Chile Cost and Return Estimates, 2008

Guide Z-113
Jerry M. Hawkes and James D. Libbin1

Cooperative Extension Service College of Agriculture and Home Economics

Long-run continued success of New Mexicos commercial chile crop will, as always, depend upon the protability of the crop in any or all of its various forms. Table 1 presents typical costs and returns of producing chile in the primary producing areas of New Mexico. These estimates provide comparisons that can be used by current and prospective chile producers and processors to assess the protability of chile production. Chile is widely recognized throughout New Mexico and the Southwest as a diverse commodity. Not only is there the obvious red vs. green distinction, but there are clear differences among forms of sales: farmers markets, roadside stands, wholesale for further processing, or fresh, canned, chopped or processed for salsa and enchilada sauce. Red chile is used for food and dyes, made into ristras, and sold whole, chopped, or ground. Regardless of the end use of the chile, the crop must provide an adequate return to cover the producers costs. Obtaining a higher price or reducing costs can generate increased prot. The cost-return relationship must be examined carefully by every producer of every commodity, whether in agricultural, manufacturing, or service industries. Because of the economic structure of agriculture markets, cost and return relationships are particularly important. The basic building blocks of cost and return analyses are enterprise cost and return estimates (CAREs), which are later organized and compiled into other budgets, including whole farm, partial, and cash ow budgets. An enterprise CARE includes all costs and returns associated with producing an enterprise in some particular manner. Enterprise CAREs are constructed on a per-unit basis, such as per acre, to make a workable comparison among alternative enterprises. An enterprise is any activity that results in a product used on the farm or sold in the market, and a farm can be made up of any one or many enterprises. Each enterprise requires a certain combination of resources, such as land, labor, machinery, capital, and purchased inputs. Enterprise CAREs can estimate costs and returns on enterprises currently in the farm plan, as well as for new enterprises being considered. Most enterprise CAREs also list physical resources needed for production, which is useful
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information for prospective new producers of a commodity. In addition to producers, many other professionals in agriculture nd enterprise CAREs to be valuable information sources. These include lenders, assessors and appraisers, consultants, and lawyers. The New Mexico State University Cooperative Extension Service publishes representative CAREs for various regions of the state annually. These enterprise CAREs represent typical costs and returns for a given size and method of production in a particular region of the state. The CAREs are not averages, but represent typical situations. NMSU CAREs represent current conditions for farming situations where management is above average. Adjusting these CAREs for prices and yields expected in the future would increase their value as decision-making tools. Projections based upon a farms unique set of conditions would be most valuable. Some items can be modied easily to build more personalized CAREs. Quantities and prices of purchased inputs, yields and prices of crops, fuel costs, and labor costs may be readily adapted to individual farms. Another example of a modication to these CAREs is to analyze each operation performed on each crop. If these operations are performed in a different pattern, the CAREs should be changed. Yields and prices of crops are highly variable from year to year. In analyzing historical estimates for use in forward planning, the astute manger will decide how much risk can be absorbed and will select cropping patterns accordingly. In forward planning, the manger should consider both optimistic and pessimistic price and yield combinations to account for risk, and should consider crop rotation plans. The effect of the various costs on planning decisions and business analyses is very important. These estimates present a full-cost approach to enterprise analysis. Many of the costs are opportunity costs; that is, they are real costs of doing business, but may not be cash expenditures. For example, if all labor is provided by the operator, then the entire amount listed in these estimates is money that can be kept by the operatorit represents a return to operator and family labor. Similarly, all land and all capital is charged at competitive rates regardless of whether land is rented or owned or whether capital is borrowed or owned.

Respectively, Assistant Professor and Professor, Department of Agricultural Economics and Agricultural Business, New Mexico State University, Las Cruces.

To nd more resources for your business, home, or family, visit the College of Agriculture and Home Economics on the World Wide Web at www.cahe.nmsu.edu

Table 1. Costs and Returns for Producing Chile in New Mexico for 2008
Doa Ana/ Sierra Valencia Jalapeos Wholesale 11 tons Green Green Green Green/Red Red Red Red Red Red Hidalgo Cotton City Socorro Valencia Doa Ana Luna Eddy Artesia Hidalgo Cotton City Eddy Carlsbad

County Area Luna Color Green

$300.00 $3,300.00 $114.00 $83.25 $54.71 $10.00 $28.00 $97.02 $11.44 $70.71 $5.33 $179.64 $654.10 ($2,645.90) $171.54 $825.64 $2,474.36 $2,889.67 ($415.30) $11.58 $231.09 $242.67 ($657.98)

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Marketing System Wholesale Wholesale Wholesale Local Local Wholesale Wholesale Wholesale Wholesale Wholesale Yield Green 11 tons 11 tons 12 tons 12,000 lbs 275 bushels Units Red Units 3,500 lbs 4,000 lbs 3,200 lbs 3,500 lbs 3,200 lbs Price Green $380.00 $380.00 $380.00 $0.15 $7.50 Price Red $0.79 $0.79 $0.79 $0.68 $0.72 Jalapeos Other Income $500.00 $600.00 Gross Returns $3,685.00 $3,685.00 $3,420.00 $2,300.00 $2,662.50 $2,765.00 $3,160.00 $2,525.00 $2,380.00 $2,304.00 Cash Operating Expenses Seed $68.00 $85.00 $84.00 $147.00 $112.00 $136.00 $68.00 $136.00 $72.00 $128.00 Fertilizer $169.95 $184.00 $114.90 $61.55 $52.00 $154.00 $151.58 $90.40 $122.85 $98.60 Chemicals $31.08 $165.80 $25.13 $19.05 $54.71 $165.80 $31.08 $75.47 $28.32 $75.56 Crop Insurance $72.58 $40.00 $40.00 $76.22 $20.00 $40.00 Other Purchased Inputs $115.50 $67.50 Canal Water $106.33 $25.00 $28.00 $113.00 $43.00 Fuel & LubricantsEquipment $52.36 $56.93 $75.23 $149.92 $291.77 $56.93 $56.34 $49.43 $51.28 $45.43 FuelIrrigation $149.93 $116.68 $130.89 $30.16 $105.79 Repairs $28.65 $2.66 $40.96 $38.61 $18.91 $0.89 $14.33 $3.60 $33.51 $15.92 Custom Charges $1,089.00 $1,137.50 $1,243.33 $720.00 $70.71 $815.00 $880.00 $736.00 $790.00 $816.00 Land Taxes $1.76 $9.65 $2.96 $1.62 $5.33 $9.65 $1.76 $1.98 $2.96 $1.46 Other Expenses $65.75 $71.58 $51.71 $91.19 $165.27 $71.58 $65.75 $53.43 $51.52 $150.48 Total Cash Expenses (B) $1,729.06 $1,859.45 $1,754.90 $1,369.43 $866.20 $1,562.85 $1,475.95 $1,196.47 $1,258.23 $1,414.45 Return Over Cash Expenses (C = A - B) $1,955.94 $1,825.55 $1,665.10 $930.57 $1,796.30 $1,237.15 $1,724.05 $1,331.53 $1,121.77 $889.55 Fixed Expenses (D) $110.39 $59.53 $87.06 $130.83 $191.99 $50.09 $89.72 $52.81 $77.40 $99.96 Total Expenses (E = B + D) $1,839.45 $1,918.98 $1,841.95 $1,500.26 $1,058.19 $1,612.94 $1,565.67 $1,249.28 $1,335.63 $1,514.41 Net Farm Income $1,845.55 $1,766.02 $1,578.05 $799.74 $1,604.31 $1,187.06 $1,634.33 $1,278.72 $1,044.37 $789.59 Labor and Management Costs (G) $263.74 $250.07 $239.40 $324.49 $1,393.87 $229.97 $218.85 $248.81 $200.12 $155.87 Net Operating Prot (H = F - G) $1,581.81 $1,515.95 $1,338.65 $475.26 $210.44 $957.09 $1,415.48 $1,029.91 $844.25 $633.72 Capital Costs Interest on Operating Capital (I) $26.16 $37.06 $22.32 $16.27 $13.35 $35.91 $23.48 $14.14 $19.01 $18.81 Interest on Equipment Investment (J) $49.78 $31.30 $68.51 $65.70 $996.68 $26.78 $35.28 $27.15 $55.63 $240.20 Total Capital Costs (K = I + J) $75.94 $68.36 $90.83 $81.97 $1,010.03 $62.69 $58.76 $41.29 $74.63 $259.01 Return to Land and Risk (L = H - K) $1,505.87 $1,447.59 $1,247.80 $393.28 ($799.59) $894.40 $1,356.72 $988.62 $769.62 $374.71 Letters in parentheses refer to denitions in the Glossary

 The key to interpreting the bottom-line gure calculated in these estimates lies in the type of decision at hand. For next years crop, the important point is the level of gross margins (the returns minus all cash expenses). Can enough cash be generated to meet reasonable family living needs and to cover all nancial debt commitments? In the long run, all expenses must be covered (of particular importance when trying to determine whether to buy a farm). In the short run, a negative net income is not desirable, but it may not necessarily be enough to cause business failure. For a short while, depreciation and other non-cash costs can provide a cushion to allow producers additional nancial exibility. CAREs like these are updated annually. More detailed estimates and a guide to using the CAREs (NMSU Extension publications 400 Z-32) may be obtained from each county Extension Farm Management Specialist.

Net operating prot: Gross returns minus total operating expenses. (Line H) Operating capital: Operating expenses minus xed costs, i.e., the amount of cash required for all purchased inputs (including labor, fuel, oil, and repairs) to produce a crop, without regard to machinery, equipment, or land investments. Operating expenses: The total of all costs of producing a crop, except interest. Opportunity cost: The cost of using a resource in one enterprise when it could be used in alternative enterprises or investment opportunities, measured by the return that could be obtained from using the resource in an alternative investment. For example, if cash used in crop production could be placed in the bank at a 10% rate of interest, the opportunity cost of cash to the crop would be 10%. Overhead expenses: Expenses not directly associated with production, such as insurance, employee benets, land taxes, and utilities. These costs occur without regard to the level of production or whether production exits at all. Partial budgeting: A planning procedure that lists only items of receipt and expenses that are affected by a particular change in procedure or organization. Rate of return on investment: Net operating prot divided by the total machinery, equipment, and land investment. A measure of protability of assets in percentage terms. Return over cash expense: Gross returns less all cash operating expenses. (Line C = A - B) Return to capital, labor, land, and risk: Charges for the listed factors of capital, labor, and land have not yet been subtracted from gross returns. Typically, these three factors are owned. Return to land and risk: Net operating prot minus the interest change on the use of machinery, equipment, and operating capital. This return gure shows the nal return before a land charge is calculated. (Line L)

GLOSSARY Depreciation expense: Annual allowance for the deterioration of an asset whose productive life is more than one year. Depreciation is not paid in cash, but is an expense to the business since the purchase price of a long-lived asset cannot and should not be deducted in any one year. Enterprise cost and return estimate: A detailed fullcost listing of all returns and costs (whether paid or unpaid) associated with a particular crop or livestock enterprise. Fixed costs: Expenses that do not vary with the level of production, such as depreciation and personal property taxes. For example, personal property taxes are the same on a tractor regardless of whether that tractor is used on one acre or on 300 acres. (Line E) Gross margins: Returns minus variable costs; the most important short-run planning gure. Gross returns: Total cash receipts from a crop, i.e., total yield times price. (Line A)
Interest on operating capital and equipment investment: A calculated cost, or opportunity cost, on the use of capital in the farm business. For some farmers, interest cost will be an outlay, while for others it will be an imputed cost. (Lines I and J)

Net farm income: Returns to labor management, capital, land, and risk, i.e., gross returns minus purchased inputs, fuel, oil, lubricants, repairs, and xed costs. (Line F)

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Return to risk: Return to land and risk minus a charge for land investment, i.e., the amount of gross returns left over after charges are made for every factor of production. Variable cost: Expenses that vary with the level of production, such as labor, fuel, oil and repairs, fertilizer, and seed. Whole-farm budget: Projected crop mix revenues and expenses for a production year. A projected plan and income statement.

New Mexico State University is an equal opportunity/afrmative action employer and educator. NMSU and the U.S. Department of Agriculture cooperating. November 2008
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Las Cruces, NM