FARMSIM EXPLANATION
FARMSIM is a computerized model
of a typical Midwest farming operation. All participants in FARMSIM begin with
identical resources and receive identical information. Each year for ten years you will be asked to
make decisions regarding production, marketing and financing of your farming
operation. You will have several chances
to acquire additional resources. FARMSIM
will automatically provide you with detailed records of your results each
year.
1. Initial Resources
You start with $10,000 cash,
20,000 bushels of corn, 10,000 bushels of soybeans, 619 head of market hogs, 60
sows and 2 boars, a small set of machinery, cattle feedlot facilities with a
capacity to finish 500 head each year, and 420 acres of land (400 crop acres). Labor supply is one full-time person (3,000
hours).
2. Crop Selection
You may allocate your crop
acres among corn, soybeans and corn silage.
Soybeans must be sold, corn silage is only fed to beef cattle, and corn
may be either sold or fed to hogs and cattle.
Crop yields will vary with the weather conditions. Yields may be reduced if planting and
harvesting are not completed in a timely manner. This depends on the number of acres planted,
machinery size and labor available. An
estimated 10% yield decrease results when soybeans follow soybeans on the same
acres or when corn follows corn. The proportion of acres assumed to follow corn
or soybeans is the same as the proportion of your acres planted to each of
those crops the previous year, even though the actual number of acres may have
changed.
Nitrogen fertilizer
requirements for corn are automatically reduced by 1 pound for each bushel of
soybeans raised, 20 pounds for each head of cattle fed, and 200 pounds for each
sow unit, all from the previous year.
3. Machinery Set
You begin with a new
machinery set, size 1 (see below). Each
year after year 1 you may trade up or down.
Four machinery sets are available.
Machinery is traded for its current used value as shown on the Net Worth Statement. The
cash difference paid to trade can be financed with a 5-year loan at 7 %
interest. Repairs costs for machinery
will increase as it ages. Repair costs and down time for machinery will
increase as it gets older, but in the year of purchase are repair costs are
paid for by the warranty.
|
|
Set 1
|
Set 2
|
Set 3
|
Set 4
|
|
New
cost
|
$225,000
|
$300,000
|
$375,000
|
$450,000
|
4. Combine
At the beginning you do not
own a combine. You may buy a combine at
the beginning of any year after year 1, or continue to custom hire your grain
harvesting done. Up to 90% of the
combine purchase cost may be financed with a loan, at 7 % interest rate, for
five years. Four sizes of combines are
available. Any size combine may be used
with any size machinery set. Repair costs
and down time for combines will increase as they get older, but in the year of
purchase are repair costs are paid for by the warranty.
|
|
Size 1_
|
Size 2_
|
_Size 3_
|
Size 4_
|
|
New
cost
|
$150,000
|
$180,000
|
$220,000
|
$260,000
|
________________________
Prepared by William Edwards,
Department of Economics, Iowa
State University,
September 2008.
5. Custom Hire
Corn and soybean harvesting are custom hired if you
do not own a combine. Fertilizer
application and silage harvesting are always custom hired. Custom rates are:
|
corn
combining
|
$28/acre
|
|
soybeans
combining
|
$28/acre
|
|
silage
harvesting
|
$60/acre
|
|
fertilizer
application (corn acres only)
|
$10/acre
|
6. Crop Insurance
Two types of Multiple Peril
Crop Insurance are available. Yield
insurance guarantees you 80% of your proven yield (long-term average). Revenue insurance guarantees you 80%
of your average gross revenue per acre, based on your proven yield and standard
market prices shown below:
|
|
|
Yield Insurance___________
|
|
|
|
Corn
|
Soybeans
|
|
Proven
yield--bu./acre
|
|
160
|
50
|
|
Guarantee--bu./acre
|
|
128
|
40
|
|
Premium--$/acre
|
|
$11.00
|
$7.50
|
|
Indemnity
rate--$/bu.
|
$4.00
|
$10.00
|
|
|
|
Revenue Insurance________
|
|
|
|
Corn
|
Soybeans
|
|
Normal
revenue--$/acre
|
|
$640
|
$500
|
|
Guaranteed
revenue--$/acre
|
|
$512
|
$400
|
|
Premium--$/acre
|
$17.00
|
$12.00
|
Crop yield insurance
payments are equal to the indemnity price multiplied by the difference between
the guaranteed yield chosen and the actual yield achieved. Indemnity prices are $4.00 for corn and
$10.00 for soybeans. Acres planted after
June 1 (for corn) or June 15 (for soybeans) will have their coverage reduced to
a 60 % guarantee.
For example, corn insured at
the 80% yield level would receive the following indemnity payment when
the actual yield is 100 bushels per acre:
(80% x 160 bu. base yield) =
128 bu. guaranteed yield
(128 guaranteed yield - 100 actual yield)
= 28 bu./a. insured loss
28 bu./a. x $4.00/bu. = $112 / acre
payment received
If you choose revenue
insurance, your “actual revenue” is your actual yield multiplied by the actual
fall cash price that year. If your
actual revenue is less than your guaranteed revenue, you receive a payment for
the difference. For example, soybeans
insured at the 80% revenue level would receive the following payment if the
actual yield is 40 bushels and the actual fall price is $8.00:
(80% x 50 bushels x $10.00
per bushel) = $400 revenue guarantee
(40 bushels x $8.00 per
bushel) = $320 actual revenue
($400 - $320) = $80 per acre
payment received.
7. Grain Selling
Any amount of corn or soybeans on inventory may be
sold at four opportunities:
a) In the
spring, on the cash market (beginning in year two).
b) In the
spring, forward contracted for fall delivery (beginning in year two).
c) In the
fall, after harvest, on the cash market.
d) At the
end of the year, on the cash market.
Year-end prices are the same as fall cash prices.
All sales are cash
sales. If insufficient corn is left for
livestock feed, additional corn will be purchased automatically, at the current
cash price, with a 5% handling cost added.
Your lender will not allow you to forward contract more than 75% of your
expected production. If more grain is
forward contracted than is available to be delivered in the fall then the
deficit is purchased at the fall cash price plus 5%.
You have grain storage for a
total of 60,000 bushels of corn and soybeans.
Excess grain carried over from fall to spring is stored commercially at
a cost of $.15 per bushel each year.
8. Land Renting
A limited amount of cropland
in 100 acre parcels can be rented beginning in year two (for farming in year 3)
under (a) a share lease where the owner pays half the cost of seed,
fertilizer, herbicide, insecticide, and drying, and receives half the crop, or
(b) a cash lease, 50% payable in March, the rest in December, where the
operator pays all costs. The minimum
cash rental rate is $175 per acre. The
cash rent acres available will be rented to the highest bidders each year. All leases are for one year, only, and only
one form of lease arrangement can be used in a given year.
Corn silage cannot be grown
on crop-share rented land.
9. Land Purchase
A land auction will be held in year seven, with all operators
invited to submit bids on a specified
number of acres.
Land will be awarded to the highest bidder until the supply is
gone. Land can be
financed by your lender with a minimum of 25% down, for 25
years at 8 % annual interest rate. If
cash flow is insufficient, down payment money can be acquired by refinancing your
original owned land. Any land that you
purchase will be valued on your net worth statement at its purchase price,
initially.
10. Feeder Cattle
You may purchase 550 lb.
steer calves or 750 lb. yearling steers at the end of each year, beginning in year
two. You can choose among the following
rations:
|
|
550 lb. calves (per head)
|
750 lb. yearlings (per
head)
|
|
Ration:
|
1
|
2
|
1
|
2
|
|
corn
- bu.
|
71
|
57
|
67
|
58
|
|
silage
– ton
|
.0
|
1.7
|
.0
|
1.1
|
|
hay
– ton
|
0.4
|
.0
|
0.25
|
.0
|
|
supplement
- lb.
|
130
|
130
|
100
|
100
|
|
expected
days on feed
|
210
|
210
|
165
|
165
|
|
selling
weight - lb.
|
1,150
|
1,150
|
1,250
|
1,250
|
Cattle can be purchased only
at the end of the year. Feedlot capacity
is 500 head. All silage needed must be
in storage when cattle are purchased.
Hay and supplement are purchased at their current prices each year. Cattle purchases can be financed up to 100%
at the current short-term rate. Calves
are sold when they reach 1,150 pounds, yearlings when they reach 1,250
pounds. Cattle can be forward priced by
signing a forward contract at the time of purchase, or sold on the cash market
when ready.
11. Hog Expansion
Your present hog system is
large enough to accommodate 60 sows in older buildings. In year five or later the hog system can be
expanded to any level over 60 sows.
However, if you expand to the point where your labor supply is too
small, your pigs weaned per litter average may suffer.
The investment costs and
labor requirements per sow unit are as follows:
|
System
|
(1)
|
(2)
|
(3)
|
|
Investment cost / sow
|
$1,400
|
$2,000
|
$2,800
|
|
Labor requirement / sow
|
24 hours
|
18 hours
|
12 hours
|
Up to 90% of the investment costs can be financed
at 7 % interest for 10 years.
Investments for new facilities can be made in year 5 and/or any
succeeding year. Maximum capacity can be
increased in any succeeding year. New
facilities will be used at 50% of capacity in the year they are built, and at
full capacity, thereafter. Corn feed
requirement is approximately 265 bushels per sow per year. Hogs are sold at 260 lb. average weight.
12. Labor
As operator you provide
3,000 hours of labor per year. Up to
3,000 hours of extra crop labor and extra livestock labor may be hired any time
after year one. The labor is contracted
for one year at a time. Total hired
labor cost is $12.00 per hour. Labor shortages
will result in late planting and harvesting, lower crop yields, and/or fewer
pigs weaned per litter. Only 2,000 hours of labor each year can be
used for crop production, due to a limited number of suitable field days and
machinery units.
Crop labor requirements are
affected by the mix of crops grown the previous year. For example, if 60% of your acres were
planted to corn last year and you have 500 crop acres this year, 300 of those
acres are assumed to have been in corn last year. Labor requirements are as follows:
Crops
(Hours/acre)
|
Spring
work*
|
Machinery
Set 1
|
Machinery Set 2
|
Machinery Set 3
|
Machinery Set 4
|
|
|
|
Corn
|
Soybeans
|
Corn
|
Soybeans
|
Corn
|
Soybeans
|
Corn
|
Soybeans
|
|
|
|
1.5
|
1.1
|
1.3
|
0.9
|
1.1
|
0.7
|
0.8
|
0.6
|
|
|
*Spring
work hours are based on the previous year’s mix of crops.
|
|
Harvesting
|
Combine 1
|
Combine
2
|
Combine
3
|
Combine
4
|
Custom
Hire
|
|
|
Corn
|
Soybeans
|
Corn
|
Soybeans
|
Corn
|
Soybeans
|
Corn
|
Soybeans
|
Corn
|
SB
|
Silage
|
|
|
1.10
|
.75
|
.75
|
.60
|
.60
|
.45
|
.45
|
.35
|
.40
|
.30
|
.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hogs Cattle
System (1) 24
hours per sow unit Calves 3 hours per head
System (2) 18
hours per sow unit Yearlings 2 hours per head
System (3) 12
hours per sow unit
General Management 800 hours per year
13. Operating Capital
Each spring after year one
you will be asked how much operating capital you wish to borrow. Spring cash flow needs are calculated as the
sum of seed, fertilizer, chemicals; 50% of diesel fuel, and machinery repairs,
50% of cash rent, income taxes due, and half the property taxes, and insurance,
minus spring crop sales and January 1 cash on hand.
Average borrowing period for
operating capital is assumed to be 9 months at the current short-term interest
rate, which will vary from year to year.
If your operating loan is too small to meet all your cash expenses,
emergency loan funds will be advanced.
However, there will be an additional interest penalty equal to 5% of the
emergency loan. Other livestock and
general expenses are assumed to be paid from livestock sales. Interest for feeder cattle loans is
calculated separately. Extra cash on
hand earns interest at a 5 % annual rate.
14. Cash Flow
Operating loans must be
repaid and all other loan payments must be met at the end of each year. If cash inflows plus beginning cash on hand
are not large enough to cover all cash expenditures, five options are
available:
a) Carry over
short-term debt to the following year.
However, current liabilities cannot exceed current assets. If you carry over the maximum debt and later
sell current assets, the amount of debt carried over will be reduced
automatically.
b) If you still have
corn or soybeans on hand, they can be sold to raise cash.
c) Sell market hogs
on hand early, at their current weight and price.
d) If you own a
combine you can sell it and pay off the remaining debt, using cash left over
for cash flow.
e) Refinance by
borrowing from the bank against equity in land.
Total debt against your land cannot exceed 75% of its current land
value, however.
You must continue to choose
one of these options until your ending cash balance is positive. If you exhaust all of these options your
creditors may carry you another year or they may sell you out. If you have cash left over at the end of the
year, you can pay ahead on any of your term loans.
15. Income Taxes
Income taxes are calculated
on a cash accounting basis. Federal and
state income taxes and self-employment tax must be paid in the following
year. If you have a net operating loss
it is carried forward to the next tax year.
16. Records
You will receive the following
printed reports for each year from the computer:
a) crop production summary
b) hog production summary
c) feeder cattle summary (if
cattle were purchased the year before)
d) cash flow summary
e) net income statement
f) income tax summary
g) net worth statement
h) statement of owner equity
i) farm business analysis
When you reach the end, use option 2 on Main Menu to get a
printout of your results.
17. Net Worth Statement
Your beginning net worth
statement is attached. Every farm begins
with identical assets and liabilities.
Grain and livestock are valued at year-end market prices. The value of swine buildings already on the
farm is included in the value of improvements, but new swine buildings and
equipment will be shown separately.
Swine equipment and machinery are valued at their remaining depreciable
value. Land is valued at both cost and
market value. Total assets and net worth
are also shown at both cost and market value.
18. Initial Debt
The machinery set you start
with has a debt against it of $112,500, payable over five years in equal annual
principal payments plus 7 % interest on the outstanding balance.
The land has a debt of
$400,000 against it. It is financed on a
contract with 25 years remaining, so principal payments are $16,000 per
year. Interest rate is 8% on the unpaid
principal. You have no other debts or
taxes due to begin with.
19. Operating FARMSIM
FARMSIM can be operated by
accessing the Economics 330 class home page on the World Wide Web at: http://www.econ.iastate.edu/classes/econ330/kliebenstein/
a. Click on the FARMSIM
button, then on “FARMSIM log-in.”
b. When you see the title page, enter your farm number, such as 57,and your
farm password, such as FARMSIM57. If you have changed your password, it must be
entered exactly the same way, including capital or small letters. Click
on Submit.
c. Now you will see the following menu:
1. Run FARMSIM Program (choose this to run the next year). Enter values for each input screen, then click on Submit.
2. View a Previous Year Report (choose this to print a copy of your
reports from any year you have already run).
3. Change Password (write it down!!).
4. Rent Land (do this before you run the next year--the land office
closes on Monday at 8:00 a.m.).
5. Show Class Averages (for any year that you have completed). Class rankings by net worth and debt/asset
ratio for that year are also shown.
You cannot run the next year
until it is available to the entire class.
You can, however, back up and rerun years that you have already
completed. You will have to rerun each
year after that year, also. Note—the
original data for the year you rerun and for any years after that will be
deleted as soon as you start to rerun a year.
You can use the “back” or
“forward” buttons on your browser to move bank and forth through the input
screens or report screens, until you pass the Summary of Production
Decisions screen. Once you pass this
screen, do not back up to a screen before this. You can quit the program at any time by
clicking on the Home button --
however, any data you have entered up to that point will be lost.
When you reach the end, use
option 2 on Main Menu to get a printout of
your results. Good luck!
