General Session I
Evaluating Investment in New Technology
COLUMBIA, MO. (June 29, 2010) — Investment in new agricultural technology can be expensive. So how does a beef producer decide if application of technology will be cost-effective? According to Oklahoma State University Agricultural Economist Eric DeVuyst, economic theory-based tools for decision analysis often are mathematically complex and the amount of information required is too great to be practical for most farm- and ranch-level applications. Their complexity and information requirements vary with the levels of investment scale, risk and degree of reversibility.
Eric DeVuystHowever, DeVuyst told an audience gathered for the 2010 Beef Improvement Federation (BIF) Research Symposium that simplified decision-making tools with lower information requirements are available for real-world decision makers.
According to DeVuyst, the simplest form of applied decision tool is partial budgeting. This tool is useful when considering small-scale, low-risk and highly reversible decisions. With a partial budget, only changes in revenues and expenses are included.
An enterprise budget projects all revenues, variable expenses, and fixed (overhead) expenses that can be allocated to a given enterprise. Decisions considered may be less reversible, larger in scale and somewhat more risky.
“Whole-farm budgeting builds on enterprise budgeting. Enterprise budgets are aggregated, and unallocated expenses are subtracted from aggregate returns. With the focus on the whole farm, even larger-scale decisions can be analyzed,” explained DeVuyst. “Impacts on the farm’s bottom line are the focus of whole farm budgeting.”
In contrast, cashflow budgeting is focused solely on cash. Calling this tool “a must,” DeVuyst said it is used to project time periods where cash is short or in excess of current cash demands.
Capital budgeting is concerned with investments that are long-lived, addressing revenues and expenses are incurred over multiple years. Capital budgeting techniques do not explicitly consider risk and irreversibility.
According to DeVuyst, most land-grant universities have simplified decision tools that are available to livestock and crop producers. However, little is currently available for evaluating how use of DNA technology for selection may affect profitability.
Themed "Gateway to Profit," the 2010 BIF Annual Research Symposium and Annual Meeting was hosted by BIF June 28-July 1 in Columbia.
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