Farm Management Notes
Farm Management Notes
Farm Management Notes
LECTURE NOTES
Course No. BAG 3107
Farm Management
Compiled by
Dr.Muhoro Michael
Professor
Department of Animal Production and Health
Nakuru Campus
Credit hours: 3
Pre requisites: BAG1202, BAG2102, BAG2205
Purpose
Provide in depth knowledge on farm management.
Expected Learning Outcomes
By the end of the topic the learner should be able to;
i) Describe the principles of production and resource management in agriculture
ii) Explain the uses of farm records
iii) Discuss soil and water management
Course content
Principles of production and their application to decision making and allocation of resources for
agricultural production; Use of farm records and accounts; Economics of crop and livestock
production, mechanization, soil and water management, land tenure and conservation of natural
resources; Economic and technical efficiency; Selection of enterprises; High and low resource
options; Decision making under risks and uncertainties; Management of farm labour.
Teaching learning methodologies
Lectures; Tutorials; Practical; Class Discussions; Field work
Instructional materials and equipment
Handouts; Charts; Chalkboard; Laboratory equipment
Course assessment
Examination - 70%; Continuous assessment tests - 30%; Total - 100%
Core text books
1. John P. Daley, James R. Morris (2008): Introduction to Financial Models for
Management and Planning; CRC press, N.J
2. Ronald Kay (2007); Farm Management; Mcgraw-hill College
3. Andrew Boss, George A Pond (2008); Modern Farm Management: Principles And
Practice; Daya Publishing House
4. Barbara Damrosch (1998); The Garden Primer; Workman Publishing Recommended
Text Books
1. Miller ,R.J (1988)Foundations of economics Longman, London
FARM MANAGEMENT
Meaning
Farm Management comprises of two words i.e. Farm and Management.
Farm means a piece of land where crops and livestock enterprises are taken up
under common management and has specific boundaries.
Farm is a socio economic unit which not only provides income to a farmer but
also a source of happiness to him and his family. It is also a decision making unit
where the farmer has many alternatives for his resources in the production of crops
and livestock enterprises and their disposal. Hence, the farms are the micro units of
vital importance which represents centre of dynamic decision making in regard to
guiding the farm resources in the production process.
The welfare of a nation depends upon happenings in the organisation in each
farm unit. It is clear that agricultural production of a country is the sum of the
contributions of the individual farm units and the development of agriculture means
the development of millions of individual farms.
Management is the art of getting work done out of others working in a group.
Management is the process of designing and maintaining an environment in
which individuals working together in groups accomplish selected aims.
Management is the key ingredient. The manager makes or breaks a business.
Management takes on a new dimension and importance in agriculture which is
mechanised, uses many technological innovations, and operates with large amounts of
borrowed capital.
The prosperity of any country depends upon the prosperity of farmers, which
in turn depends upon the rational allocation of resources among various uses and
adoption improved technology. Human race depends more on farm products for their
existence than anything else since food, clothing – the prime necessaries are products
of farming industry. Even for industrial prosperity, farming industry forms the basic
infrastructure. Thus the study farm management has got prime importance in any
economy particularly on agrarian economy.
DEFINITIONS OF FARM MANAGEMENT.
1. The art of managing a Farm successfully, as measured by the test of
profitableness is called farm management. (L.C. Gray)
2. Farm management is defined as the science of organisation and management
of farm enterprises for the purpose of securing the maximum continuous
profits. (G.F. Warren)
3. Farm management may be defined as the science that deals with the
organisation and operation of the farm in the context of efficiency and
continuous profits. (Efferson)
4. Farm management is defined as the study of business phase of farming.
5. Farm management is a branch of agricultural economics which deals with
wealth earning and wealth spending activities of a farmer, in relation to the
organisation and operation of the individual farm unit for securing the
maximum possible net income. (Bradford and Johnson)
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NATURE OF FARM MANAGEMENT.
Farm management deals with the business principles of farming from the point
of view of an individual farm. Its field of study is limited to the individual farm as a
unit and it is interested in maximum possible returns to the individual farmer. It
applies the local knowledge as well as scientific finding to the individual farm
business.
Farm management in short be called as a science of choice or decision
making.
SCOPE OF FARM MANAGEMENT.
Farm Management is generally considered to be MICROECONOMIC in its
scope. It deals with the allocation of resources at the level of individual farm. The
primary concern of the farm management is the farm as a unit.
Farm Management deals with decisions that affect the profitability of farm
business. Farm Management seeks to help the farmer in deciding the problems like
what to produce, buy or sell, how to produce, buy or sell and how much to produce
etc. It covers all aspects of farming which have bearing on the economic efficiency of
farm.
RELATIONSHIP OF FARM MANAGEMENT WITH OTHER SCIENCES.
The Farm Management integrates and synthesises diverse piece of information
from physical and biological sciences of agriculture.
The physical and biological sciences like Agronomy, animal husbandry, soil
science, horticulture, plant breeding, agricultural engineering provide input-output
relationships in their respective areas in physical terms i.e. they define production
possibilities within which various choices can be made. Such information is helpful to
the farm management in dealing with the problems of production efficiency.
Farm Management as a subject matter is the application of business principles
n farming from the point view of an individual farmer. It is a specialised branch of
wider field of economics. The tools and techniques for farm management are supplied
by general economic theory. The law of variable proportion, principle of factor
substitution, principle of product substitution are all instances of tools of economic
theory used in farm management analysis.
Statistics is another science that has been used extensively by the agricultural
economist. This science is helpful in providing methods and procedures by which data
regarding specific farm problems can be collected, analysed and evaluated.
Psychology provides information of human motivations and attitudes, attitude
towards risks depends on the psychological aspects of decision maker.
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Sometimes philosophy and religion forbid the farmers to grow certain
enterprises, though they are highly profitable. For example, islam prohibits muslim
farmer to take up piggery while Hinduism prohibits beef production.
The various pieces of legislation and actions of government affect the
production decisions of the farmer such as ceiling on land, support prices, food zones
etc.
The physical sciences specify what can be produced; economics specify how
resources should be used, while sociology, psychology, political sciences etc. specify
the limitations which are placed on choice, through laws, customs etc.
ECONOMIC PRINCIPLES APPLIED TO FARM MANAGEMENT.
The outpouring of new technological information is making the farm problems
increasingly challenging and providing attractive opportunities for maximising
profits. Hence, the application of economic principles to farming is essential for the
successful management of the farm business.
Some of the economic principles that help in rational farm management
decisions are:
1. Law of variable proportions or Law of diminishing returns: It solves the
problems of how much to produce ? It guides in the determination of optimum
input to use and optimum output to produce.. It explains the one of the basic
production relationships viz., factor-product relationship
2. Cost Principle: It explains how losses can be minimized during the periods of
price adversity.
3. Principle of factor substitution: It solves the problem of ‘how to produce?. It
guides in the determination of least cost combinations of resources. It explains
facot-factor relationship.
4. Principle of product substitution: It solves the problem of ‘what to produce?’.
It guides in the determination of optimum combination of enterprises
(products). It explains Product-product relationship.
5. Principle of equi-marginal returns: It guides in the allocation of resources
under conditions of scarcity.
6. Time comparison principle: It guides in making investment decisions.
7. Principle of comparative advantage: It explains regional specialisation in the
production of commodities.
8
LAW OF VARIABLE PROPORTIONSOR LAW OF DIMINISHING
RETURNS
OR
PRINCIPLE OF ADDED COSTS AND ADDED RETURNS
The law of diminishing returns is a basic natural law affecting many phases of
management of a farm business. The factor product relationship or the amount of
resources that should be used (optimum input) and consequently the amount of
product that should be produced (optimum output) is directly related to the operation
of law of diminishing returns.
This law derives its name from the fact that as successive units of variable
resource are used in combination with a collection of fixed resources, the resulting
addition to the total product will become successively smaller.
Most Profitable level of production
(a) How much input to use (Optimum input to use).The determination of
optimum input to use.
An important use of information derived from a production function is in
determining how much of the variable input to use. Given a goal of maximizing
profit, the farmer must select from all possible input levels, the one which will
result in the greatest profit.
To determine the optimum input to use, we apply two marginal concepts viz:
Marginal Value Product and Marginal Factor Cost.
Marginal Value Product (MVP): It is the additional income received from using
an additional unit of input. It is calculated by using the following equation.
Marginal Value Product = ? Total Value Product/? input level
MVP = ? Y. Py/? X
? Change
Y =Output
Py = Price/unit
Marginal Input Cost (MIC) or Marginal Factor Cost (MFC): It is defined as the
additional cost associated with the use of an additional unit of input.
Marginal Factor Cost = ? Total Input Cost/? Input level
MFC or MIC = ? X Px/? X = ? X .Px / ? x = Px
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X input Quantity
Px Price per unit of input
MFC is constant and equal to the price per unit of input. This conclusion
holds provided the input price does not change with the quantity of input
purchased.
Decision Rules:
1. If MVP is greater than MIC, additional profit can be made by using more input.
2. If MVP is less than MIC, more profit can be made by using less input.
3. Profit maximizing or optimum input level is at the point where MVP=MFC
Marginal Cost (MC): It is defined as the additional cost incurred from producing an
additional unit of output. It is computed from the following equation.
Marginal Cost=Change in Total Cost / Change in Total Physical Product
MC=? X. P x/? Y
X= Quantity of input
Px= Price per unit of input.
Decision Rules:
1. If Marginal Revenue is greater than Marginal Cost, additional profit can be made
by producing more output.
2. If Marginal Revenue is less than Marginal Cost, more profits can be made by
producing less output.
3. The profit maximizing output level is at the point where MR=MC
OPPORTUNITY COST
It is an economic concept closely related to the equi-marginal principle. Opportunity
cost recognizes the fact that every input has an alternative use. Once an input is
committed to a particular use, it is no longer available for any other alternative use
and the income from the alternative must be foregone.
Definition : Opportunity cost is defined as the returns that are sacrificed from the next
best alternative.
Opportunity cost is also known as real cost or alternate cost.
PRINCIPLE OF PRODUCT SUBSTITUTION
This principle explains the product-product relationship and helps in deciding the
optimum combination of products. Also, this economic principle guides in making a
decision of what to produce.
It is economical to substitute one product for another product, if the decrease in
returns from the product being replaced is less than the increase in returns from the
product being added.
The principle of product substitution says that we should go on increasing the output
of a product so long as decrease in the returns from the product being replaced is less
than the increase in the returns from the product being added.
TYPES OF FARMING
On the basis of similarity in crop production and livestock rearing we have
TYPES OF FARMING.
The type of farming refers to the nature and degree of product or combination
of products being produced and the methods and practices used for them
I. SPECIALIZED FARMING:
When a farm is organized for the production of a single commodity and this
commodity is the only source of income, the farm is said to be specialized.
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The major enterprise contributes more than 50% of the total farm income.
Examples are sugarcane farm, cotton farm, poultry farm, dairy farm, wheat farm etc.
Advantages:
1. Better use of land
2. Better marketing
3. Better management
4. Improved skill and efficiency
5. Economical to maintain costly machinery
6. Less requirement of labour
Disadvantages:
1. Greater risk
2. Soil fertility cannot be maintained
3. By products cannot be fully utilized
4. Income is received once or twice in a year
5. Knowledge about enterprises becomes limited.
II. DIVERSIFIED FARMING:
When a farm is organized to produce several products (commodities), each of
which is itself a direct source of income, the farm business is said to be diversified. In
diversified farming, no single enterprise contributes 50% of the total farms income.
Advantages:
1. Better utilization of productive resources.
2. Reduction of risks .
3. Regular and quicker returns.
4. Proper utilization of by products.
Disadvantages:
1. Supervision will become difficult.
2. Marketing problems.
3. Not economical to maintain costly machinery.
III. MIXED FARMING:
It is the type of farming under which crop production is combined with
livestock raising. At least 10 per cent of gross income must be contributed by the
livestock. This contribution in any case should not exceed 49%.
Advantages:
1. Maintenance of soil fertility
2. Proper use of by products
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3. Facilitates intensive cultivation
4. Higher income
5. Milch cattle provide drought animals.
6. Employment of labour.
IV. RANCHING:
The practice of grazing animals on public lands is called ranching. Ranch land is not
used for raising of crops. Ranching is followed in Australia, America and Tibet
V. A. Dry farming: Cultivation of crops in regions with annual rainfall of less than
750 mm. Crop failure is most common due to prolonged dry spells during crop period.
B. Dry land farming : Cultivation of crops in regions with annual rainfall of more
than 750mm. Moisture conservation practices are necessary for crop production.
C. Rain fed farming : Cultivation of crops in regions with an annual rain fall of
more than 1150 mm.
FACTORS AFFECTING TYPES OF FARMING:
Physical factors : Climate, soils, topography.
Economic factors:
1. Marketing cost
2. Relative profitability of enterprises
3. Availability of capital
4. Availability of labour
5. Land values
6. Cycles over and under production
7. Competetion between enterprises
8. Personal likes and dislikes of farmer
SYSTEMS OF FARMING.
The system of farming refers to the organizational set up under which farm is
being run. It involves questions like who is the owner of land, whether resources are
used jointly or individually and who makes managerial decisions.
Systems of farming, which are based on different organisational set up, may
be classified into five broad categories:
a) Capitalistic farming
b) State farming
c) Collective farming
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d) Peasant farming
e) Co-operative farming
1. Capitalist or Estate farming: In what is known as capitalistic or estate or
corporate farming, land is held in large areas by private capitalists, corporations or
syndicates. Capital is supplied by one or a few persons or by many, in which case it
runs like a joint stock company. In such farms, the unit of organization is large and
the work is carried on with hired labour; latest technical know how is used and
extensive use of machines are made and hence they are efficient. Examples of this
type of farming are frequently found in USA, Australia, Canada and few in India too.
Such types of farms have been organized in the states of Bombay, Madras and
Mysore for the plantation of coffee, tea and rubber and sugarcane.
The advantages of such farming are good supervision, strong organizational
set up, sufficient resources etc. Their weaknesses are that it creates socio-economic
imbalances and the actual cultivator is not the owner of the farm.
2.State farming: State farming as the name indicates is managed by the government.
Here land is owned by the state. The operation and management is done by
government officials. The state performs the function of risk bearing and decision
making, which cultivation is carried on with help of hired labour. All the labourers are
hired on daily or monthly basis and they have no right in deciding the farm policy.
Such farms are not very paying because of lack of incentive. There is no dearth of
resources at such farms but s ometimes it so happens that they are not available in time
and utilized fully.
3.Collective farming: The name, collective farming implies the collective
management of land where in large number of families or villagers residing in the
same village pool the ir resources eg: land, livestock, and machinery. A general body
having the highest power is formed which manages the farms. The resources do not
belong to any family or farmer but to the society or collective.
Collective farming has come into much promine nce and has been adopted by
some countries notably by the Russia and China. The worst thing with this system is
that the individual has no voice. Farming is done generally on large scale and thereby
is mostly mechanized. This system is not prevalent in our country.
4.Peasant farming: This system of farming refers to the type of organization in
which an individual cultivator is the owner, manager and organizer of the farm. He
makes decision and plans for his farm depending upon his resources which are
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genera lly meager in comparison to other systems of farming. The biggest advantage
of this system is that the farmers himself is the owner and therefore free to take all
types of decisions. A general weakness of this system is that the resources with the
individual are less. Another difficulty is because of the law of inheritance. An
individual holding goes on reducing as all the members in the family have equal rights
in that land.
5.Cooporative farming: Co-operative farming is a voluntary organization in which
small farmers and landless labourers increase their income by pooling land resources.
According to planning commission, Co-operative farming necessarily implies pooling
of land and joint management. The working group on co-operative farming defines a
co-operative farming society as “a voluntary association of cultivators for better
utilization of resources including manpower and pooled land and in which majority of
the members participate in farm operation with a view to increasing agricultural
production, employment and income.”
A co-operative farming society makes one of the following four forms
I. Co-operative better farming
II. C-operative Joint farming
III. Co-operative tenant farming
IV. Co-operative collective farming
Co-operative better farming: These societies are based on individual ownership and
individual operation. Farmers who have small holdings and limited resources join to
form a society for some specific purpose eg: use of machinery, sale of product. They
are organized with a view to introduce improved methods of agriculture. Each farmer
pays for the services which he receives from the society. The earnings of the member
from piece of land, after deducting the expenses, his profit.
Co-operative Joint farming: Under this type, the right of individual ownership is
recognized and respected but the small owners pool their land for the purpose of joint
cultivation. The ownership is individual but the operations are collective. The
management is democratic and is elected by the members of the society. Each
member working on the farm receives daily wages for his daily work and profit is
distributed according to his share in land.
Co-operative tenant farming: Such societies are usually organized by landless
farmers. In this system usually land belongs to the society. The land is divided into
plots which are leased out for cultivation to individual members. The society arranges
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for agricultural requirements eg: credit, seeds, manures, marketing of the produce etc.
Each member is responsible to the society for the payments of rent on his plot. He is
at liberty to dispose of his produce in such a manner as he likes.
Co-operative collective farming: Both ownership and operations under this system
are collective. Members do not have any right on land and they can not take farming
decisions independently but are guided by a supreme general body. It undertakes joint
cultivation for which all members pool their resources. Profit is distributed according
to the labour and capitals invested by the members.
FARM PLANNING
A successful farm business is not a result of chance factor. Good weather and
good prices help but a profitable and growing business is the product of good
planning. With recent technological developments in agriculture, farming has become
more complex business and requires careful planning for successful organisation.
A farm plan is a programme of total farm activity of a farmer drawn up in
advance. A farm plan should show the enterprises to be taken up on the farm; the
practices to be followed in their production ,use of labour , investments to be made and
similar other details
Farm planning enables the farmer to achieve his objectives (Profit
maximization or cost minimization) in a more organized manner. It also helps in the
analysis of existing resources and their allocation for achieving higher resource use
efficiency, farm income and farm family welfare. Farm planning is an approach which
26
introduces desirable changes in farm organization and operation and makes a farm
viable unit.
TYPE OF FARM PLANS
1. Simple farm planning: It is adopted either for a part of the land or for one
enterprise or to substitute one resource to another. This is very simple and easy to
implement. The process of change should always begin with these simple plans.
2. Complete or whole farm planning: This is the planning for the whole farm. This
planning is adopted when major changes are contemplated in the existing organization
of farm business.
Characteristics of Good farm plan
1. It is should be written.
2. It should be flexible..
3. It should provide for efficient use of resources.
4. Farm plan should have balanced combination of enterprises. Such combination
in turn ensures,
a. Production of food, cash and fodder crops.
b. Maintain soil fertility.
c. Increase in income.
d. Improve distribution of and use of labour, power and water requirement
throughout the year.
5. Avoid excessive risks.
6. Utilize farmer’s knowledge and experience and take account of his likes and
dislikes.
7. Provide for efficient marketing.
8. Provision for borrowing, using and repayment of credit.
9. Provide for the use of latest technology.
FARM BUDGETING
Budgeting can be used to select the most profitable plan from among a number
of alternatives and to test the profitability of any proposed change in plan. It involves
testing a new plan before implementing it, to be sure that it will improve profit.
Farm budgeting is a method of estimating expected income, expenses and
profit for a farm business.
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Types of farm budgets
1. Enterprise budget
An enterprise is defined as a single crop or livestock commodity
being produced on the farm. An enterprise budget is an estimate of all income and
expenses associated with a specific enterprise and estimate of its profitability.
Enterprise budget can be developed for each actual and potential
enterprise in a farm plan such as paddy enterprise, wheat enterprise or a cow
enterprise. Each is developed on the basis of small common unit such as one acre or
one hectare for crops or one head for livestock. This permits easier comparison of the
profit for alternative and competing enterprises.
Enterprise budget can be organized and presented in three sections income,
variable costs and fixed costs.
The first step in developing an enterprise is to estimate the total production
and expected output price. The estimated yield should be an average yield expected
under normal weather conditions given the soil type and input levels to be used. The
output price should be the manager’s best estimate of the average price expected
during the next year or next several years.
Variable costs are estimated by knowing the quantities of inputs to be used
(such as seed, fertilizer, labour, manures) and their prices.
The fixed costs in a crop enterprise budget are depreciation on
machinery, equipment, implements, livestock, farm building etc., rental value of land,
land revenue, interest on fixed capital
2. Partial budget
It is used to calculate the expected change in profit for a proposed change in
the the farm business. Partial budget is best adopted to anlysing relatively small
change in the whole farm plan.
Changes in the farm plan or organization adopted to analysis by use of partial
budget are of three types.
1. Enterprise substitution: This includes a complete or partial substitution of one
enterprise for another. For example, substitution of sunflower for groundnut.
2. Input substitution : Example : Machinery for labour, changing livestock rations,
owning a machine instead of hiring, increasing or decreasing fertilizers or
chemicals.
3. Size or scale of operation: This includes changing in total size of the farm
business or in the size of the single enterprise, buying or renting of additional
land , expanding or decreasing an enterprise.
1. Additional costs
A proposed change may cause additional costs because of a new or expanded
enterprise requiring the purchase of additional inputs.
2. Reduced income
Income may be reduced if the proposed cha nge would eliminate an enterprise, reduce
the size of an enterprise or cause a reduction in yield.
3. Additional income
A proposed change may cause an increase in total farm income if a new enterprise is
being added, if an enterprise is being expanded or if the change will cause yield levels
to increase.
4. Reduced costs
Costs may be reduced if the change results in elimination of an enterprise, or
reduction in size of an enterprise or some change in technology which decreases the
need for variable resources.
Partial budgeting is intermediate in scope between enterprise budgeting and
whole farm planning. A partial budget contains only those income and expense items
which will cha nge if the proposed modification in the farm plan is implemented. Only
the changes in income are included and not total values. The final result is an estimate
of the increase or decrease in profit.
3. Complete Budget or Whole farm budget
It is statement of expected income, expenses, and profit of the firm as a whole.
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4. Cash flow budget
It is summary of cash inflows and outflows for a business over a given time
period. Its primary purpose is to estimate the future borrowing needs and loan
repayment capacity of the farm business.
BASIC STEPS IN FARM PLANNING AND BUDGETING
I. RESOURCE INVENTORY:
The development of whole plan is directly dependent upon an accurate
inventory of available resources. The resources provide the means for production
and profit. The type and quality of resources available determine the inclusion of
enterprise in whole farm plan.
1) Land: Land resource should receive top priority when completing the resource
inventory. It is one of the fixed resources. The following are some of the
important items to be included in land inventory
a) Total number of acres available
b) Soil types ( slope, texture, depth)
c) Soil fertility levels.
d) Water supply or potential for developing an irrigation system.
e) Drainage problems and possible corrective measures.
f) Existing soil conservation practices
g) Existing and potential pest and weed problems which might
affect enterprise selection and crop yields.
h) Climatic factors including annual rainfall, growing seasons etc.
2) Buildings: Listing of all farm buildings along with their size, capacity and
potential uses. Livestock enterprises and crop storage may be severely limited in
both number and size of the build ings available.
3) Labour: Labour should be analyzed for both quantity and quality. Quantity can
be measured in man days of labour available from the farm operator (farmer),
family members and hired labour. Labour quality is more difficult to measure, but
any special s kills, training and experience should be noted.
4) Machinery: it is also a fixed resource. The number, size and capacity of the
available machinery should be included in the inventory.
5) Capital: The farmer’s own capital and estimate of amount which can be
borrowed represent the capital available for developing whole farm plan.
6) Management: The assessment of the management resources should include not
only overall management ability but also special skills, training, strengths,
weaknesses of mana ger. Good management is reflected in higher yields and more
efficient use of resources.
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II. Identifying enterprises: Based on resource inventory, certain crop and
livestock enterprises will be feasible alternatives. Care should be taken to include
all possible enterprises to avoid missing enterprise with profit potential. Custom
and tradition should not be allowed to restrict the list of potential enterprises.
III. Estimation of co-e fficients : Each enterprise should be defined on small unit
such one acre or hectare for crops and one head for livestock. The resource
requirements per unit of each enterprise or the technical coefficients must be
estimated. The technical coefficients become very important in determining the
maximum size of enterprise and the final enterprise combination.
IV. Estimating gross margins :
A gross margin is estimated for a single unit of each enterprise. Gross margin
is the difference between total income and total variable costs. Calculation of
gross margin requires the farmer’s best estimate of yields for each enterprise and
expected prices for the output. The calculation of total variable cost requires a list
of each variable input needed, the amount required and the price of each input.
V. Developing the whole farm plan:
All information necessa ry to organize a whole farm plan is now ready for
use. The systematic procedure to whole farm planning is identifying the most
limiting resource and selecting those enterprises with greatest gross margin per
unit of resource.
Gross Margin____
Returns per unit of resource = Units of resources required
Land will generally be a limiting resource and it provides a good
starting point. At some point in the planning procedure, a resource other than
land may become more limiting and emphasis shifts to identifying enterprises
with greatest return or gross margin per unit of this resource.
LINEAR PROGRAMMING
Linear programming was developed by George B Dantzing (1947) during
second world war. It has been widely used to find the optimum resource allocation
and enterprise combination.
The word linear is used to describe the relationship among two or more
variables which are directly proportional. For example , doubling (or tripling) the
production of a product will exactly double (or triple) the profit and the required
resources, then it is linear relationship.
Programming implies planning of activities in a manner that achieves some optimal
result with restricted resources.
Definition of L.P.
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Linear programming is defined as the optimization (Minimization or maximization) of
a linear function subject to specific linear inequalities or equalities.
1
2
1
yy?Y
?Y
MRS 1 2
16. Price ratio of factor (PR)
PR =
Price per unit of replacedproduct
Price per unit of added resource
PR =
2
1
1
2
PX
PX
or
PX
PX
17. Product price ratio (PR)
PR =
Price per unit of replacedproduct
Priceper unit of addedproduct
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PR =
2
1
1
2
PY
PY
or
PY
PY
18. Constant rate of factor substation
n1
n2
21
22
11
12
?X
?X
?X
?X
?X
?X
LL
19. Decreasing rate of factor substitution
n1
n2
21
22
11
12
?X
?X
?X
?X
?X
?X
LL
20. Increasing rate of product substitution
n1
n2
21
22
11
12
?Y
?Y
?Y
?Y
?Y
?Y
LL
21. Constant rate of product substitution
n1
n2
21
22
11
12
?Y
?Y
?Y
?Y
?Y
?Y
LL
22. Decreasing rate of product substitution
n1
n2
21
22
11
12
?Y
?Y
?Y
?Y
?Y
?Y
LL
23. Short run production function y = f (x1 / x2, x3 …… xn)
24. Long run production function y = f (x1, x2, x3 …… xn)
25. Least cost combination of resources.
Price perunit of replacedresources
Priceper unit of addedresource
Number of units of addedresource
Number of units of replacedresource
LCC =
2
1
1
2
PX
PX
?X
?X
or
1
2
2
1
PX
PX
?X
?X
26. Optimum combination of products
Priceper unit of replacedproduct
Price per unit of added product
Number of units of added product
Number of units of replacedproduct
1
2
2
1
PY
PY
?Y
? Y or ? Y2 / ? Y1 = PY1/ PY2
27. Optimum input or profit maximizing level of input
84
Marginal value product (MVP) = Marginal factor cost (MFC)
P Py x ? X
?X
?X
? Y or
y
x
P
P
?X
?Y
28. Optimum output or profit maximizing level of output
Marginal Revenue (MR) = Marginal cost
P Py x ? Y
?X
?Y
?Y
?Y
P ?X .Px
y
Y.Py = X.Px
29. Future value of present sum (compounding)
FV = P (1 + i)n
FV: Future value; P: present sum (original investment); i : rate of interest;
n : number of years.
30. Present value of Future sum (Discounting)
PV = 1 in
P
where PV: Present value; P: sum to be received in future); i : rate of interest;
n : number of years.
31. Variable cost (TVC) = P x1X1
Px1 = price per unti of X1, X1 = Quantity of X1 input
32. Total fixed cost (TFC) = j
n
j
x PX
y
1
(j = 2, 3, … w)
33. Total cost (TC) = Total variable cost + Total fixed cost
TC = TVC + TFC
34. Average variable cost (AVC) =
output
Total variable cost
AVC =
Y
TVC
35. Average fixed cost (AFC) =
output
Total fixed cost
AVC =
Y
TFC
85
36. Average total cost (ATC) =
output
Total cost
or
Average total cost (ATC) = Average variable cost + Average fixed cost
? TC = AVC + ATC or
Y
TC
37. Cost A2 = Cost A1 + Rent on leased in land
38. Cost B = Cost A1 / A2 + Rent on owned land + Interest on owned fixed capital
39. Cost C = Cost B + Value of family labour
40. Farm business income = Gross income – Cost A1 / A2
41. Family labour income = Gross income – Cost B
42. Net income = Gross income – Cost C
43. Farm investment income = (Gross income – Cost C) + (Cost B – Cost A)
44. Net cash income = Total cash income – Total cash operating expenses
45. Net Farm income = Net cash income + Change in inventory and depreciation
46. Farm earning = Net farm income + Value of farm products consumed in home
47. Family labour earnings =Farm earnings – Interest on capital
48. Returns to management = Family labour earnings - Value of family labour
49. Operating cost ration (OCR) =
Gross income
Operating expenses
50. Fixed cost ratio (FCR) =
Gross income
Total fixedcosts
51. Gross cost ratio (GCR) =
Gross income
Total costs
52. Rate of capital turnover =
Total capital invested
Gross income
53. Net capital ratio (NCR) =
Total liabilities
Total assets
54. Working ratio (WR) =
Current liabilites Working liabilities
Current assets Working assets
55. Current ratio (CR) =
Current liabilites
Current assets
56. Debt/equity ratio =
Owner's equity or net woth
Total liabilites
86
57. Production efficiency =
x 100
Average yieldof the same crop inthe locality
Yieldof a crop on the farm
58. Cropping intensity = x 100
Net sown area
Gross cropped area
59. Productive man work units per mar equivalent
Number of man equivalents
Total productive man work units
60. Straight line method =
Useful life
Originalcost - Junk value
61. Diminishing balance method = (Book value at the biginning) x R
where R is rate of depreciation
62. Sum of the years digits method = (Original cost – Junk value) X
SoYD
RL
RL : Remaining years of useful life
SoYD : Sum of the years digits
63. Income capitalization V = R / r
where V = capitalized value, R = Net income per unit of land per annum, r = rate of
interest
64. Break-even output =
Seeling price per unit Variable costs per unit (AVC)
TotalFixedcosts
ABBREVIATIONS
1. PF : Production Function
2. EP : Elasticity of production
3. SRPF : Short run production function
4. LRPF : Long run production function
5. TP : Total Product
6. MP : Marginal product
7. AP : Average Product
8. TPP : Total physical product
9. APP : Average physical product
10. MPP : Marginal physical product
11. TVP : Total value product
12. AVP : Average value product
13. MVP : Marginal value product
14. MFC : Marginal factor cost
87
15. MIC : Marginal input cost
16. MC : Marginal cost
17. MRS : Marginal rate of substitution
18. MRTS : Marginal rate of technical substitution
19. MRPS : Marginal rate of product substitution
20. PR : Price ratio
21. TFC : Total fixed cost
22. TVC : Total variable cost
23. TC : Total cost
24. AFC : Average fixed cost
25. AVC : Average variable cost
26. ATC : Average total cost
27. PPC : Production possibility curve
28. LCC : Least cost combination of resources
29. LDR : Law of diminishing returns
30. LEMR : Law of equi-marginal returns.
31. CYI : Crop yield index
32. CI : Cropping intensity
33. GI : Gross income
34. NI : Net income
35. PMWC : Productive man work unit
36. BEO : Break-even output
37. BEP : Break-even point
38. NCR : Net capital ratio
39. WR : Working ratio
40. CR : Current ratio
41. MR : Marginal revenue
42. OCR : Operating cost ratio
43. FCR : Fixed cost ratio
44. GCR : Gross cost ratio
45. FBI : Farm business income
46. FLI : Family labour income
47. LP : Linear programming