash

_2__ Principle and interest payments on debt __2__ Capital purchases __1__ Commodity sale __2__ Family living expenses __1__ Borrowed money __1__ Sale of capital items

1. Cash inflow 2. Cash outflow

6__ Sell to consumer or point of use without the middleman. __2__ Allows for the current pricing and delivery of a crop, but the receipt of payment is delayed. Used mostly for tax purposes. __4__ A position in the futures market that locks in the futures portion of price. __3__ The marketing tool most often used in combination with crop insurance. This contract allows producers to establish a price for later delivery. __5__ More a form of insurance than a marketing tool, this marketing tool allows a producer to pick their price and pay a premium for that price. __1__ The simplest of all marketing tools where commodity is delivered to a location for the price offered on that day of delivery.

1. Cash sale 2. Deferred payment contract 3. Cash forward contract 4. Short futures hedge 5. Put option purchase 6. Direct sales

__2__ There is growing interest in this type of lease because landowners do not want to be involved in the farm management decisions. __2__ There are fixed and bonus variations to this type of lease. __1__ Considered the fairest of lease arrangements because landowner and operator share in production and price risk. __1__ Crops are shared in the same portion as the expenses are shared. __4__ This type of lease can be written or oral even though a written lease is a good business practice. __3__ Used by the landowner who wants 100% of the crop.

1. Crop Share 2. Cash Lease 3. Custom Lease 4. Pertains to all three lease types

4__ Covers medical expenses. __3__ Covers perils like fire, wind, and theft. __6__ Provides income for a person unable to perform his or her work for various reasons. __1__ A type of property insurance that when used in combination with marketing plans can reduce a drop in revenue. __2__ Protects against claims or lawsuits brought by persons whose property or person has allegedly been injured by the farmer's negligence. __5__ Helps meet financial obligations and goals for a person who dies.

1. Crop insurance 2. Liability insurance 3. Property and casuality insurance 4. Health insurance 5. Life insurance 6. Disability insurance

__3__ Used for estimating the effect of changes in plans that include only those items that change. __2__ Shows whether cash inflows will cover cash outflows. __4__ A summary of the major physical and financial features of the entire farm business __1__ A statement of expected returns, costs and resulting expected net returns for a certain type of enterprise.

1. Enterprise budget 2. Cash flow budget 3. Partial budget 4. Whole farm budget

2__ Some would argue that this type of capital is what makes it possible to grow farms businesses. __3__ This type of arrangement does not use up equity nor does it incur debt. __2__ Lender supplied cash with a promise by the borrower to pay it back is this type of equity. __1__ Owners using their own cash to purchase assets are using this source of capital. __3__ These arrangements can be oral or written. __1__ An asset that is debt free is considered a source of this kind of capital.

1. Equity capital 2. Debt capital 3. Lease or Contract

__2__ Associated with efficient use of labor. __1__ Fixed costs like machinery become lower per acre as cost is spread over more acres. __1__ Market purchasing power increases with greater size; can take advantage of input volume discounts. __2__ This type of integration/expansion controls the value chain as a more finished product is provided to sale to the consumer.

1. Horizontal integrated farm 2. Vertically integrated farm

_3__ Only two people married to each other are able to hold real property with this kind of title. __1__ With this type of title, lots of persons' names can be on the title, but on a person's passing his or her share is automatically and directly transferred to the surviving title holders with a step-up in basis on their portion of ownership. __2__ If I want to be able to transfer/direct my portion of property by will, this is the preferred way to title this property.

1. Joint Ownership with Rights of Suvrvivorship 2. Tenancy in Common 3. Tenancy by the Entirety

_4__ Markets __3__ Institutions __2__ Technology __1__ Resources

1. Land, buildings, facilities, equipment, capital, labor. 2. Computers, global position systems (GPS), irrigation, drones, embryo transfer, genetic coding. 3. Government programs, lenders. 4. Auctions, terminal sales, revenue for services provided, contracts.

3__ Tough for new competition to get started in this kind of market either because of natural or created barriers. __1__ Easy in, easy out compared to other markets. __2__ Relatively many sellers or provider of a type of product or service distinquished by slight differentiations. __4__ Very few dominate firms operate under this type of competition and are often regulated by public boards __1__ This type of market competition sets a price and a farmer chooses when to take it. __1__ Many producers of a uniform product selling through few markets. __1__ Farmers operate in this type of market. __2__ This competition gets to set price, but are controlled largely by their many competitors.

1. Perfect Competition 2. Monopolist Competition 3. Oligopoly 4. Monopoly

_5__ Employee management __1__ Weather __4__ Laws and regulations __4__ Contractual arrangements __2__ Price volatility/variability __3__ Ability to maintain and grow equity __2__ Access to a place to sell commodity or provide a service __1__ Pests __3__ Ability to meet cash flow needs in a timely manner __5__ Health and well-being

1. Production 2. Marketing 3. Financial 4. Legal 5. Human

_2__ Farm implements __1__ Buildings __2__ Household goods __3__ Life insurance policies __1__ Boundary Fences __2__ Farm truck

1. Real 2. Personal/tangible 3. Personal/intangible

2__ Understand they must take some chances to get ahead. They gather information and analyze odds to maximize income. __1__ Most cautious of risk takers. Willing to give up some income to avoid some level of risk. May value safety, stability or financial survival more than a opportunity for higher profits. __3__ Enjoys risk as a challenge and exciting. Looks for the chance to take risk.

1. Risk Averse 2. Risk Neutral 3. Risk Preferring

_1__ Most farm owners choose this type of business arrangment expecially if they have no plans to engage the public on their farms. __3__ Two or more owners formally or informally share expenses and income from a property. __2__ Separates personal assets from business assets in a hybrid form of an S corporation and partnership.

1. Sole Proprietorship 2. Limited Liability Company 3. Partnership

_2__ Doing something deliberately such as keeping children away from operating farm equipment is an example of this tool. __3__ Regular maintenance greatly helps with keeping things on schedule, but is no guarantee that something won't go wrong. __1__ This strategy involves paying a premium to have someone else protect against an adverse event. __4__ Keeping unpriced grain in on-farm storage is the most common representation of this tool for managing risk. __5__ As a person gains in wealth, they may assume their own risks.

1. Transfer 2. Avoid 3. Reduce 4. Retain 5. Self-insure

__1__ Prepare an estate plan/Establish transition goals/Consider what is fair and equitable for the transition of business or distribution of property. __2__ Use job descriptions to describe in detail what is expected of an employee/Provide orientation and training opportunities/Stay current with labor laws. __3__ Allow sufficient time for physical and mental rest/Structure work assignments and schedules consistent with skill level and physical limitations/Provide training for backup support in areas such as record keeping, production and marketing. __4__ Practice open and honest communications/Maintain a balance in life

1. Transition planning 2. Employee management 3. Human health, safety and well-being 4. Family and business relationships

1__ Veterinarian expenses __1__ Fuel __2__ Depreciation on buildings __1__ Crop insurance __1__ Seed __2__ Interest on term debt __1__ Feed costs

1. Variable cost 2. Fixed cost

Organizing a business as a limited liability company or as a corporation reduces personal liability.

A) True

__4__ Planning __2__ Controlling __3__ Directing __1__ Organizing

Acquisition and organization of land, labor, machinery, livestock, capital and management resources. 2. Evaluating and taking corrective action. 3. Physically doing the work, motivating labor, scheduling production. 4. Setting goals, managing costs, analyzing industry, examining alternatives.

There are certain conditions that must be met for something or someone to be insurable. Select the answer below that is NOT a condition for insurability.

All of the above are conditions for covering an insurable event.

If a balance sheet is showing a large negative working capital then that means:

All of the above.

Select from below what could be a source of data for using in budgets.

All of the above.

Which of the financial documents do you look at to find your net worth?

Balance sheet

Which one of the following goals is considered complete by the definition of SMART goals.

By the end of this semester I will pass this class with an A

This financial document shows the plan for day-to-day spending and income for both farm and family purposes. It shows timeliness of money in and out of a business.

Cash flow budget

Select all of the following that are considered essential documents in a set of financial statements

Check book balance B) Balance Sheet C) Income statement D) Cash flow statment

DIRTI is an acronym indentifying the components for calculating the value of a farm asset. It is particularly useful for figuring rents for assets like buildings, feedlots, and other types of facilities. What does each of the letters represent?

Depreciation, interest, repairs, taxes, insurance.

Assuming annual general office expenses of $9,000, choose from below what would be the most reasonable allocation for this expense over a three enterprise operation that generates 60% revenues from one enterprise, 30% revenues from the second and 10% revenues from the third enterprise.

Enterprise #1 $5,400, Enterprise #2 $2,700 and Enterprise #3 $900.

"Farm manager" is a term that can only be used by professionals formally educated for the task

False

A direct expense is something that is used over an entire operation so therefore must be allocated to an enterprise.

False

A short position in the market gains in value when the market rises.

False

Because of the nature of farming, there are very few laws or regulations that affect farmers.

False

Budgets include only cash items.

False

Discounting is the process of determining the future value of a payment or a stream of payments that is to be received in the future.

False

Insurance can be an effective means of transferring small and annoying risks to someone else.

False

Legally, written leases can only be drafted by attorneys.

False

Marketing plans guarantee the highest possible profit.

False

Net farm income is a measure of liquidity.

False

Oral agreements are an illegal form of doing business.

False

Property held as joint tenancy with rights of survivorship can be directed by will to whomever the deceased wants to receive the property upon his or her passing.

False

Schedule F is preferred by lenders over the income statement to show profitability.

False

Since commodity producers are price takers, there is little or no need for knowing breakevens or cost of production.

False

The best source of historical production and marketing information for an individual operation is obtained from published USDA surveys.

False

The definition of a farm as used in the USDA Ag Census is any acreage over 10 acres and producing $1,000 of revenue.

False

The two risk situations that most concern agriculture producers are: 1) The possibility that an outcome exceeds their expectations on the positive side, and 2) would those outcomes significantly disrupt the business?

False

To see if a business is profitable one should check enterprise budgets.

False

Tort liability (negligence or intentional inflicition of damage to a person or property) for farmers in an uninsurable event.

False

Ultimate control for a land leasing arrangement, cash, crop share or custom lease, lies with the farm operator.

False

Vision is considered your near term purpose of your existence.

False

When calculating Net Farm Income, family living expenses are subtracted along with operating expenses from farm revenue.

False

With declining prices, farmers who own farmland will suffer more with lower revenue when compared to farmers who pay realtively high cash rents.

False

Which organization sets the standards for farm financials?

Farm Financial Standards Council

Give two examples of professionals with whom a farm manager might work with to implement and monitor their risk management plans.

Farm managers may work with an insurance company to help protect them with crop insurance. Farm managers may also work with lawyers.

The USDA publication "Introduction to Risk Management" discusses five areas of risk for farmers. Those areas are: Production, Marketing, ______________,Legal and Human

Financial

You can find your net farm income from this financial document.

Income statement

Depreciation and Full Time Labor in a budget are two examples of:

Of an overhead and fixed expense.

Select all actions that a farm manager can do that would fall into the "important" category.

Perform regular maintenance on all farm machinery. Financial records are worked with daily Keep fences in good repair to keep livestock confined and safe

When a lender want to see your income statement he or she is looking for:

Profitability

If you wanted to look historically at your sources of income and uses of cash you would look at this financial document.

Statement of Cash flows

Which one of the following choices is not considered a basic component of financial risk?

The ability to estimate yields for impending crops or livestock.

Net Present Value is:

The value of a future stream of income discounted to today's dollars less the initial expense of the investment.

The USDA publication "Introduction to Risk Management" identifies four beneficial reasons to set goals. Identify the one answer below that is NOT included as a beneficial reason.

To increase chances of maximizing revenue while decreasing risks

A key marketing principle is delivering a product with the characteristics that have the greatest value in the marketplace.

True

A marketing plan reduces the risk of lower income than an operation needs to be profitable.

True

A risk management technique for keeping family living fairly stable in light of lower revenues is to have a source of off-farm income.

True

According to Farm Business Farm Management records for Illinois, about 48% of the net farm income is used for family living expense.

True

An enterprise budget is a projection of costs and returns for a specific crop or livestock enterprise.

True

Budget is a projection of income and expenses, used for planning the future and before committing resources.

True

By default many farm are operated as sole proprietorships which opens the family and the farm to a number of liabilities.

True

Certification, licensing, third party audits and compliance of laws and regulations can reduce the risk of tort liability.

True

Compounding is the ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings.

True

Farm management can be defined as the making and implementing of the decisions involved in organizing and operating a farm for maximum production and profit.

True

Financial ratios are calculated using the market value column of a balance sheet.

True

Given that cash grain and oil crop prices are down 30 to 50% from previous years, a farm manager can expect net income will decrease when higher proportions of farmland are cash rented.

True

In the farm business, legal risks arise out of disputes or disagreements between individuals, individuals and groups or between groups.

True

Liquidity is the ability of a business to meet financial obligations as they come due.

True

Mission is considered the guiding force for near term priorities.

True

Over time, improvements in technology and crop production practices have helped decrease agronomic risks and increase yields.

True

Probabilities are a way of expressing the chance of various outcomes occurring.

True

Risk can be defined as the chance of or an unfavorable outcome associated with an action.

True

Risk management strategies are affected by an individual's capacity or ability to bear or take risk.

True

The ability to handle risk strongly influences a managers decision.

True

The financial document that links a beginning and ending balance sheet is the income statement.

True

The statement of owner equity explains how wealth was accumulated on a balance sheet.

True

A negative net present value means

You should not make that investment.

It is not possible for a direct expense or cost to be considered as a variable expense or cost.

false

The four functions of management put in a timeline is called

manager

Your balance sheet is a financial document designed to:

show a single day of your assets and liabilities.

It is possible for an expense item to be both fixed and overhead.

true

The vast majority of farmland in Illinois is owned by someone other than the person farming it.

true