Financial aspects of investment in livestock and pastures on irrigated farms
by John Reichel
A THESIS Submitted to the Graduate Faculty in partial fulfillment of the requirements for the degree
of Master of Science in Agricultural Economics
Montana State University
© Copyright by John Reichel (1953)
Abstract:
The purpose of this study is to develop a method which may be used to determine the effect that
alternative degrees of livestock-grassland type of farming would have upon the financial position of an
irrigated farm unit.
Part I develops the various aspects of the problem and thus provides a basis for the study. The basic
concepts and principles of the theory of the firm are discussed. The relationship that exists between the
firm theory and the budget method as a mean's of making empirical investigations is presented. • The
budget method is described in the following pages.
In Part II the results of a previous study are summarized and used as the basis for the analysis upon
which the present study is centered. Three selected types of price movement are. applied to the
"typical" farm organization. Costs and receipts are adjusted by the use of appropriate indexes. The
analysis of each alternative for each year are presented in a series of annual budgets. The results of
these budgets are used to make comparisons in changes in borrower-creditor equity.
Part III draws the conclusion that any expansion of the livestock organisation by the use of borrowed
funds would jeopardize the financial position of a farm operator. This part is also concerned with the
general implications of the study for individual farmers and agricultural credit agencies. Last, it
considers the limitations that can be associated with this type of study. ' FINANCIAL ASPECTS OF INVESTMENT IN LIVESTOCK
AND PASTURES ON IRRIGATED FARMS
by
JOHN EFICHEL
w
A THESIS
S ubm itted to th e ' G raduate F a c u lty
in
p a r t i a l f u l f i l l m e n t o f th e re q u ire m e n ts
f o r th e d eg ree o f
M aster of'"S cience i n A g r ic u ltu r a l Economics
‘a t
. Montana S ta te C o lleg e
-
■Approved:
Chairman, Examining Committee
Bozeman,- M ontana
O cto b er, 1953
'i' HRIr1W
WHilI .
K37?
ft
1T
2.
c Y' ~
TABLE OF CONTENTS
T itle
!H S .
L i s t o f T a b le s ......................................................................................................................
^
L i s t o f F ig u r e s ..............................................................................................................
Acknowledgements........................................................................................................................
?
A b s t r a c t ...........................................................................................................................
P a rt I .
I n tr o d u c ti o n ............................................................................................
A.
The Problem .......................................................................................
9
B.
The Method.........................................................................................
10
C.
The Theory o f th e Firm ................................................................
H
I.
D.
P a rt I I .
R e la tio n Between th e Budget and th e Theory
o f th e F i r m . . . ..................................................................
13
The P ro d u c tio n Method o r P ro d u ctio n P la n ........................
15
1.
The Use o f th e Budget Method........................................
l5
2.
D iv is io n s o f th e Farm B udget.......................................
I?
3.
In fo rm a tio n Needed f o r th e B udget.............................
17
U.
F l e x i b i l i t y o f P ro d u c tio n ..............................................
18
E m p irical I n v e s t i g a t i o n .........................................................................
A.
B.
21
Summary o f R e s u lts o f P rev io u s Study..................................
21
1.
Budget S y n th e s is ..................................................................
26
2.
Crop P ro d u ctio n E xpenses.................................................
29
3.
D ir e c t L iv e sto c k E xpenses..............................................
32
The Budget A n aly ses....................................................................
33
I.
37
Method o f A d ju s tin g R e c e ip ts and C o s ts .....................
110381
3
T it le
■
2.
■C.
P a rt I I I .
Page
a.
A djustm ent o f
R e c e i p t s .. . . J . ............................
37
b.
A djustm ent o f
C o s t s . . . . . . . . . .................................
38
A djustm ent o f C osts, i n A lte r n a tiv e s I and 1 1 1 . . .
39
Y ear By Y ear E f f e c ts Upon In c o m e ........................ ...............' 39
k?
D.
The O p e ra to r’ s Cash P o s i t i o n . .............................^
E.
Changes i n B o rro w e r-C re d ito r E q u i ty ...................................
30
F.
Suimnary o f T a b le s ........................................................
33
1.
I n t e r p r e t a t i o n o f th e B alance S h e e t s . . . . ; . . . . . . .
37
2.
I n t e r p r e t a t i o n o f A lte r n a tiv e No. I . . - . ....................
38
3.
I n t e r p r e t a t i o n o f A lte r n a tiv e No. - I I I . . . . . .............
38
.
C o n c lu s io n s ................o .* ...* .
A.
B.
G eneral I m p lic a tio n s o f th e S tu d y . ........... ..........................
63
1.
For In d iv id u a l F a rm e rs .. . . . . . . . . . . . . . . . . . . . . . . . .
6b
2.
For C r e d it A g e n c ie s ............................................. ..
63
L im ita tio n s o f th e S t u d y . . . . . . ................
.I.
The Budget M ethod.................................................................
A ppendix.........................
63
63
68
Appendix. A...............
69
A ppendix B . . . . . . . . . . . . .........................................................................
88
Appendix C ..,. . . . o . . . . . . . . . . . . *»..
89
Appendix B .................................. ......................
90
Appendix T a b le s .......................................................................................
91
B ib liography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9^6
it.
-
LIST OF TABLES
T it le
Number
Page
Budget Summaries o f R e c e ip ts and Expenses f o r
O rig in a l and Three A lte r n a tiv e Farm O rg a n iz a tio n s ................
22
■ II
Budget f o r Crop Producti on***ea*o****oo**5*o****o********
2 rJ
III
Budget f o r L iv e s to c k P ro d u c tio n ........... .................................... ......
28
Budget f o r Crop P ro d u c tio n E xpenses........... ..
29
Budget f o r L iv e s to c k Expenses
32
In v e n to r y o f M achinery, B u ild in g s , and Equipm ent*. * . . . . . »
33
I n d i r e c t and F ix ed Farm E x p e n ses.............................................
35
In d e x e s o f P r ic e s R eceiv ed , P r ic e s P a id , and R a tio
o f P r ic e s R eceived to P r ic e s P a id ........... ............ ....................... ..
36
IX
Annual
E f f e c ts on Income w ith 1 9 5 0 -’52
P r ic e M o v em en t....
I4O
X
Annual
E f f e c ts on Income w ith 1 9 3 0 -‘ 32
P ric e M o v em e n t....
I40
XI
Annual
E f f e c ts on Income w ith 1 9 ii0 -’ li2
P ric e Movement.....
)|l
I
IV
V
VI
VII
V III
X II
n n
XIV
Loan Advances and Repayments as R e la te d to N et Cash
Income D uring 1 9 5 0 -r52 P r ic e M ovement.' A lte r n a tiv e
TjQ* I e e e o o e o ® e o o e o o e o e o o e e e o o e e e ® o » t o o ® o o O o e o » ® o o o o e
Loan Advances and Repayments as R e la te d to Net Cash
Income D uring 1950-^52 P ric e Movement. A lte r n a tiv e
No. I l l . . . . 0. 0. . . , O . . . . . * . . . . .
Loan Advances and Repayments as R e la te d to N et Cash
Income D uring 1930-* 32 P ric e - Movement. A lte r n a tiv e
o o o o o o o o o o o o o e o o o o o o e o o o o o o o o o o e o o o o o
No.0 I- L.
1
xv
XVI
e e e e e
o g o o o o o o o o o
U5
o ' o e e
HS
Loan Advances and Repayments as R e la te d to Net Cash
Income D uring 1 9 3 0 -'3 2 P ric e Movement, A lte r n a tiv e
No. I l l ............................. ..............................................................................
1+7
Loan Advances and Repayments as R e la te d to Net Cash
Income D uring 191+0-'1+2 P ric e Movement. A lte r n a tiv e
No. I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1+8
Zo
Number
T itle
Page
XVU
Loan Advances and Repayments as R e la te d to Net Cash
Income D uring 19bO“Tb2 P ric e Movement. A lte r n a tiv e
' No. I l l ............................................ ..............................................................
U9
In v e stm e n t and Net Worth o f th e Farm B usiness D uring
th e Three Year P e rio d s . O rig in a l O r g a n iz a tio n ................ ....
£2
In v e s tm e n t, In d e b te d n e s s and Net Worth o f th e Farm
B u sin e ss During th e Three Year P e rio d s . A lte r n a tiv e
No. I . ............................... .................................. ...........................................
53
XX ■ In v e s tm e n t, In d e b te d n e ss and Net Worth o f th e Farm
B u sin e ss D uring th e Three Y ear P e rio d s . A lte r n a tiv e
No. I I I . . . ............................... ................... ..................................................
5b
XVlII
XIX
XXI
XXII
XJCEII
XXIV
E f f e c ts o f Three D if f e r e n t S e le c te d P r ic e Movements
Upon th e Average I n c o m e ........................................... ..................
55
A ccum ulations o f Annual Income A v a ila b le f o r Savings
o r Debt Payments D uring th e Three S e le c te d P e rio d s
Under th e Three Farm O r g a n iz a tio n s ...................................... ..
56
A ccum ulations 3f Annual Income A v a ila b le A fte r Payments
on Debt D uring th e Three S e le c te d P e rio d s u n d er th e
Three Farm O r g a n iz a tio n s .................................................................' . .
57
P e rc e n t Change i n N et Worth and Changes i n Working
R a tio s o f th e Three Farm O rg a n iz a tio n s D uring th e
Three S e le c te d P e r i o d s . . . , ......... ..................... ................................ ..
59
APPENDIX TABLES
I
Budget Summary o f R e c e ip ts .
O rig in a l O rg a n iz a tio n ............. ..
91
IX
Budget Summary, o f R e c e ip ts .
A lte r n a tiv e No. I , . . . . . ......... '
92
. Ill
Budget Summary o f R e c e ip ts .
A lte r n a tiv e No, I I I . .................
93
IV
Budget Summary o f E xpenses.
O rig in a l O rg a n iz a tio n ...............
9b
V
Budget Summary o f E xpenses.
A lte r n a tiv e s I and I I I . . . . . .
95
6.
LIST OF FIGURES
Number
1
T itle
Page
R e la tio n o f S u b je c tiv e P r o b a b il ity ( f r e q u e n c y ) '
D is tr ib u tio n and U n c e r t a in ty ................................................... ..
79
2
R e la tio n o f Income to U n c e r ta in ty ............................ .................
80
3
E q u ilib riu m i n S iz e o f F i r m . . . . . . . . .
86
......... .......................
7
ACKNOWLEDGEMENTS .
The a u th o r w ishes to e x p re ss s p e c ia l th a n k s and a p p r e c ia tio n to .
P r o fe s s o r C. Be B aker, whose a s s is ta n c e and guidance th ro u g h o u t th e
w r iti n g o f t h i s t h e s i s h as been i n d i s p e n s a b l e ,. A s im ila r d e b t i s due
to P r o f e s s o r s Me M. K elso , M.- C. T a y lo r, and Edward He Ward, th e o th e r
members o f th e a u th o r 's t h e s i s com m ittee, f o r t h e i r h e lp f u l c r itic is m s
and a d v ic e .
F in a lly , th e a u th o r i s g r a te f u l t o C laren ce W. Jensen, f o r
la y in g th e groundwork upon w hich t h i s t h e s i s i s b a se d .
Any e r r o r s and
o m issions i n t h i s s tu d y a re e n t i r e l y th o se o f th e a u th o r.
A'
oJ
O
8.
ABSTRACT
The purpose o f t h i s s tu d y i s to d ev elo p a method w hich may be u s e d to
d eterm in e th e e f f e c t t h a t a l t e r n a t i v e d e g re es o f liv e s to c k - g r a s s la n d ty p e
o f farm in g would have upon th e f i n a n c i a l p o s itio n o f an i r r i g a t e d farm
u n it.
P a r t I d ev elo p s th e v a rio u s a s p e c ts o f th e problem and th u s p ro v id e s
a b a s is f o r th e s tu d y . The b a s ic c o n ce p ts and p r in c ip le s o f th e th e o ry
o f th e fir m a re d is c u s s e d . The r e l a t i o n s h i p t h a t e x i s t s betw een th e firm
th e o ry and th e b u d g et method as a mean's o f making e m p iric a l in v e s tig a tio n s
i s p re s e n te d . • The b u d g et method i s d e s c rib e d i n th e fo llo w in g p ag es.
I n P a r t I I th e r e s u l t s o f a p re v io u s s tu d y a re summarized and u sed
as th e b a s i s f o r th e a n a ly s is upon which th e p r e s e n t s tu d y i s c e n te re d .
Three s e le c te d ty p e s o f p r ic e movement a re . a p p lie d to th e " ty p ic a l" farm
o r g a n iz a tio n . C osts and r e c e i p t s a re a d ju s te d by th e u se o f a p p ro p ria te
in d e x e s . The .a n a ly s is o f each a l t e r n a t i v e f o r each y e a r a re p re s e n te d
i n a s e r i e s o f annual b u d g e ts. The r e s u l t s o f th e s e b u d g ets a re u se d to
make com parisons i n changes i n b o r r o w e r - c r e d ito r e q u ity .
P a r t I I I draws th e c o n c lu s io n t h a t any ex p an sio n o f th e liv e s to c k
o r g a n is a tio n by th e u se o f borrow ed fu n d s would je o p a rd iz e th e f in a n c ia l
p o s i t i o n o f a farm o p e r a to r . T h is p a r t i s a ls o concerned w ith th e g e n e ra l
im p lic a tio n s o f th e s tu d y f o r in d iv id u a l fa rm e rs and a g r i c u l t u r a l c r e d i t
a g e n c ie s . L a s t, i t c o n s id e rs th e l i m i t a t i o n s t h a t can be a s s o c ia te d w ith
t h i s ty p e o f s tu d y .
9
PART I .
INTRODUCTION
The Problem
When a fa rm e r s h i f t s from one e n t e r p r i s e , o r system o f fa rm in g , to
a n o th e r, he ru n s in to a c a p i t a l problem .
He may need a d d itio n a l o p e ra tin g
c a p i t a l , o r th e ad ju stm en t may r e q u ir e new f ix e d c a p it a l o u tla y .
Adding
a d a iry -h o g e n te r p r is e o f te n p r e s e n ts th e l a t t e r c a p it a l problem .
The
pu rpose o f t h i s s tu d y i s to determ in e th e f i n a n c i a l p o s itio n ( le v e l and
s t r u c t u r e o f e q u ity ) r e q u ir e d , u n d er d i f f e r e n t k in d s o f a n tic ip a te d p r ic e
and. c o s t r e l a t i o n s h i p s , to j u s t i f y s h i f t s from a cash crop system o f farm ­
in g to a l t e r n a t i v e d e g re es o f li v e s t o c k ( d a ir y - h o g ) - g r a s s la n d ty p e o f
farm in g on i r r i g a t e d fa rm s.
V a ria tio n s in y ie ld s a n d /o r p r ic e s r e s u l t i n low n e t incomes (o r
p e rh a p s even a n e g a tiv e incom e) i n some y e a r s , and i n v e ry h ig h incomes
i n o th e r y e a r s . • The wide v a r i a t i o n s o f income r e l a t i v e to th e h ig h e r
f ix e d c o s ts , p lu s th e in d e b te d n e s s which may be n e c e s s a ry i n s h i f t i n g to
a d a ir y —hog o p e ra tio n may fo r c e th e fa rm e r in to in s o lv e n c y d u rin g th e low
income y e a r s .
The farm er must e v a lu a te h is re s o u rc e s a c c u r a te ly i n term s
j*.
■o f lo a n v a lu e to d eterm in e th e e x te n t' o f in d e b te d n e s s which he may s a f e ly
in c u r .
Given an u n c e r ta in t y s e t t i n g , th e optimum p la n f o r any in d iv id u a l
d epends, among o th e r th in g s , on h is p s y c h o lo g ic a l makeup, h i s c a p it a l
p o s i t i o n and th e ends he w ish es to m axim ize.
W ill " s u r v iv a l o f th e firm "
10,
or m axim ization o f p r o f i t s be th e ends Of p rod u ction ? I /
P r o f i t s c o n s t i­
t u t e a g o a l in te r m e d ia te t o th e a tta in m en t o f u t i l i t y on many farm s.
Among o th e r g o a ls i s th e d e s ir e f o r s e c u r it y which g iv e s r i s e to an
attem p t f o r co n tin u o u s or r e g u la r income r a th e r than th e p o s s i b i l i t i e s o f
s h o r t-r u n , maximum p r o f i t s .
On th e o th er hand, s u r v iv a l may be regarded
as an in te r m e d ia te end. . S u r v iv a l o f th e firm in th e s h o r t - n m i s a means
o f m axim izing r e tu r n s over a p e r io d o f s e v e r a l y e a r s .
W hile s u r v iv a l as
an. end may be c o m p e titiv e w ith p r o f i t m axim ization in th e sh o r t-r u n ,
sh o r t-r u n s u r v iv a l i s complementary w ith p r o f i t m axim ization in th e lo n g ru n . . P re ca u tio n a ry m easures employed b y farm ers i n a ttem p tin g t o guaran­
t e e s u r v iv a l may outw eigh any sm a ll changes in p r ic e r e la t io n s h ip s in th e
u se o f reso u rce s.
When p ro d u ctio n and income are v a r ia b le , two a lt e r n a t i v e s f o r p la n ­
n in g farm p ro d u ctio n and fa m ily e x p en d itu res are open.
A p la n Can be
adopted w hich ( l ) in v o lv e s la r g e v a r ia t io n s from yea r to y ea r b u t a llo w s
a g r e a te r average n e t income over tim e , or (2 ) r e s u l t s i n (a ) sm a lle r
v a r ia tio n s betw een y e a r s , and (b ) a lo w er average income over a l l y e a r s .
The Method
Comparisons are made betw een th e e f f e c t t h a t th r e e s e l e c t e d ty p e o f
p r ic e movements would have upon th e income and s o lv e n c y o f th e farm er o f
I / S c h ic k e le d e f in e s "farm s u r v iv a l end" i n o p e r a tio n a l term s i n t h i s ways
"To manage p r o d u c tio n , in v e n t o r ie s , cash r e s e r v e s and a c c e s s t o o u ts id e
fu n ds so a s to m inim ize th e p r o b a b ilit y o f a r i s k l o s s la r g e enough t o '
ren d er th e farm er in s o lv e n t " . See R ain er S c h ic k e le , "Farmers' Adapta­
t io n s to Income U n c e r ta in ty " , Jou rn al o f Farm Econom ics, XXXII, A ugust,
19^0, p . -363.
11.
th r e e d i f f e r e n t a l t e r n a t i v e farm o r g a n iz a tio n s .
The " o r ig in a l" o rg a n iz a ­
t i o n was th e one found to be th e .m o s t p r e v a le n t in th e a re a o f s tu d y .
The
a l t e r n a t i v e o rg a n iz a tio n s s e le c te d a re concerned w ith v a ry in g d e g re es o f
in c r e a s e i n li v e s t o c k o r g a n iz a tio n , w hich r e q u ire d a d d itio n a l o p e ra tin g
c o s ts and new f ix e d c a p i t a l o u tla y s .
From a l t e r n a t i v e farm b u d g ets p r e v io u s ly o rg a n iz e d l / an a tte m p t
w ill, be made to d eterm in e th e e f f e c t d i f f e r e n t ty p e s o f p r ic e movements
would have had upon th e n e t farm income f o r th e p a r t i c u l a r ty p e and s iz e
o f farm s c o n sid e re d . ' Any a d d itio n a l in v e stm e n t i n p a s tu r e s , l iv e s to c k
and equipm ent had been made in 1 9 ^ 8 -' lt9.
I t w i l l be assumed t h a t any
a d d itio n a l in v e stm e n t would be made th ro u g h th e u s e o f borrow ed c a p i t a l .
The e f f e c t o f v a ry in g n e t farm incomes upon th e e q u ity p o s i t i o n . w i l l be
n o te d to d eterm in e w hether th e e n t i t y o f th e firm 2/ can be m a in ta in e d
w ith th e ty p e o f p r ic e movements a p p lie d .
The Theory o f th e Firm 3 /
The b a s ic co n cep ts and p r i n c i p l e s o f th e th e o ry o f th e firm p ro v id e
]/
^
gee C laren ce Ti. J e n s e n , The Economics o f P a s tu re I n t e g r a t i o n on
I r r i g a t e d Farm s, Montana S ta te C o lleg e E xperim ent' S ta tio n ,' Mimeograph
C ir . 67, Bozeman, M ontana, J u ly , 1952.
2/
The e n t i t y o f th e fir m may be d e fin e d i n te rm s "o f m a in ta in in g th e
v a lu e o f th e firm as e x p re ss e d b y th e d if f e r e n c e betw een t o t a l a s s e t s
v alu e and o u ts ta n d in g l i a b i l i t i e s . For. an e la b o r a tio n on t h i s p o in t,
see C. B. B aker, Government P a r t i c i p a t i o h i n th e S upply o f S h o rt Term
C re d it f o r A g r ic u ltu r e , U n p u b lish ed Ph.D . t h e s i s , U n iv e r s ity o f
C a l if o r n ia , p p. 1 9 2 -3 .
2/
For a more d e t a i l e d d is c u s s io n o f th e th e o ry , see A ppendix A«
12.
t o o l s f o r d eterm in in g th e optimum a l l o c a t i o n o f r e s o u r c e s .
S in ce an i r r i ­
g a te d farm , c h a r a c t e r i s t i c a l l y , i s i n a p u r e ly c o m p e titiv e p o s it io n w ith
regard to o th e r a g r ic u lt u r a l firm s f o r th e purchase o f in p u ts and s a le o f
o u tp u ts , th e d is c u s s io n may be li m it e d t o a firm i n pure c o m p e titio n .
A
s e t o f fu n c tio n a l r e l a t io n s h ip s may be d e r iv e d from v a r io u s com binations
o f f a c t o r s f o r th e p ro d u ctio n o f a p roduct or p r o d u c ts.
The fu n c tio n a l
r e la t io n s h i p o f a v a r ia b le f a c t o r in com bination w ith c e r t a in - f ix e d f a c ­
to r s i n th e p ro d u ctio n o f a p rod u ct i s e v e n t u a lly s u b je c t to th e law o f
d im in ish in g r e t u r n s .
The a p p lic a t io n o f p r ic e s to th e m argin al a n a ly s is
d e r iv e d from th e th e o r y p r o v id e s a b a s is f o r making a c h o ic e betw een a l t e r
n a t i v e s which i s b ased on c e r t a in m axim izing and m in im izin g c o n d it io n s .
The m axim izing c o n d itio n i s t h a t m arginal c o s t must be eq u ated to p r ic e o f
o u tp u t.
The m in im izin g c o n d itio n i s t h a t th e p r o p o r tio n a te com bination o f
f a c t o r s must be th e ch e a p e st com bination o f f a c t o r s t h a t y i e l d a g iv en
q u a n tity o f p ro d u ct, l /
Where th e ch o ic e i n v o l v e s “th e a l l o c a t i o n o f g iv e n r e s o u r c e s betw een
com peting p ro d u c ts, maximum v a lu e p rod u ct ( n e t o f th e v a r ia b le reso u rce
c o s t ) i s a t t a in e d when th e m arginal r a t e o f p rod u ct s u b s t it u t io n i s in ­
v e r s e l y eq u al to t h e prod u ct p r ic e r a t i o .
The b r i e f d is c u s s io n above p r e s e n ts th e ca se f o r th e a ll o c a t io n o f
g iv e n r e s o u r c e s and m a xim ization o f p r o f i t s where p e r f e c t knowledge
e x ists .
The assum ption o f a f i x e d q u a n tity o f r e s o u r c e s and p e r f e c t
knowledge must be l i f t e d to an a ly ze th e problem .
Y ie ld s and p r ic e s in
I / ' See. A ppendix A f o r an e la b o r a tio n o f th e s e c o n d it io n s .
13.
a g r ic u ltu r e a re u n c e r ta in and v a ry from y e a r to y e a r .
The e f f e c t o f adding
a n o th e r v a r ia b le f a c t o r (borrow ed fu n d s) upon ( I ) th e c o s ts , ( 2) th e r e v ­
en ue, (3) th e o u tp u t o f p ro d u c ts , and (I*) th e new e q u ilib riu m p o s itio n w ith
r e s p e c t to th e p r o p o r tio n in g o f v a r ia b le f a c t o r s betw een p ro d u c ts m ust be
a n aly z e d w ith some degree o f s u b je c tiv e p r o b a b i l i t y .
The e f f e c t o f su b se q u e n t p r ic e v a r i a t i o n s , e s p e c i a l l y w here c a p it a l .
i s borrow ed, becomes im p o rta n t i n m a in ta in in g e n t i t y o f th e fir m , as w e ll
as m axim ization o f p r o f i t s .
The e x te n s io n o f c a p i t a l by le n d e r s i s de­
p en d en t upon c e r t a i n a t t r i b u t e s o f th e borrow er as w e ll as th e economic
.
p o s i t i o n o f th e le n d e r s .
"The p r i n c i p l e o f in c r e a s in g r i s k " l / p la c e s a
l i m i t a t i o n upon th e u se o f borrowed c a p i t a l .
T his " p r in c ip le " i s r e f l e c t e d
i n two phenomena a s s o c ia te d w ith u n c e r ta in t y .
One, r i s k a v e r s io n , i s th e
s i t u a t i o n i n w hich l i m i t a t i o n s a re imposed i n t e r n a l l y t o th e a c q u is itio n
and u se o f r e s o u r c e s .
The o th e r , c a p it a l r a t i o n i n g , i s th e s i t u a t i o n i n
w hich l i m i t a t i o n s a re imposed e x t e r n a l l y to th e a c q u is itio n and u se o f
re so u rc e s.
R e la tio n Between th e 'B u d g e t and th e Theory o f th e Firm
The th e o ry o f th e fir m i s d i f f i c u l t to u se e m p ir ic a lly .
However,
th e m arg in al a n a ly s is as dev elo p ed i n th e th e o ry o f th e fir m p ro v id e s a
b a s is f o r making a com parison o f c o s ts and r e tu r n s i n any e n te r p r is e
th ro u g h th e b u d g et m ethod.
The th e o r y does n o t p ro v id e a sim ple acco u n t­
in g te c h n iq u e , b u t i t does p ro v id e a method o f re a so n in g t h a t can be
I / M. K a le c k i, "E ssays iti th e Theory o f Economic F lu c tu a tio n s " , A lle n &
Ui1Win, London, 1939, pp. 93-106.
in c o rp o ra te d i n t o th e b u d g et a n a ly s is .
Ttie d is c u s s io n o f th e b u d g et
m ethod and th e method o f s u b s t i t u t i o n i n th e b u d g e tin g p ro c e s s i s c o n ta in e d
i n th e s e c tio n fo llo w in g .
The b udget method i s a means f o r t e s t i n g com binations o f a v a ila b le
re s o u rc e s i n term s o f th e p ro s p e c tiv e income flo w s t h a t can be d e riv e d
from a l t e r n a t i v e o r g a n iz a tio n s .
T h is i s c o n s is te n t w ith th e b a s ic assump­
t i o n o f th e th e o ry o f th e fir m i n th e sen se t h a t p r o f i t s c o n s ti tu te one
o f th e e n tr e p r e n e u r ia l g o a ls .
The t e s t i n g o f d i f f e r e n t com binations o f re so u rce s, i s analogous to
d e te rm in in g th e m a rg in a l r a t e o f s u b s t i t u t i o n o f f a c t o r s and m in im iza tio n
o f c o s t f o r any l e v e l o f o u tp u t as s e t up by th e th e o ry o f th e fir m .
Use
o f th e . m a rg in a l a n a ly s is p r e s e n ts some d i f f i c u l t i e s as a p p lie d i n th e
method o f s u b s t i t u t i o n . . The th e o ry assumes t h a t in p u ts can be a p p lie d i n
i n f i n i t e s i m a l am ounts.
T h is assum ption i s n o t c o m p letely a p p lic a b le to
some f a c t o r s o f p ro d u c tio n i n a g r i c u l t u r e , such as b u ild in g s and eq u ip ­
m ent.
T h is s i t u a t i o n can be somewhat a l l e v i a t e d by th e a d d itio n o f
s m a lle r s iz e u n i t s .
The s u b s t i t u t i o n o f a l t e r n a t i v e o rg a n iz a tio n s and com paring the. n e t
farm incomes o f d i f f e r e n t com binations o f e n te r p r is e s can be compared toth e p r i n c i p l e i n th e th e o ry t h a t s e t s f o r t h th e c o n d itio n s f o r m axim izing
p r o f i t s from com peting p ro d u c ts t h a t a re produced by a g iv en s e t o f r e ­
s o u rc e s .
The b udget method does n o t p r e s e n t sim ple u n q u e stio n e d s o lu ­
t i o n , b u t i t does im p ly rough e s tim a te s o f p ro d u c t s u b s t i t u t i o n .
I n s p i t e o f th e e m p iric a l sh o rtco m in g s t h a t may e x i s t betw een th e
th e o ry and th e b u d g e t m ethod, th e co n cep t o f th e th e o ry o f th e firm i s
'
' '
in v a lu a b le a s a g u id e to o rg a n iz in g a budget*
W ith t h i s r e l a t i o n i n mind
th e n e x t s te p s h a l l be to develop a m ethodology f o r d e te rm in in g th e e f f e c t
t h a t in d e b te d n e s s and v a ry in g amounts o f n e t farm income w ith a l t e r n a t i v e
d e g re es o f li v e s t o c k o rg a n iz a tio n w i l l have upon th e e q u ity p o s itio n , n e t
w o rth , and so lv en c y o f th e firm .
T h is w i l l be accom plished by th e u se o f
th e b u d g et m ethod.
The P ro d u c tio n Method o r P ro d u c tio n P la n
A budget p la n i s a d e f i n i t e p la n f o r th e u se o f re s o u rc e s d u rin g some
f u tu r e p e rio d o f tim e .
The s p e c i f i c purpose o f th e b u d g et i s to e s tim a te
r e tu r n s m ost l i k e l y under a g iv en system o f o rg a n iz in g o r managing a farm .
The p la n sh o u ld be o rg a n iz e d to ach iev e any g o a ls ^ a p p ro p ria te ” to a g iv en
s i t u a t i o n , and th u s maximize th e " s u r p lu s e s '^ i n term s o f th e s e g o a ls , p ro ­
duced by th e re s o u rc e s over a p e rio d o f s e v e ra l y e a r s . . I /
The b u d g e t i s th e p la n n in g phase o f farm in g c a r r ie d o u t b efo reh an d on"
■paper o r i n th e mind.
n e t incom e.
R e s u lts o f th e p la n a re m easured i n term s o f some
The farm er does n o t p la n to produce a c e r t a i n d o l l a r 's w o rth
o f a c ro p , b u t e s tim a te s t h a t a c e r t a i n number o f a c re s w i l l y i e l d a c e r ­
t a i n p h y s ic a l q u a n tity o f p ro d u c t.
The c r i t e r i a o f ch o ice betw een com­
p e tin g e n t e r p r i s e s a re th e l e v e l , and w ith p ro p e r a p p lic a tio n , v a r i a t i o n
o f n e t income from th e a v a ila b le r e s o u r c e s .
The Use o f th e Budget Method
The budget method i s a to o l u se d i n farm management f o r t e s t i n g
l/
Time p e rio d v a r ie s w ith th e problem .
16,
co m binations o f re s o u rc e s i n term s o f th e p ro s p e c tiv e income flo w s t h a t
can be d e riv e d from a l t e r n a t i v e o rg a n iz a tio n s #
The budget method may be
u s e d to compare ( l ) a l t e r n a t i v e p la n s o f a new farm b u s in e s s , o r ( 2) a l t e r ­
n a tiv e o r g a n iz a tio n s f o r a "going" farm b u s in e s s . I /
An o r g a n iz a tio n a l
change may be c o n s ti tu te d by a d i f f e r e n t p ro p o r tio n o f e n t e r p r i s e s , d i f f ­
e r e n t p r a c t i c e s and methods o f p ro d u c tio n , d i f f e r e n t schemes f o r s o i l
c o n s e rv a tio n , or, n e t a d d itio n s to th e t o t a l q u a n tity o f re s o u r c e s employed,
to g e th e r w ith th e v a rio u s means by which th e y may be a c q u ire d .
E n te r p r is e s
may produce c o m p e titiv e in d e p en d e n t p ro d u c ts w ith c o n s ta n t o r in c re a s in g
r a t e s o f s u b s t i t u t i o n ; th e y may a ls o produce com plem entary•o r supplem ent­
a r y p ro d u c ts .
The method o f s u b s t i t u t i o n i s g e n e r a lly th e method u sed to
s e l e c t betw een com peting e n t e r p r i s e s . 2/
The s u b s t i t u t i o n method c o n s is ts o f co m p le tely o r p a r t i a l l y s u b s t i ­
t u t i n g f o r an e x i s t i n g e n t e r p r i s e o r g a n iz a tio n a d i f f e r e n t com bination o f
e n t e r p r i s e s and checking th e v a lu e o f th e r e s u l t s upon th e t o t a l n e t
income flo w s o f th e farm .
Since o n ly v a r ia b le c o s ts a re r e le v a n t to
c u r r e n t management d e c is io n s , i t i s o n ly n e c e s s a ry to c o n s id e r th e v a r i ­
a b le c o s ts i n th e method o f s u b s t i t u t i o n .
The farm er m ust sometimes make
a ch o ice o r compromise betw een t h e ' l e v e l o f income and th e s t a b i l i t y
I/
Andrew Boss and George A. Pond, Modern .Farm Management P r in c i p le s and
P r a c tic e , The Webb. P u b lis h in g C o., S t. P a u l, M inn., 19U7j PP. 198-222*
2/
O ther methods o f farm p la n n in g a re th e ( l ) method o f d i r e c t com pari­
son, and (2 ) s ta n d a rd com parison o f farm e n t e r p r i s e s . .For a d is c u s ­
s io n o f th e s e m ethods, see G. W. F o r e s te r , Farm O rg a n iz a tio n and
Management, P r e n tic e - H a ll, I n c . , New York, 1949, PP« 97-15)0.
17
w hich he d e s ir e s when he makes d e c is io n s re g a rd in g th e a b s o lu te and r e l a ­
t i v e s iz e o f e n t e r p r i s e Se
D iv is io n s o f th e Farm Budget
G e n e ra lly th e farm b u d g e t i s broken down in th e th r e e fo llo w in g
d i v i s i o n s , v i z . , th e crop p la n , th e li v e s t o c k p la n , and th e i n d i r e c t and
f ix e d e x p en se s, l /
These p a r t s a re th e n summarized in to an a g g re g a te i n
th e budget summary.
The o rg a n iz a tio n o f competing e n te r p r is e s w ith in th e
c ro p s and l i v e s t o c k e n t e r p r i s e s and betw een th e s e e n t e r p r i s e s sh o u ld be so
a rra n g e d t h a t th e " n e t m a rg in a l r e tu r n " from each i s eq u al f o r a l l o f th e
re s o u rc e s em ployed.
In fo rm a tio n Needed f o r th e Budget
The in fo rm a tio n needed f o r b u d g et a n a ly s is can be c l a s s i f i e d in to th e
two b ro ad c a te g o r ie s o f p ro d u c tio n d a ta and p r ic e d a ta .
On th e p ro d u c tio n
s i d e , th e fa rm e r m ust c o n s id e r th e te c h n ic a l p o s s i b i l i t i e s o f p ro d u c tio n
betw een com peting, com plem entary, o r supplem entary e n t e r p r i s e s from th e
e x te n t and c o n d itio n o f a v a ila b le farm re s o u rc e S --Ia n d , la b o r , c a p i t a l ,
equipm ent, and e n tr e p r e n e u r ia l a b i l i t y .
The in p u t- o u tp u t r e l a t i o n s h i p o f
crops and l i v e s t o c k r e p r e s e n t e x p e c ta tio n s f o r a tim e span r e le v a n t to th e
problem a t hand.
The p ro d u c tio n fu n c tio n s a re u n c e r ta in , b u t th e y may be
b ased upon average y ie ld s f o r th e p a s t 5 o r 10 y e a r s , o r th e y may be b ased
on some "nbrm al" y e a r .
W hatever method i s ad o p ted , th e in fo rm a tio n sh o u ld
be r e l i a b l e and a d a p ta b le to th e q u a l i t y a n d .q u a n tity o f re s o u rc e s
I/
John A. H opkins, E lem ents o f Farm.Management, P r e n tic e - H a ll, I n c . ,
New Y ork, I S h l3 PP« 113-ho
18
(e x p e c te d to be) a v a ila b le th ro u g h tim e .
The c a te g o ry o f p r ic e d a ta i s concerned W ith p u ttin g p r ic e s on th e
in p u ts and th e o u tp u ts .
S ince f u tu r e p r ic e s a re u n c e r ta in , th e e x p ec te d
p r ic e becomes a " s u b je c tiv e p r e d ic tio n " on th e p a r t o f th e farm er w ith a
p r o b a b i l i t y d i s t r i b u t i o n t h a t i s c o n d itio n e d by th e g e n e ra l economic con­
d i t i o n s and governm ent p r ic e su p p o rt program s I / , and e n te r s th e d e c is io n
f u n c tio n s u b je c t to th e in d iv id u a l’s p s y c h o lo g ic a l makeup, h i s f in a n c ia l
p o s i t i o n , and th e ends to be m axim ized.
A lthough p r ic e s a p p lie d to in p u ts
and o u tp u ts i n b u d g e tin g a re alw ays " e x p e c ta tio n s " r a t h e r th a n " a c tu a l" ,
th e y may be b a se d on h i s t o r i c a l p r ic e b e h a v io r.
I t i s im p o rta n t t h a t th e
p r ic e r e l a t i o n s h i p betw een, as w e ll as w ith in , th e in p u t- o u tp u t r e l a t i o n ­
s h ip s i s c o n s is te n t,
X t w i l l be th e r e l a t i v e y i e l d s , p r i c e s , and c o s ts
ta k e n to g e th e r w hich d eterm in e th e m ost p r o f i t a b l e crop and liv e s to c k
e n te rp ris e s . 2 /
The movement o f p r ic e s i s a s u b je c t w hich m ust be g iv en
p a r t i c u l a r a t t e n t i o n by th e fa rm e r i f a w ise ch o ice o f e n t e r p r i s e i s to
be made.
F l e x i b i l i t y o f P ro d u c tio n
The em phasis in th e b u d g et method h as been upon th e b a la n c e needed
to maximize th e n e t farm incom e.
B ut when p ro d u c tio n and income are v a r i ­
a b le , due to th e u n c e r t a i n t y o f p r ic e s and y i e l d s , th e fa rm e r may fo llo w a
more c o n s e rv a tiv e p la n in o rd e r to g u a ra n te e s u r v iv a l,
l/
2/
A p la n may be
D. B. W illia m s, " P ric e E x p e c ta tio n s and R e a c tio n s to U n c e rta in ty by
Farm ers in I l l i n o i s " , J o u rn a l o f Farm Economics, Vol. XXXIII, Feb.
1951, P . 237.
John A. Hopkins and E a r l 0 . Heady, Farm R eco rd s, T h ird E d itio n , Iow a
S ta te C o lleg e P re ss,.A m e s, Iow a, 19h9, p p . I h - l 5 .
19.
adopted w hich r e s u l t s i n s m a lle r v a r i a t i o n s betw een y e a rs even i f i t p ro ­
v id e s a lo w e r income o v er a l l y e a r s .
income f o r s t a b i l i t y o f incom e.
The fa rm e r may s a c r i f i c e l e v e l o f
D iffe re n t" c o m b in a tio n s o f c a p i t a l 5 w ith
re g a rd to l i q u i d i t y , w i l l r e s u l t i n firm s w ith d i f f e r e n t d e g re e s o f f l e x i ­
b ility .
L i q u i d i t y i n a s s e t s tr u c t u r e may a ls o be c o n sid e re d a form o f
fin a n c ia l f l e x i b i l i t y .
sh o ck s.
L i q u id ity can be u s e d to c o u n te ra c t economic
Cash o r c r e d i t i s a ls o needed i n o rd e r to c a r r y on c u r r e n t p ro ­
d u c tio n and o th e rw ise f a c i l i t a t e c u r r e n t o p e r a tio n .
F l e x i b i l i t y can be p ro v id e d by e s ta b lis h in g a ty p e o f p l a n t t h a t
allo w s f o r g r e a te r s u b s t i t u t i o n o f e n t e r p r i s e s .
P ro d u c tio n p o s s i b i l i t i e s
open a f t e r s e l e c t i o n o f a s p e c ia liz e d p la n a re l i m i t e d i n th e s h o r t- r u n ,
due to th e te c h n ic a l l i m i t a t i o n s o f s p e c ia liz e d re s o u r c e s .
The a d o p tio n
o f a f l e x i b l e p la n a llo w s th e firm to a d ju s t p ro d u c tio n to changing p r ic e
ra tio s .
A s h o r t - l i v e d re s o u rc e p ro v id e s a g r e a te r tim e f l e x i b i l i t y th a n
a d u ra b le re s o u r c e .
I f a change i n p la n s i s b ro u g h t ab o u t by a.change i n
th e p r ic e s o f com peting p ro d u c ts , th e o p e ra to r does n o t s a c r i f i c e as g r e a t
an in v e stm e n t i n th e s h o r t - l i v e d re s o u rc e as he may i n th e d u ra b le re s o u rc e .
I t i s assumed t h a t th e "durable re s o u rc e has a h ig h e r i n i t i a l t o t a l c o s t.
A good example o f p ro d u c t f l e x i b i l i t y i s th e s e le c tio n o f d u al purpose
cows in s te a d o f d a ir y cows to allo w a sw itch betw een b e e f and b u t t e r f a t
as p r ic e r a t i o s v a ry .
Some ty p e s o f li v e s t o c k p ro d u c tio n have l e s s
f l e x i b i l i t y th a n do some o f th e annual c ro p s .
I n a d d itio n to a f l e x i b l e m u ltip le - p ro d u c t p l a n t , d i v e r s i f i c a t i o n
can be accom plished by s e le c tin g e n t e r p r i s e s i n f ix e d p ro p o rtio n s o v er
tim e .
The prem ise o f t h i s id e a i s t h a t i f th e r e tu r n s a re low i n one
20
c ro p , th e r e tu r n s in a n o th e r may be h ig h , due to th e r e l a t i v e p r ic e changes
o f p ro d u c ts o v er tim e and changes of. y i e l d s , o f . p ro d u c ts .
21
■PART i t ;
EMPIRICAL INVESTIGATION
.Summary o f R e s u lts o f P rev io u s Study
The p r e s e n t s tu d y i s b ased on a p re v io u s s tu d y made to d eterm in e th e
m ost p r o f i t a b l e p ro p o r tio n o f p a s tu r e s and cash crops i n an i r r i g a t e d farm
o r g a n iz a tio n , l /
T h ir ty sample farm s were drawn from th o se h av in g seed ed
i r r i g a t e d p a s tu r e s alo n g th e Y ellow sto n e R iv e r i n S t i l l w a t e r and Yellow­
sto n e c o u n tie s o f M ontana,
On th e a v erag e , as o f 19U8, th e s e farm s con­
ta in e d about 120 a c re s o f i r r i g a t e d la n d .
a s th e " t y p i c a l 11 farm .
T h is was th e s iz e t h a t was u sed
The i r r i g a t e d la n d was u sed f o r cro p and p a s tu r e
i n th e fo llo w in g p r o p o r tio n s s
Sugar b e e t s ----------------------------------------- - 32 p e r c e n t
Hay and p a s tu r e --------- ------------------------------'31 p e r c e n t
G rain --------------------------- ---------------------------- 28 p e r c e n t
Fence l i n e s , ro a d s , i r r i g a t i o n
d itc h e s , fa rm s te a d , e t c . ----------------- —
9 per cent -
Farm r e tu r n s and c o s ts w ere c a lc u la te d on th e b a s is o f average p r ic e s
f o r 1 9 L 8 -'L 9 .
These a v erag e s were a p p lie d to a farm " ty p ic a l" o f th e a r e a .
T his o r g a n iz a tio n was th e n u se d a s a b a s is f o r com paring a l t e r n a t i v e o r g a n iz a tio n s which m ight be s e t up: I n th e a re a .
I n c re a s e d y ie ld s d e riv e d
from h a v in g fo ra g e s i n th e r o t a t i o n were n o t c a lc u la te d f o r th e a l t e r n a ­
t i v e o r g a n iz a tio n s .
S ince d a ir y in g was fo u n d to be th e m ajor liv e s to c k
e n t e r p r i s e , i t was u s e d i n th e b u d g ets f o r th e a l t e r n a t i v e farm o rg a n iz a ­
tio n s .
I/
Comparison o f incom es from a l t e r n a t i v e o r g a n iz a tio n s b a se d on
Jensen, op. c i t , , p,. 1 7.
-
22
p r ic e s and c o s ts was th e n made.
The b u d g et summaries f o r th e o r ig i n a l and
th r e e a l t e r n a t i v e o rg a n iz a tio n s a re g iv en in Table I . I /
Table I .
O rg a n iz a tio n
O rig in a l
Farm
O rg a n iz a tio n
A lte r n a tiv e
No. I
A lte r n a tiv e
No. I I
Budget Summaries o f R e c e ip ts and Expenses f o r O rig in a l
and Three A lte r n a tiv e Farm O rg a n iz a tio n s .
Expenses
R e c e ip ts
Crops
D airy-H og
Home Consumed
TOTAL
Crops
D airy-H og
Home Consumed
TOTAL
Crops
D airy-H og
Home Consumed
TOTAL
$ 6,773
U,025
502
$11,300
$ 215
13,161
502
$14,133
$13,704
280
$13,981+
-
A lte r n a tiv e
No. H I
Crops
D airy-H og
Home Consumed
TOTAL
$ 2,974
14,304
502
$17,700
Crops
Dairy-Hog
I n d i r e c t and F ix ed
TOTAL
$ 4,067
549
2,613
$ 7,229
NET FARM INCOME
$ 4,071
Crops
Dairy-Hog
I n d i r e c t and F ix ed
TOTAL
$
NET FARM INCOME
$ 5,733
Crops
Dairy-Hog
I n d i r e c t and F ix ed
TOTAL
$ 7,502
143
2,983
$10,620
NET FARM INCOME
$ 3,356
Crops
Dairy-Hog
I n d i r e c t and F ix ed
TOTAL
$ 2,101
3,286
6,158
$11,545
NET FARM INCOME
$ 6,235
487
3,859
4,824
$ 0,400
The o r i g i n a l crop and p a s tu re o r g a n iz a tio n was made up o f th e p ro p o r­
t i o n o f crop a c re s as g iv e n above.
I/
I b id ., Table XIV, p. Tl
The li v e s t o c k e n te r p r is e was composed
23
o f 10 d a ir y cows, from which b u t t e r f a t and y e a r lin g s were m ark eted , and a
hog e n te r p r is e o f 3 sows which produced 18 p ig s f o r m ark et.
I n A lte r n a tiv e No, I , n e a r ly a l l la n d was s h i f t e d to th e p ro d u c tio n
o f forage*
The s iz e o f th e d a ir y e n te r p r is e was in c re a s e d from 10 to 30
cows, and th e hog e n te r p r is e from 3 sows to 9 sows.
T h is r e q u ir e d an
a d d itio n a l o u tla y o f $1|,600 f o r li v e s t o c k and $1 ,7 2 5 f o r s u f f i c i e n t b u ild ­
in g s and equipm ent to han d le them ,
Tn A lte r n a tiv e No, I f , a l l la n d was s h i f t e d to cash cro p s — 75.5
a c re s o f su g ar b e e ts and 33.5 a c re s o f w h eat.
li v e s t o c k i n th e farm o r g a n iz a tio n .
T his a l t e r n a t i v e h as no
S ince t h i s stu d y i s concerned w ith
s h i f t i n g to v a ry in g d e g re es o f in c r e a s e s i n liv e s to c k o rg a n iz a tio n i n
com parison to th e " o r ig in a l" o r g a n iz a tio n , t h i s a l t e r n a t i v e p ro v id e s no
b a s is o f concern h e re ; th e r e f o r e , i t w i l l n o t be c o n sid e re d f u r t h e r .
A lte r n a tiv e o rg a n iz a tio n No. I l l was made up o f ab o u t l / 3 cash crops
(s u g a r b e e ts ) and 2 /3 fo ra g e and p a s tu r e .
The d a ir y e n te r p r is e was i n ­
c re a s e d to 28 cows, and th e hog e n te r p r is e was in c re a s e d to 18 sows.
T his
o r g a n iz a tio n would have r e q u ir e d an a d d itio n a l o u tla y o f $ 2,100 f o r b u ild ­
in g s and equipm ent and $1*,500 more f o r li v e s t o c k in v e stm e n ts .
The c o n c lu sio n t h a t can be drawn from th e s e b u d g ets i s t h a t w ith
p r ic e s f o r li v e s t o c k and li v e s t o c k p ro d u c ts a t 19li8-l l|.9 l e v e l s , th e average
farm er i n th e B il l i n g s a re a could have im proved h is income by s h i f t i n g to
th e p ro d u c tio n o f more fo ra g e and l i v e s t o c k .
B ut v a r i a t i o n as w e ll as l e v e l o f n e t farm income i s c r i t i c a l to m ost
fa rm e rs .
The v a r i a t i o n in n e t farm income was g r e a te r f o r th e two l i v e - ­
stock- a l t e r n a t i v e s th a n i t was f o r th e o r i g i n a l o r th e. a l l cash crop
21;*
a lte rn a tiv e .
C e r ta in s t a t i s t i c a l m easures were u se d to d eterm in e th e r e l a ­
t i v e n e t income v u l n e r a b i l i t y o f an average farm er u n d er th e o rg a n iz a tio n s
p la n n e d .
The b a s is f o r com paring th e v a r i a t i o n s in income among th e a l t e r ­
n a tiv e s was th e p r ic e c o e f f i c i e n t o f n e t income v a r i a t i o n .
The c o e f f ic ie n t
o f v a r i a t i o n may be d e fin e d as' th e s ta n d a rd d e v ia tio n o f a sample d iv id e d
by th e mean v a lu e o f th e item s i n th e sam ple.
T hat i s , v a r i a b i l i t y i s
e x p re ss e d as a c e r t a i n p e r c e n t o f th e mean.
S in ce th e c o e f f i c i e n t o f
v a r i a b i l i t y m easures r e l a t i v e d is p e r s io n , i t i s u s e f u l i n com paring a l t e r ­
n a tiv e o r g a n iz a tio n s .
The f i r s t s te p i n th e c a lc u la tio n o f th e g ro ss income v a r i a t i o n was
to, c a lc u la te th e c o e f f i c i e n t o f p r ic e v a r i a t i o n f o r th e f iv e m ajor m arket­
a b le com m odities— su g ar b e e ts , w heat, b u t t e r f a t , b e e f and hogs f o r th e
y e a rs 1920-19i|8,
The c o e f f i c i e n t o f p r ic e v a r ia tio n a r r iv e d a t h e re gave
th e p e rc e n ta g e w hich th e p r ic e co u ld be e x p e c te d to v a ry from th e mean i n
two y e a rs o u t o f th re e ,,
fo llo w s :
The c o e f f i c i e n t o f p r ic e v a r i a t i o n f ig u r e s a re as
su g ar b e e t s , «273j w h eat, , l i ^ l j b u t t e r f a t , ,L 0 2; b e e f , . 5>1 2 ;
and p o rk , ,1i 95. I /
The n e x t s te p c o n s is te d o f w e ig h tin g th e c o e f f i c i e n t s o f p r ic e v a r i ­
a t i o n by th e p ro p o r tio n t h a t each commodity c o n trib u te d to th e g ro ss farm
incom e.
The summation o f each w eig h ted c o e f f i c i e n t o f p r ic e v a r i a t i o n f o r
each e n te r p r is e d iv id e d by 100 i n each o rg a n iz a tio n g iv e s a com parison o f
g ro ss farm income v a r i a t i o n among th e a l t e r n a t i v e s .
I/
I b i d , , p. 75 ft
The g ro ss income
25
c o e f f i c i e n t o f v a r i a t i o n f o r each a l t e r n a t i v e i s as fo llo w s s Xj
O r ig in a l--------------------------------------------------------------»3516
A lte r n a tiv e No. I ---------------------------------------------
.1+700
A lte r n a tiv e No. I I -------------------------------------------
.2956
A lte r n a tiv e No. H I ------------------------------------------— .1+I|l5
' S in ce v a r i a t i o n i n n e t farm income i s th e c r i t i c a l income f i g u r e , i t
was n e c e s s a ry to combine th e g ro ss income c o e f f i c i e n t o f v a r i a t i o n w ith
farm expenses to s e c u re a com parison o f th e p r ic e v u l n e r a b i l i t y o f n e t
farm income among th e d i f f e r e n t o r g a n iz a tio n s .
I n com bining th e g ro ss
income c o e f f i c i e n t o f v a r i a t i o n w ith e x p en se s, th e assum ption was made
t h a t th e r e w i l l be no s i g n i f i c a n t d if f e r e n c e i n expense v a r i a t i o n over
tim e among a l t e r n a t i v e o r g a n iz a tio n s .
W ith t h i s assu m p tio n , th e r a t i o o f
th e g ro ss income c o e f f i c i e n t o f v a r i a t i o n to th e d if f e r e n c e betw een a v er­
age g ro ss income and t o t a l expenses ( ___ X _ _ _ ) p e rm its a com parison o f
I - E /I
th e p r ic e v u l n e r a b i l i t y o f n e t farm income among th e d i f f e r e n t o rg a n iz a ­
tio n s .
The n e t income v u l n e r a b i l i t y f o r th e d i f f e r e n t o rg a n iz a tio n s
b u d g et a re as fo llo w s ; 2/
O r ig in a l---------- ----------- — ----------------- -— — ---- -
.9759
A lte r n a tiv e No. I — ----------------- ---------- 7------— 1 .1 5 8 8
A lte r n a tiv e No. I I —-------------------------—---------— 1.2317
A lte r n a tiv e No. T H — — ---------------------- 1.2589
I/
I b i d . , p . 76.
2/
See J e n s e n , I b i d . ," f o r d e te rm in a tio n o f n e t income v u l n e r a b i l i t y and
fig u re s .
- .
26
Budget S y n th e sis
The " o r ig in a l” o r g a n iz a tio n b ased on 191+8- ' 1$ av era g es as shown in
th e p r e v io u s stu d y i s p r e s e n te d i n d e t a i l in order to r e f l e c t th e y ie ld s
and s p e c i f i c c o s t s a s s o c ia t e d w ith each e n t e r p r i s e .. S in ce i t i s n ot
p o s s ib le to d eterm ine th e s p e c i f i c la n d u se o f A lt e r n a t iv e s I and I I I , th e
" o r ig in a l" o r g a n iz a tio n w i l l be u sed as a b a s is f o r e s tim a tin g th e r e s u l t s
o f th e a lt e r n a t i v e o r g a n iz a tio n s .
The b u d gets f o r crop and l i v e s t o c k p ro­
d u ctio n are p r e s e n te d i n T ab les I I and I I I .
sto n e and S t ill w a t e r c o u n tie s in 191+8- ' 1+9 . l /
Y ie ld s are av era g es fo r Y ellow
The p r ic e s a p p lie d to th e s e
p ro d u ctio n a v era g es were th e average p r ic e s r e c e iv e d by Montana farm ers i n
191+8- ' 1+9 . 2/
y
2/
Montana A g r ic u ltu r a l S t a t i s t i c s , Montana Department o f A g r ic u ltu r e and
Labor In d u str y c o o p era tin g w ith U n ite d S t a t e s Departm ent o f A g r ic u l­
tu r e , Bureau o f .A g r ic u lt u r a l Econom ics, H elena, Montana, V ol. I l l ,
December, 1 9 5 0 , , pp. 95 and 103 .
I b id . , pp. 95 and 103» .
27
Table I I .
Y ie ld
per
Acr e( a)
T o ta l
38.0
12
U56
—
U56
$ 1 3 .09(b)
1 6 .0
30
U80
75
Uo5
1.8U
O ats
6.5
U5
293
293
■ ■
■ mm
■» mm
B arley
8.5
Uo
3U0
3U0
•
mm mm
mm mm
Crop
Sugar B eets
(to n s )
Wheat
G rains
(bu.)
Budget fo r Crop Production.
A cres
Hay ( T . )
2U.0
P a s tu re
( l b s . TDN)
13.0
2036
Corn ( b u . )
1.5
33
Fallow
1.5
Waste
11.0
TOTAL
120.0
1.9U
Feed
U6.5
26U70
U3
Crop D is p o s itio n
U nit
S ale P r ic e ( a )
—
Gross
S a le s
$5969
7U5
68
3.5 19.53
26U70
U9.5
U9.5
$6773
(a )
Source f o r y ie ld and p r ic e d a ta :
op. c i t . , pp. 95, 103.
Montana A g r ic u ltu r a l S t a t i s t i c s ,
(b )
In c lu d in g $ 2 .UU p e r to n government paym ent.
S ource:
I b i d . . p. 1 3 .
28
Table I I I .
No.
Y e a rlin g s
C alves
9
Sows
3
P igs
18
P o u ltry
Kind
10
CO
D a iry Cows
P ro d u c tio n
100
VX
E n te r p r is e
Budget fo r L iv esto ck Production.
Amount
Home
Consumed
D is p o s itio n
M arketed
U n it
Amount P ric e
21$ l b s . 2030 l b s . S o .70$
Value
S iiJ J
B .F.
22US l b s .
Meat
1300 l b s .
1$00 l b s .
0 .2 0
300
Meat
3L00 l b s .
7$0 l b s . L6$0 l b s .
0. 2k
1116
■ as
— mm
Pork
900 l b s .
0 .1 8
1 62
kbO l b s . 2li20 l b s .
0.2 2
$32
900 l b s .
Pork 356k l b s . ( a )
Eggs
8$0 d o z . ( a )
Meat
77$ l b s .
12$ doz.
700 doz.
O.UO$
28k
90 l b s .
66$ l b s .
0 .3 0
200
Sk02$
TOTAL
(a )
An average o f 3 .2 p ig s p e r y e a r h e ld as rep la ce m e n t s to c k .
(b)
T w en ty -fiv e dozen eggs u sed f o r h a tc h in g c h ic k s .
29
Crop Production Expenses
E stim a te s o f d i r e c t crop p ro d u c tio n c o s ts are g iv en in Table IV .
These a re o n ly th e d i r e c t expenses t h a t can be a p p lie d to s p e c if ic e n te r ­
p ris e s .
T able IV.
Budget f o r Crop P ro d u c tio n Expenses, (a )
Sugar B e e ts:
D ire c t Expense
Seed ( l u 5 I b s ./A . )*
F e r t i l i z e r (5>T. manure and 100 l b s .
p h o s p h a te /A .)
C o n tra c t la b o r (2 5 .5 m anhours/A .)**
F u e l, G rease, O il, and R e p a irs
H a rv e stin g and H auling
M achinery D e p re c ia tio n * * *
TOTAL
Per Acre
T o ta l
$ 1 .8 0
$
68
1 0 .9 0
35. ho
3 .6 0
hO. 80
l.h h
h lh
13h5
138
1550
$ 9 3 .9h
$3570
55
*
Seed p r ic e o f 1:5 c e n ts p e r pound and see d in g r a t e from D. C. M yrick,
U .S. D epartm ent o f A g r ic u ltu r e , Bureau o f A g r ic u ltu r a l Economics,
Bozeman, M ontana, u n p u b lish e d d a ta .
** C o n tra c t la b o r r a t e s a d ju s te d by in d ex o f farm wage r a t e s to r e f l e c t
19U8-U9 p r i c e s . S ource: The Farm C ost S it u a tio n , Bureau o f A g ric u l­
t u r a l Economics, U. S. D ept, o f A g r ic u ltu r e , W ashington 25, D. C. , March
1952, p. 2.
**? S p e c ia liz e d equipm ent u sed o n ly f o r b e e ts .
Wheat:
D ir e c t Expense
Seed ( I b u ./ A .)*
F u e l, G rease, O il, and R e p a irs
H a rv e stin g
TOTAL
P er Acre
T o ta l
$ h.0 0
l.hh
5 .5 0
$ 1 0 .9h
$
* P ric e o f seed w heat e s tim a te d a t tw ice th e m arket g r a in p r ic e
6h
23
88
$ 175
30.
Table IV (continued)
O ats:
D ir e c t Expense
Seed (2 b u ./A .)*
F u e l, G rease, O il, and R e p a irs
H a rv e stin g
TOTAL
* P r ic e o f seed o a ts e stim a te d
Per Acre
T otal
S I.oo
$ 26
9
l.h k
5 .5 0
$ 1 0 .9k
36
$ Tl
tw ic e th e m arket g ra in p r ic e .
B a rle y :
D ir e c t Expense
P er Acre
T o ta l
Seed (1 .5 b u ./A .) *
F u e l, G re ase , O il, and R e p a irs
H a rv e stin g
$ 3 .3 0
I . Uk
5 .5 0
$1 0 . 2k
$
TOTAL
$
28
12
UT
87
# P r ic e o f seed b a r le y e s tim a te d a t tw ic e th e m arket p r i c e .
Hay:
D ir e c t Expense
Per Acre
T o ta l
Seed (8 l b s . / A . ) *
F u e l, G rease, O il, and R ep a irs
$1 .1 2
1 .6 6
$2.78
$
TOTAL
$
27
ko
67
# Seed p r ic e o f 56 c e n ts p e r pound (19U8-1h9 average p r i c e , E l l i o t t Seed
Co. , B i l l i n g s , Mo n t . ) . Seeding r a t e from R. D. M ercer, D epartm ent o f
Agronomy and S o i l s , Montana S ta te C o lle g e , Bozeman, M ontana. C ost o f
seed a llo c a te d o v er a f o u r -y e a r p e rio d .
31
Table IV (continued)
P a s tu r e :
D ir e c t Expense
Per Acre
T o ta l
Seed ( l 6 l b s . / A . ) »
F e r tiliz e r * *
F u e l, G rease, O il, and R ep airs
$ 1.22
3 .io
1.19
$ 16
$ 7.31
$ 97
TOTAL
*
From prim ary d a ta .
66
13
Seed c o s t a llo c a t e d over f iv e - y e a r p e r io d .
•^ S ev en teen to n s o f manure a p p lie d over th e f iv e - y e a r p e r io d .
TOTAL DIRECT EXPENSES
$1067
(a ) Source fo r exp en se ite m s: Farm Budget Standards f o r I r r ig a t io n Farm­
in g , Branch o f O p eration and M aintenance, U .S . D ept, o f I n t e r io r ,
Bureau o f R ecla m a tio n , R egion 6 , B i l l i n g s , Montana, O ctober, 19L8,
pp. 2 -lU .
Source f o r in d e x o f exp en se ite m s:
p. 2.
The Farm C ost S it u a t io n , op. c i t . ,
32
D ir e c t L iv esto ck Expenses
The b u d g et f o r li v e s t o c k expenses i s p re s e n te d i n Table V.
Home
grown fe e d s a re in c lu d e d in th e ta b le o n ly to show th e fe e d re q u ire m e n ts
f o r each c la s s o f l i v e s t o c k .
The p r ic e s fa rm e rs would have re c e iv e d f o r
g r a in s i s u sed as a b a s is f o r e s tim a tin g c o s t o f purch ased g ra in .
T able V.
E n te r p r is e
C a ttle
Hogs
P o u ltry
TOTAL
Kind
Budget f o r L iv e s to c k E xpenses, (a )
Amount
Home Grown
D ire c t Expenses
Amount
Purchased
U n it
P ric e
Value
SO. 67
$108
Oats
B a rle y
Hay
P a s tu re
V et.
E quip.
D epr. (b)
221 bu.
2li5 bu.
la .S t .
26500 TDN
l 6l b u .
XX
XX
XX
Corn
O ats
B a rle y
Skim M ilk
V et.
B u ild in g
D epr. (b)
U9.5 b u .
72
bu.
95
bu.
Ili 700 l b s .
Wheat
Mash
B u ild in g
D epr. (b)
75 bu.
6000 l b s .
XX
XX
6000 l b s .
2 . 75/c w t
.165
XX
XX
XX
23
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
75
XX
38
1 .6 0
0 .6 7
82
36
XX
5l b u .
53 b u .
XX
XX
XX
XX
XX
XX
XX
XX
10
XX
XX
XX
12
$519
(a ) Feeds fe d to li v e s t o c k b a se d on Recommended N u tr itiv e A llow ances f o r
D om estic A nim als, Committee on Animal N u tr it io n , W ashington 25, D. C. ,
No. I to VI, R ev ise d , 19!>0.
(b ) Value o f equipm ent and b u ild in g s b ased upon p r ic e s as g iv en i n Farm
Budget S ta n d a rd s f o r I r r i g a t i o n Farm ing, op. c i t . , p . 5>7. A d ju sted
by in d ex o f b u ild in g m a te r ia ls p r ic e s to 19L 8 -'h 9 p r ic e l e v e l .
33
The in v e n to r y o f m achinery, b u ild in g s , and equipm ent as taken from
Table XI o f J e n s e n 's work i s p resen ted in Table VI.
Item s th a t are r e ­
q u ired fo r th e fir m h ou seh o ld are o m itted , as th e s e item s are dependent
upon th e s i z e o f n e t farm income and in d iv id u a l fa m ily d e s ir e s .
Table VI.
I n v e n to r y o f M achinery, B u ild in g s , and E q uipm ent.(a)
Ite m
T r a c to r
Flow
D uckfoot
S p ik e to o th Harrow
S p rin g to o th Harrow
D isc
Wagon
F lo a t
S p read er
D itc h e r
B eet C u ltiv a to r
R o lle r
B eet D r i l l
L ifte r
Mower
S ide D e l. Rake
Dump Rake
S ta c k e r
G ra in D r i l l
M ilk e r
Cream S e p a ra to r
Feed G rin d er
P o s t Hole D igger
M isc. T ools
Truck
Auto (farm sh a re )
Barn
G ranary
Garage and Shop
Hog Houses and Equipment
P o u ltr y Houses and
Equipm ent
Barbed W ire F encing
C ost
L if e
(Y ears)
12117
L37
230
6h
190
205
221
63
332
193
28b
17b
59b
HO
209
265
120
158
b85
152
210
95
300
158
1980
1052
1300
375
750
230
10
18
15
20
18
b5o
315
33
33
16
10
10
15
20
15
20
15
18
12
15
18
15
15
10
15
17
15
5
12
10
33
33
33
33
Annual
De p r .
(b )
Annual
R e p a irs
(c )
T o ta l
$250
2b
15
3
11
13
22
6
22
10
—
9
—
~
17
18
7
11
32
—
—
6
20
32
165
$ —
11
6
2
5
5
6
2
8
5
—
b
—
5
7
3
b
12
—
2
8
b
151
2b3
26
8
15
—
$ 250
35
21
5
16
18
28
8
30
15
— ( d)
13
— (d)
— (d )
22
25
10
15 '
bb
—(d ,
— (d,
8
28
36 .
3 l6 ( e ,
3b8(e)
65
19
38
.
— Cd4
(d )
(d )
(d )
(d)
(d,
io 5
39
11
23
— (d)
— (d)
10
(d )
( d)
(d )
(d )
(d )
(d)
(e )
(e )
(d )
— (d)
6-
— (d /
16
3k*
T able 'VJ. ( c o n tin u e d )
Woven W ire F encing
E l e c t r i c Fencing
I r r i g a t i o n S tr u c tu r e s
50
70
195
$11128
33
33
33
2
2
5
$891
1
1
h
$55U
3
3
10
$114*5
(a )
Sources
5 6 -6 o .
Farm Budget S ta n d a rd s f o r I r r i g a t i o n Farm ing, op. c i t . , pp.
(b )
Annual d e p r e c ia tio n o f t r a c t o r i s b a se d upon h o u rs o f o p e ra tio n as
c a lc u la te d i n method p re s e n te d b y O rlin J . S c o v ille s ttF ix e d and V a ri­
a b le E lem ents i n th e C a lc u la tio n o f Machine D e p re c ia tio n " , A g ric u lt u r a l Economics R ese arch , U0Se D ept, o f A g r ic ., B .A .E ., . W ashington,
D .C ., J u ly , 19h9s PP. 66-67. D e p re c ia tio n o f o th e r m ach in ery and
equipm ent b a se d upon normal l i f e ex p ec ta n cy . Farm Budget S tan d ard s
f o r I r r i g a t i o n Farm ing, op. c i t . , pp. 6 6 -6 7 .
(c )
Annual r e p a i r s e s tim a te d a t 2 .5 p e r c e n t o f new c o s t f o r m achinery %
and 2 p e r c e n t f o r b u ild in g s and im provem ents. I b i d .
(d )
These expense ite m s have been e n te r e d as d i r e c t expenses to th e
e n t e r p r i s e s f o r w hich th e y a re s p e c ia liz e d . T ab les IV and V.
.(e)
A lso in c lu d e s g a s , o i l , g r e a s e , and t i r e s .
I n d i r e c t expense item s a re shown i n T able V H.
These in c lu d e th e
t o t a l o f m achine d e p r e c ia tio n and r e p a i r s (fro ft Table V I)
and th e amount
o f h ir e d h e lp , l /
F ixed expense ite m s , shown in T able V II, in c lu d e ta x e s , in s u ra n c e ,
and b u ild in g and improvem ents d e p r e c ia tio n and r e p a i r s .
The amount o f
th e ta x e s tim a te i s b a se d upon ta x e s as r e p o r te d by sample fa rm e rs in ­
te rv ie w e d .
T his amounted to an average o f $3.03 p e r a c r e , n o t in c lu d in g
w a te r c h a rg e s.
I/
E xcluding c o n tr a c t hand la b o r and custom h ir e d h a r v e s tin g .
ite m s were ch arg ed to th e e n t e r p r i s e s as d i r e c t expenses*
These
35.
Table VII.
I n d ir e c t and Fixed Farm Expenses
Amount
I n d ir e c t Expenses
Machine D e p r e c ia tio n and
R ep airs (From Table VI)
H ired Labor
TOTAL INDIRECT
$1291
ill?
$1708
F ixed Expenses
$ 361
55
OD
151
305
CD
4»
Taxes (a )
In su ran ce (b )
B u ild in g and Improvements
D e p r e c ia tio n and R ep airs (From Table VI)
Water Charge
TOTAL FIXED
(a )
R eal e s t a t e ta x r a te i s an average o f th e r a t e s r e p o r te d by 17 o f th e
30 farm ers in te r v ie w e d .
(b )
Amount o f in su ra n ce based upon th e amount in v e s t e d in m achinery, l i v e
s to c k , b u ild in g s , and im provem ents, as compared w ith l i k e in v estm en ts
and in su ra n ce premium in Flan No. I , p . 5 3 , Some Economic A sp ects o f
th e Proposed Lower M arias I r r ig a t i o n P r o j e c t , Department o f A g r ic u ltu r a l Economics and Rural S o c io lo g y , Montana A g r ic u ltu r a l Experim ent
S t a t io n , Montana S ta te C o lle g e , Bozeman, Montana, in co o p era tio n w ith
th e Bureau o f R eclam ation , Department o f th e I n t e r i o r , June, 19^6.
The Budget A n a ly ses
I t w i l l be remembered t h a t th e purpose o f t h i s stu d y i s to d ev elo p a
method f o r d eterm in in g th e f in a n c ia l p o s it io n a farm er sh ou ld h ave, under
a n t ic ip a t e d p r ic e and c o s t r e l a t io n s h i p s , in order to j u s t i f y s h i f t s to
v a ry in g d eg ree s o f l i v e s t o c k in an ir r ig a t e d farm u n it .
One method o f
d eterm in in g th e annual and cu m u lative e f f e c t o f d if f e r e n t p r ic e movements
on farm o r g a n iz a tio n and income f o r d i f f e r e n t farm ing system s i s to de­
v e lo p a s e r i e s o f annual b u dgets i n which r e c e ip t s and c o s t s are v a r ie d
in accordance w ith p r ic e and c o s t movements as th e y e x i s t e d in th e p a s t
36.
or accord in g to a n t ic ip a t e d fu tu r e movements.
The method u se d h ere to
show th e r e l a t i v e e f f e c t s o f p a s t movements upon th e f in a n c ia l p o s it io n o f
a farm er a f t e r th e in v estm en t has been made i n p a s tu r e , l i v e s t o c k , and
a llie d a s se ts.
Three p e r io d s have been s e le c t e d .
1939-19U 2, and 19U 9-1952.
They a re:
1 9 2 9 -1 9 3 2 ,
The o v e r a ll in d ex o f p r ic e s r e c e iv e d , p r ic e s
p a id , and r a t io o f p r ic e s r e c e iv e d to p r ic e s p a id by farm ers f o r each o f
th e th ree p e r io d s are shown in Table V III.
The r a t io moved c o n tin u o u sly
downward in th e f i r s t p e r io d ; c o n tin u o u sly upward in th e secon d ; and was
r e l a t i v e l y s t a b le in th e l a s t p e r io d .
Table V III.
In d ex Numbers o f P r ic e s R eceiv ed , P r ic e s P aid ,
and R a tio o f P r ic e s R eceiv ed to P r ic e s P a id .*
1 9 1 0 -lli - 100
P r ic e s R eceived
P r ic e s Paid
Year
P r ic e s R eceiv ed
P r ic e s Paid
1929
1930
1931
1932
1U8
125
87
65
160
151
130
112
92
83
67
58
1939
19U0
1 9 la
1912
95
100
123
158
122
12L
132
151
78
81
93
105
19U8-'U9
1950
1951
1952
267
256
302
288
25L
255
281
277
io 5
100
107
10I4
* S o u rce: O utlook C harts, U n ited S t a t e s Department o f A g r ic u ltu r e , U n ited
S ta te s Government P r in tin g O f f ic e , W ashington, D .C ., 1 9 $ 2 , p . .9*
'37.
Method o f A d ju s tin g R e c e ip ts and C osts
,The method u se d to a d ju s t th e r e c e i p t s and c o s ts f o r each a l t e r n a t i v e
to th e th r e e - y e a r p e rio d s was to a p p ly th e movement o f p r ic e s re c e iv e d and
!
p r ic e s p a id by a p p ro p ria te in d ex es as th e y o ccu red in th e s e p e r io d s .
The
y e a r ending i n n in e was ta k e n as th e b a se 100 f o r each y e a r e x c e p t 19ItS1952.
The b a se p e rio d , 1 9 U 8 -'1**9, was u sed f o r th e l a t e r p e rio d b e c a u s e .
.
r e c e i p t s and c o s ts o f th e p re v io u s ly o rg a n iz e d b u d g ets were b ased on th e
average o f th e s e two y e a r s .
A djustm ent o f R e c e ip ts '
To a d ju s t th e g ro ss r e c e i p t s from each a l t e r n a t i v e f o r each p r ic e
p e r io d , th e IS ltS -l ItS g ro ss r e c e i p t s from each p ro d u c t were m u ltip l ie d by
th e c a lc u la te d in d e x o f p r i c e s r e c e iv e d in each y e a r f o r t h a t p ro d u c t.
The g ro ss r e c e i p t s from each p ro d u c t f o r th e o r ig i n a l o rg a n iz a tio n a re
g iv e n i n T ables I I and H I .
The g ro ss r e c e i p t s from each p ro d u c t i n
a l t e r n a t i v e s I and I I I a re g iv e n i n A ppendix B and C> r e s p e c tiv e ly .
The
p r ic e s g iv en i n th e Montana Farm and Ranch P r ic e s l / were th e b a s is f o r
d e te rm in in g th e in d e x o f p r ic e s ' re c e iv e d i n th e 1 9 2 9 - 3 2 Bnd lS S S -t ^
p e rio d .
The p r ic e s g iv en i n th e Montana A g r ic u ltu r a l S t a t i s t i c s 2 / was
th e b a s is f o r d e te rm in in g th e in d e x o f ,p ric e s re c e iv e d i n th e 19.5 0 * 52p e rio d .
The g ro ss r e c e i p t s from each e n te r p r is e f o r each y e a r a re g iv en
in Appendix..; T ab les I - I I I .
I/
2/
Montana Farm and Ranch P r ic e s , Mimeograph C ir . 5 l s M ontana S ta te
• C o lle g e , Bozeman, M ontana, A p r il, 19U9.
Montana A g r ic u ltu r a l S t a t i s t i c s , Montana D epartm ent o f A g ric u ltu re
and L abor I n d u s tr y c o o p e ra tin g w ith U .S . D epartm ent o f A g r ic u ltu r e ,
Bureau o f A g r ic u ltu r a l Economics, H elen a, M ontana, V ol. IV , D e c., 1952.
38.
A djustm ent o f C osts
S ince i t was n o t p o s s ib le to d eterm in e th e la n d u se o f a l t e r n a t i v e s ■
I and I I I , th e change i n c o s ts t h a t o c c u rre d i n th e " o r ig in a l" o rg a n iz a ­
t i o n i s u s e d to a d ju s t c o s ts i n a l t e r n a t i v e s I and I I I .
To a d ju s t th e
d i r e c t crop p ro d u c tio n c o s ts i n th e o r i g i n a l o r g a n iz a tio n , a p p ro p ria te
in d e x e s f o r each y e a r a re a p p lie d t o th e s p e c i f i c c o s ts a s s o c ia te d w ith
each e n te r p r is e i n 19 lt8 -Tlt9.
The in d e x es u se d a re g iv e n in A ppendix D.
The in d e x e s u s e d to a d ju s t th e d i r e c t c o s ts i n th e y e a r s .1930-»32 and
19lt0-' bZ were b ased on in d e x es o f p r ic e s p a id by U n ite d S ta te s fa rm e rs . I /
The in d e x es u se d to a d ju s t th e d i r e c t c o s ts i n 1 9 ^ 0 -'3 2 were b ased on
in d e x e s o f p r ic e s p a id by Montana F arm ers. 2 /
There sh o u ld be no s i g n i ­
f i c a n t d if f e r e n c e h e re b ecause th e method i s u s e d m e re ly to- r e f l e c t mqvem ent o f p r i c e s .
The. ad ju stm en t o f d i r e c t l i v e s t o c k ex p en ses was made by a p p ly in g th e
c a lc u la t e d in d e x o f p r ic e s r e c e iv e d
3/-for th e
g r a in s f e d to th e t o t a l
c o s t o f each typ e o f f e e d purchased i n 1 9 lt8 -rlt9.
The v e t e r in a r y c o s t s
f o r c a t t l e and hogs and th e mash f e d to p o u ltr y were a d ju ste d by th e i n ­
d exes g iv e n i n Appendix D.
The d e p r e c ia tio n c o s t on b u ild in g s and eq u ip ­
ment was n o t a d ju ste d b y any in d e x , a s th e s e item s were a c o n sta n t f o r
I/
The. Farm C ost S i t u a t i o n , op. c i t . 9 p . 2.
2/
In d e x es o f P r ic e s P aid by Montana Farmers and R anchers, 1933 to 1931,
Montana S t a t e C o lle g e A g r ic u ltu r a l Experim ent S t a t io n , Bozeman,
Montana, in c o o p e r a tio n w ith th e Bureau o f A g r ic u ltu r a l Econom ics,
USDA, O f f ic e o f th e A g r ic u ltu r a l S t a t i s t i c i a n , H elen a, Montana, 1932.
3yZ Montana Farm and Ranch P r ic e s , op. c i t . , and Montana A g r ic u ltu r a l
S t a t i s t i c s , V ol. IV , op . c i t . ■
39.
each y e a r .
The item s a d ju ste d i n th e in d i r e c t and f ix e d c o s t s (T able VlT)
were th e m achinery r e p a ir s , h ir e d la b o r , ta x e s and in s u r a n c e , and th e
b u ild in g r e p a ir s c o s t .
See Appendix D f o r th e in d e x e s u sed to a d ju st
th e s e ite m s .
A djustm ent o f C o sts i n A lt e r n a t iv e s I and I I I
To a d ju s t th e ex p en ses in a lt e r n a t i v e s I and I I I , i t was assumed t h a t
th e d ir e c t ( crop and l i v e s t o c k ) e x p e n se s, and in d ir e c t and f i x e d exp en ses
f o r th e s e a lt e r n a t i v e s (from Table I ) would v a ry i n th e same p ro p o rtio n
from year to y ea r from th e 1 9 lt8 -t li9 l e v e l , as th e c o s t s v a r ie d from year
to y ea r i n th e o r ig in a l o r g a n iz a tio n .
The bu dget summary o f ex p en ses fo r
each a lt e r n a t iv e in each y ea r i s g iv e n i n Appendix T a b les TV and V*
Year by Year E f f e c t s Upon,Income
The annual e f f e c t s on income o f th e th r e e d i f f e r e n t ty p e s o f p r ic e
movements are shown i n T able IX through X II .
The r e s id u a l in d e n t if ie d
h ere as "income f o r sa v in g s and d eb t payment" r e f l e c t s t h a t p o r tio n o f th e
annual income a farm fa m ily would have l e f t f o r payment on d eb ts and incom e
t a x , a d d itio n a l farm in v e s tm e n ts , and b u ild in g up o p e r a tio n and cash r e ­
s e r v e s , a f t e r p ayin g f o r a s t a b l e , rea so n a b ly adequate l e v e l o f fa m ily .
liv in g .
T able IX. — Annual E f f e c t s on Income w ith 1 9 $ 0 -'$ 2 P r ic e Movement.
Year
I
2
3
Ave .
Cash Expenses
Gross Farm Income
Orig .
A lt . I
$112U7
12181*
12292
$13008
11*993
11*731*
11908
11*21*5
Net Cash Income
Income f o r S avin gs
or D ebt Payment*
A lt .I
A lt .I ll
Orig .
A lt. I
A lt .I ll
Orig .
A lt . I
A lt . I l l
$1661*6 $7363
7887
1851*5
18283
801*3
$9351
9617
101*21
$11772
12507
13071
$3881*
1*297
1*239
$3657
5376
1x313
$1*871*
6038
5212
$2081*
21*97
21*39
$1857
3576
2513
$3071*
1*238
31*12
7761*
9796
121*50
1*11*0
1*1*1*9
5375
231x0
261*5
3575
A lt .I ll
17825
Orig .
*Net cash income a d ju sted by s u b tr a c tin g e stim a ted c o s t s f o r fa m ily l i v i n g .
c o s t s e stim a te d a t $1800 a n n u a lly .
Annual fa m ily li v i n g
T able X. — Annual E f f e c t s on Income w ith 1 9 3 0 -'3 2 P r ic e Movement.
Year
I
2
3
Ave .
Cash Expenses
Gross Farm Income
Orig .
A lt.I
A lt .I ll
$10337
7978
6692
$111*80
8050
5679
$1531*1
11031
801*6
8336
81*03
111*73
Net Cash Income
Income f o r Savings
or Debt Payment*
A lt .I
A lt .I ll
O rig .
A lt . I
A lt .ill
Orig .
A lt . I
A lt .I ll
$6890
6293
5693
$8755
7636
7021*
$11130
981*7
901*0
$3357
1685
999
$2725
1*11*
-13U5
$1*211
1181*
- 991*
$1557
- 315
- 809
$925
-1386
-311*5
$21*11
- 616
-2791*
6322
7805
10006
2011*
598
11*67
11*1*
-1202
- 333
O r ig .
L
c o s t s e stim a te d a t $1800 a n n u a lly «
T able X I. — Annual E f f e c ts on Income w ith 19UO-, U2 P r ic e Movement
Year
G ross Farm Income
O rig .
I
A lt. I
A lt.I ll
Cash Expenses
O rig .
A lt. I
A lt.I ll
Net Cash Income
O rig .
A lt . I
A lt.I ll
Income f o r Savings
o r Debt Payment#
O rig .
A lt . I
A lt.I ll
$11937 $15020
$ l8 lk k
$7250
$9371
$11728
$k687
$56k9
$6kl6
$2887
$38k9
$k6l6
2
15U98
19178
2L182
7671
9976
I2k35
7827
9202
117k 7
6027
7k02
99k7
3
1788k
23723
2980k
876k
112kl
13990
9120
12k82
1581k
7320
10682
IkO lk
Av.
15106
19307
2kOk3
7895
10196
12718
7211
9111
11325
5 k ll
7311
9525
* Net cash income a d ju sted by su b tr a c tin g e stim a ted c o s t s fo r fa m ily l i v i n g .
c o s t s e stim a te d a t $1800 a n n u a lly .
Annual fa m ily li v i n g
The Operator* s Cash P o s it io n
The o p e r a to r ’ s cash p o s itio n , from th e b e g in n in g th ro u g h each th r e e y e a r p e rio d f o r a l t e r n a t i v e s I and I I I i s shown i n T ab les X II th ro u g h
XVII.
S ince th e o r ig i n a l a l t e r n a t i v e r e q u ir e d no a d d itio n a l in v e stm e n t,
a l l o f th e income o u ts id e o f fa m ily l i v i n g i n each p e rio d would be an
a d d itio n to cash r e s e r v e s .
I t w i l l be assumed t h a t th e o p e ra to r was d e b t
f r e e to b e g in w ith , b u t t h a t a lo a n had to be made to fin a n c e th e a d d i­
t i o n a l in v e stm e n t i n l iv e s to c k and b u ild in g s .
The f i r s t a l t e r n a t i v e had
an a d d itio n a l in v e stm e n t o f $6,321? i n b u ild in g s and l i v e s t o c k .
To d e te r ­
mine th e n e t a d d itio n a l o u tla y t h a t i s n eed ed , i t would be n e c e s s a ry to
s u b t r a c t th e income t h a t would be re c e iv e d from th e d is p o s a l o f s u rp lu s
equipm ent.
A ccording to assum ptio n s c o n cern in g ow nership and u s e o f farm
m achinery, th e equipm ent t h a t would have to be d isp o se d o f would be
s p rin g to o th harrow , b e e t c u l t i v a t o r , r o l l e r , b e e t d r i l l , l i f t e r , g ra in
d r i l l , and d u c k fo o t. l /
The i n i t i a l c o s t o f th e s e item s t o t a l s $206?.
Assume t h a t th e y a re l / 2 d e p r e c ia te d , and the. farm er r e c e iv e s th e rem ain ­
in g v a lu e upon th e s a le o f th e equipm ent.
T h is would amount to $103lu
The s u b tr a c ti o n o f t h i s amount from $6235 would le a v e a n e t in v e stm en t
o f $lt,291.
The t h i r d a l t e r n a t i v e had an a d d itio n a l in v e stm en t o f $6600 fo r
b u ild in g s , equipm ent, and l i v e s t o c k .
The s u rp lu s equipm ent' t h a t co u ld be
d is p o se d o f in c lu d e s th e r o l l e r , b e e t d r i l l , and g ra in d r i l l .
t i a l c o s t o f t h i s equipm ent t o t a l s $1253«
-\J
The i n i ­
Again assum ing t h a t th e s e
Farm Budget S ta n d a rd s f o r I r r i g a t i o n Farm ing, op. c i t . , p p . 61-62«
h3*
ite m s a re l / 2 d e p r e c ia te d and th e o p e ra to r r e c e iv e s th e re m a in in g v alu e
upon th e s a le o f th e equipm ent, th e amount re c e iv e d would be $627.
The
s u b tr a c ti o n o f t h i s amount from $6600 would le a v e a n e t in v e stm e n t i n
b u ild in g s , equipm ent, and l iv e s to c k o f $5973.
The repaym ent p la n s f o r
th e s e a l t e r n a t i v e s a re b a se d on sem i-an n u al payments w ith i n t e r e s t a t
6 p e r c e n t on the. u n p a id , p r i n c ip a l..
Table X II. — Loan Advances and Repayments As R elated to Net Cash Income
During 1950-*$2 P rice Movement. A lte r n a tiv e No. I .
Year
I
Net
Loan
$4291
Net
Cash
Income
A v a ila b le (a )
T o ta l
P r in c i p a l
and
In te re s t
Payments
A v a ila b le
fo r
O ther
Purposes
P r in c i p a l
Payments
Unpaid
B alance (b)
In te re s t
P aid
$929
$800
$4291
$129
$929
0
1 -1 /2
0
929
824
3491
105
929
0
2
0
1788
1708
2667
80
1788
0
2 -1 /2
0
1788
959
959
29
990
$800
3
0
1257
0
0
0
0
1257
3 -1 /2
0
1257
0
0
0
0
1257
(a ) A fte r d ed u ctin g $900 each s i x months f o r fa m ily l i v i n g .
(b ) B eginning o f each h a lf - y e a r , e x c e p t f o r f i r s t y ea r when lo a n i s advanced e a r ly in th e y e a r .
Table X III. — Loan Advances and Repayments As R elated to Net Cash Income
During 1950-'52 P r ice Movement. A lte r n a tiv e No. I I I .
Year
I
T o ta l
P r in c ip a l
and
In te re s t
Payments
Net
Loan
Net
Cash
Income
A v a ila b le (a )
P r in c ip a l
Payments
$5973
$1537
$1358
$5973
$179
$1537
0
Unpaid
B alance (b)
In te re s t
Paid
A v a ila b le
fo r
O th er
Purposes
1 -1 /2
0
1537
1399
U615
138
1537
0
2
0
2119
2023
3216
96
2119
0
2 -1 /2
0
2119
1193
1193
36
1229
$890
3
0
1706
0
0
0
0
1706
3 -1 /2
0
1706
0
0
0
0
1706
(a ) A fte r d e d u ctin g $900 each s i x months f o r fa m ily l i v i n g .
(b ) B eginning o f each h a lf - y e a r , except fo r f i r s t year when lo a n i s advanced e a r ly in th e y e a r .
Table XIV. — Loan Advances and Repayments as R elated to Net Cash Income
During 1930-'32 P rice Movement. A lte r n a tiv e No. I .
Year
I
1- 1/2
T o ta l
P r in c ip a l
and
I n te r e s t
Payments
A v a ila b le
fo r
Other
Purposes
N et
Loan
Net
Cash
Income
A v a ila b le (a )
P r in c ip a l
Payments
Unpaid
B a la n ce(b )
In te r e st
Paid
$1291
$163
$33 U
$1291
$129
$163
0
U63
3hh
3957
119
I463
0
0
2
693
-693
0
li306
0
0
0
2- 1/2
693
-693
0
5128*
0
0
0
3
1573
-1573
0
6851**
0
0
0
3 -1 /2
1573
-1573
0
8621***
0
0
0
(a ) A fte r d ed u ctin g $900 each s i x months f o r fa m ily l i v i n g .
p u rp o se .
____ I __________ -f
Minus s ig n in d ic a te s lo a n f o r t h i s
(b) B eginning o f each h a l f - y e a r , e x ce p t f o r f i r s t y e ar when lo a n i s advanced e a r ly in th e y e a r .
* In c lu d e s $129 unpaid i n t e r e s t from f i r s t , h a lf o f y e a r .
** in c lu d e s $279 u n p aid i n t e r e s t from f i r s t y e a r . «
*** In cludes$h76 u npaid i n t e r e s t from th e f i r s t y e a r and a h a l f .
Table XV. — Loan Advances and Repayments As R elated to Net Cash Income
During 1930-'32 P rice Movement. A lte r n a tiv e No. I I I .
T o ta l
P r in c ip a l
and
In te re s t
Payments
Net
Cash
Income
A v a ila b le (a )
P r in c ip a l
Payments
Unpaid
B alance (b)
In te re s t
P aid
$5973
$1205
$1026
$5973
$179
$1205
0
1 -1 /2
0
1205
1057
hShl
148
1205
0
2
313
-313
0
U203
0
0
0
2 -1 /2
313
-313
0
L6L2*
0
0
0
3
1397
-1397
0
6171**
0
0
0
3 -1 /2
1397
-1397
0
7748***
0
0
0
Year
I
Net
Loan
(a ) A fte r d ed u ctin g $900 each s i x months fo r fa m ily l i v i n g .
p u rp ose.
(b)
B eginning o f each h a lf - y e a r , e x c e p t f o r f i r s t
A vai!a b le
fo r
O ther
Purposes
Minus s ig n in d ic a te s loan f o r t h i s
y ea r whenloan i s advanced e a r ly in th e y e a r .
*
In c lu d e s $126 unpaid i n t e r e s t from f i r s t h a lf o f y e a r .
**
In c lu d e s $ 2 6 l unpaid i n t e r e s t from f i r s t y e a r .
*** In c lu d e s $1*38 unpaid i n t e r e s t from f i r s t year and a h a l f .
Table XVI. — Loan Advances and Repayments As R elated to Net Cash Income
During 19b0-'b2 P rice Movement. A lte r n a tiv e No. I .
Year
I
T o ta l
P r in c ip a l
and
In te re s t
Payments
Net
Loan
Net
Cash
Income
A vai! a b le ( a )
P r in c i p a l
Payments
Unpaid
B alance (b )
In te re s t
P aid
$1291
$1925
$1796
$1*291
$129
$1925
0
0
A v a ila b le
fo r
O th er
Purposes
1 -1 /2
0
1925
1850
21*95
75
1925
2
0
2701
61*5
61*5
19
661*
2 -1 /2
0
2701
0
0
0
0
2701
3
0
53hl
0
0
0
0
531*1
3 -1 /2
0
531*1
0
0
0
0
531*1
$2037
(a ) A fte r d e d u c tin g $900 each s ix months f o r fa m ily l i v i n g .
(b) B eginning o f each h a lf - y e a r , e x ce p t f o r f i r s t y e ar when lo a n i s advanced e a r ly in th e y e a r .
Table XVII. — Loan Advances and Repayments As R elated to Net Cash Income
During 19U0-'U2 P rice Movement. A lte r n a tiv e No. I I I .
T ear
I
T o ta l
P r in c ip a l
and
In te re s t
Payments
A v a ila b le
fo r
O ther
Purposes
Net
Loan
Net
Cash
Income
A v a ila b le (a )
P r in c ip a l
Payments
Unpaid
B alan ce(b)
In te re s t
P aid
$5973
$2308
$2129
$5973
$179
$2308
0
1 -1 /2
0
2308
2193
38a
115
2308
0
2
0
1973
1651
1651
50
1701
$3272
2 -1 /2
0
U973
0
0
0
0
1*973
3
0
7007
0
0
0
0
7007
3 -1 /2
0
7007
0
0
0
0
7007
(a ) A fte r d e d u c tin g $900 each s i x months f o r fa m ily l i v i n g .
(b ) B eginning o f each h a l f - y e a r , e x ce p t f o r f i r s t y e a r when lo a n i s advanced e a r ly in th e y e a r .
$0 .
Changes i n B o rro w e r-C re d ito r E q u ity
The in v e stm e n t p o s i t i o n o f th e o p e ra to r may be summarized by s e t t i n g
up a b a la n c e s h e e t on A p ril I o f each y e a r f o r a l l th r e e ty p e s o f p r ic e
movements f o r each a l t e r n a t i v e .
U s u a lly a t t h i s tim e annual farm ing o p er­
a tio n s b e g in , and lo a n s a re u s u a ll y n eed ed .
G ross in v e stm e n t by a l t e r n a ­
t i v e s , th e in d e b te d n e s s f o r a l t e r n a t i v e s I and I I I , and th e c a p i t a l r a t i o s
f o r each y e a r a re shown i n T ab les X H II th ro u g h XX.
The b a la n c e s h e e t
p re s e n te d f o r O ctober I shows th e c a p i t a l 'p o s itio n o f each a l t e r n a t i v e
upon th e c lo se o f th e h a r v e s t seaso n a f t e r th e t h i r d y e a r .
The. c u r r e n t
a s s e t s sh o u ld be l a r g e r f o r th e O ctober I b a la n c e s h e e t by th e amount o f
th e v a lu e o f f e e d .
S in ce i t was n o t p o s s ib le to d eterm in e th e la n d u se
o f some o f th e a l t e r n a t i v e s , th e v a lu e o f fe e d has been o m itte d .
The ite m s in c lu d e d i n th e f ix e d a s s e t c la s s a re la n d and b u ild in g s .
The la n d v a lu e h as been assumed to be $ l£ 0 an a c r e .
T h is w ould make th e
t o t a l v alu e f o r th e " ty p ic a l" farm i n t h i s a re a $ 1 8 ,0 0 0 .
The v alu e o f
b u ild in g s was t h a t d e term in e d in 19b&-'h9) w ith o n ly th e d e p r e c ia tio n de­
d u c te d f o r each y e a r .
F or a l t e r n a t i v e s I and I I I th e a d d itio n a l in v e s t­
m ent i n b u ild in g s was added to th e o r i g i n a l in v e stm e n t.
The ite m s in c lu d e d i n th e w orking a s s e t c la s s a re d a ir y b re e d in g
s to c k , .sows, and equipm ent ( in c lu d in g c a r and tr u c k ) .
The v a lu e o f d a ir y
cows was e s tim a te d a t $200 p e r head f o r each a l t e r n a t i v e , and h e ld a t a
c o n s ta n t v a lu e f o r each y e a r .
The sows were v a lu e d a t $60 a h ead .
The
equipm ent (from T able .H ) r e f l e c t s d e p r e c ia tio n from y e a r to y e a r , and
i s a d ju s te d i n a l t e r n a t i v e s I and I I I to r e f l e c t th e v a lu e o f t h i s e q u ip ­
ment upon th e d is p o s a l o f s u rp lu s m ach in ery .
The c u r r e n t a s s e t s a re made up o f y e a r lin g s o r c a lv e s , p o u ltr y , and
cash*
For th e v a lu a tio n o f th e y e a r lin g s , c a lv e s , and p o u ltr y th e c a l­
c u la te d 1 9 W -'b 9 v a lu e o f th e s e were a d ju s te d b y th e a p p ro p ria te in d e x es
i n th e same way t h a t th e g ro ss r e c e i p t s f o r each ty p e o f p r ic e movement
were d eterm in ed from each e n t e r p r i s e e a r l i e r i n th e t h e s i s .
I t was assumed
t h a t th e y e a r lin g s would weigh $00 pounds by A p r il I , and t h a t th e c a l f
.cro p i n th e t h i r d y e a r would w eigh U00 pounds by O ctober I ,
No p ig s a re
in c lu d e d i n t h i s in v e n to ry f o r i f o n ly s p rin g p ig s a re r a i s e d , th e v a lu e
o f th e s e w ould be sm all on A p ril I , and i t i s presum ed t h a t p ig s would
have been s o ld by O ctober I , .
No v a lu e i s g iv e n e i t h e r to cro p s o r fe e d
on th e A p ril I in v e n to ry becau se th e farm in g o p e ra tio n s w ould be j u s t
s t a r t i n g ab o u t t h i s tim e and m ost o f th e fe e d would have b een f e d to th e
l i v e s t o c k d u rin g th e . w in te r months®
I t i s assumed t h a t th e r e i s no i n i t i a l in d e b te d n e s s .
The o n ly l i a ­
b i l i t i e s t h a t th e o p e ra to r w ould have w ould be th e lo a n s t h a t a re ex ten d ed
f o r fa m ily l i v i n g o r in v e stm e n t i n l i v e s t o c k , equipm ent, and build in g s®
The r a t i o s p re s e n te d show th e v a rio u s c o n d itio n s o f th e farm business®
The n e t r a t i o i s o b ta in e d by d iv id in g th e t o t a l a s s e ts by th e t o t a l
lia b ilitie s ®
The w orking r a t i o i s o b ta in e d by d iv id in g th e sum o f th e
' w orking and, c u r r e n t a s s e t s by th e sum o f th e in te rm e d ia te l i a b i l i t i e s ,
■such as p ro m isso ry n o te s , p lu s c u r r e n t l i a b i l i t i e s ®
The c u r r e n t r a t i o i s
o b ta in e d by d iv id in g th e c u r r e n t a s s e t s b y th e c u r r e n t . l i a b i l i t i e s .
Table XVIII. — Investment and Net Worth o f the Farm B usiness During th e Three-Year
P e r io d s. O rig in a l O rganization .
UX
Os
H
A sset
D-'$ 2 IPype Pr"ice
Movernent
19 3 0 -'3 2 Type P ric e
Movement
19li0-1it2 Type P ric e
Movement
U n it
A pr. I A pr. I A pr. I O c t.I
A pr. I A pr. I A pr. I O c t. I
Apr. I Apr. I A pr. I O ct. I
F ix ed A ssets
e
20997 20889 20781 20727
20997 20889 20781 20727
20997 20889 20781 20727
Working A sse ts
$
12299 11390 10U81 10026
12299 11390 IOliSl 10026
12299 11390 IOiiBl 10026
C u rre n t A sse ts
$
T o ta l A sse ts
& Net W orth
$
3218
5931
8150
SliiO
365Hi 38210 39L12 38893
1916
921
8#
lil2li 10lil7 18163 23360
35810 3 U 9 5 32183 31609
37li20 12696 Ii9li25 51013
25lii
Table XIX. — Investm ent, Indebtedness and Net Worth o f th e Farm B usiness During
th e Three-Year P erio d s. A lte r n a tiv e No. I .
U n it
1950-«52 Type P ric e
Movement
1 9 3 0 -'3 2 Type P ric e
Movement
i9 ao -« a2 iYpe P ric e
Movenlen t
A pr. I A pr. I A pr. I O c t.I
A pr. I A pr. I A pr. I O c t.I
A pr. I A pr. I A pr. I O c t.I
F ix e d A ssets
S
22517 22363 22209 22055
22517 22363 22209 22055
22517 22363 22209 22055
Working A ssets
I
15932 15066 ia200 13569
15932 15066 ia200 13569
15932 16066 ia2oo 13569
C u rre n t A ssets
$
T o ta l A sse ts
$
T o ta l Debts
$
Net Worth
I
312U
3750
5125
6352
ai573 a n 7 9 a i5 3 a ai9 7 6
a.291
2667
0
0
37282 38512 a i5 3 a ai976
2 5 ai
1783
1320
iia s
ai9 9 o 39212 37729 36772
a.29i
a306
6S81
8621
36699 3a.906 3 n a s 28151
3356
a ? 2i 13651 18951
ai8o5 a2i5o 50061 5a575
a i9 i
6a5
0
0
3751a a.1505 50061 5a575
Net R atio
9 .7
15. a
-
-
9 .5
9 .1
5 .7
a .3
9 .7
65.3
-
-
Working R a tio
a .a
7 .1
-
-
a .3
3 .9
2.a
1 .7
a .5
3 .0 6
-
-
C u rre n t R atio
.7
i.a
-
-
.59
.a
.2
.13
.7
7.3
-
-
Table XX. — Investm ent, Indebtedness and Net Worth o f the Farm B usiness During
th e Three-Year P erio d s. A lte r n a tiv e No. I I I .
19 $0- '5 2 Type P r ic e
Movement
U n it
1930-*32 Type P ric e
Movement
19it0-'it2 Type P ric e
Movement
A pr. I
A pr. I A pr. I O c t.I
A pr. I A pr. I A pr. I O c t.I
A pr. I A p r.I Apr. I O c t.I
F ix ed A sse ts
$
23097
22925 22753 22567
23097 22925 22753 22567
23097 22925 22753 22567
Working A ssets
$
15633
I itS ll 13989 13578
15633 I itS ll 13989 13578
15633 IitS ll 13989 13578
C u rre n t A ssets
$
2925
T o ta l A sse ts
$
U 655
T o ta l D ebts
S
5973
3216
Net Worth
I
35682
38030
Net R a tio
6 .9
Working R a tio
C u rre n t R atio
3510
5172
7150
Itl2li6 Ul211i 13295
2126
1702
1260
1068
ltll5 6 39L38 38002 37213
3202
71it3 20081 26392
11932 itit879 56823 62537
0
0
1i 1 2 1 1 4
13295
12.8
-
-
6 .9
9 .1
6 .2
i t .8
7.02
27.2
-
-
3 .1
5 .7
-
-
3 .0 2
3 .9
CU
1 .8
3 .2
13.3
-
-
.5
1.09
-
-
.it
.it
.l i t
.5
It.3
-
-
5973
1203
6171
7718
35183 35225 31826 29165
U\
.2
5973
1651
0
0
35959 it32l 8 56823 62537
Summary o f T ables
The average income f o r sa v in g s or d eb t payment i n each p e r io d fo r
each a lt e r n a t iv e as taken from T ab les IX through XI i s summarized in
Table XXI.
T able XXI.
E f f e c t s o f Three D if f e r e n t S e le c t e d P r ic e
Movements Upon th e Average Incom e.
A verage Annual Income f o r S a v in g s or Debt Payments (a )
A lt e r n a t iv e No. I l l
A lt e r n a t iv e No. I
O r ig in a l
%
$3575
$26U5
$2310
P eriod
1 9 5 0 -'5 2
1 9 3 0 -'3 2
IliU
-1 2 0 2
-3 3 3
1 9 l0 -'l2
51ai
7311
9525
(a )
Average annual income a f t e r d ed u ctin g e s tim a te d l i v i n g c o s t s .
During th e 1 9 $ 0 -'$ 2 p e r io d , th e average annual income would have been
o n ly 1 .1 3 tim es a s g r e a t in a lt e r n a t iv e No. I as in th e " o r ig in a l" o rg a n i­
z a t io n .
A lt e r n a t iv e No. I l l would have had an average income 1 . 5 } 'tim es as
g r e a t as th e " o r ig in a l" .
During th e 1 9 3 0 - 132 type p e r io d , th e average
annual income would have averaged n in e tim es g r e a te r in th e ' o r ig in a l
o r g a n iz a tio n as in A lte r n a tiv e No. I , and th r e e tim es as g r e a t as a l t e r ­
n a t iv e No. I I I .
During th e 19kO-'li2 ty p e p e r io d , a lt e r n a t iv e s I and I I I
would have averaged incom es 1 .3 and 1 .7 tim e s , r e s p e c t i v e ly , as g r e a t as
th e " o r ig in a l" p la n .
Table XXII i l l u s t r a t e s th e annual accu m u lation s o f income th a t are
a v a ila b le f o r sa v in g s or d eb t payment.
The accu m u lation s would have been
$6.
g r e a te r under a l t e r n a t i v e s I and I I I d u rin g th e 1 9 5 0 -' 52 and 191*0-'U2 type
p e rio d s th a n in th e o r i g i n a l .
D uring th e 1 9 3 0 -'3 2 type p e rio d th e accumu­
l a t i o n s would have been a d e f i c i t i n a l t e r n a t i v e s I and I I I .
T able XXII.
A ccum ulations o f Annual Income A v a ila b le f o r Savings
o r Debt Payment D uring th e Three S e le c te d P e rio d s
Under th e Three Farm O rg a n iz a tio n s , (a )
A lte r n a tiv e
No. I l l
P e rio d
O rig in a l
A lte r n a tiv e
No. I
1930
1931
1932
S 2,081*
I*, 381
7,01*0
S 1 ,8 3 7
3,1*33
7,91*6
$ 3,071*
7,312
10,721*
1930
1931
1932
% 1 ,3 3 7
1,21*2
1*33
&
$ 2,1*11
1 ,7 9 3
191*0
191*1
191*2
$ 2,887
8,911*
16,231*
$ 3 ,8 1 9
(a )
923
- 1*61
- 3 ,6 o6
11,231
23,263
-9 9 9
I l*,6l6
Il*, 363 ,
28,377
A f te r d e d u c tin g e s tim a te d fa m ily l i v i n g c o s ts from n e t cash income.
Annual l i v i n g c o s ts e s tim a te d a t $1800.
T able XXIII i l l u s t r a t e s th e accu m u latio n s o f an n u al income a f t e r pay­
m ents have been made on th e p r in c ip a l and i n t e r e s t o f th e d e b t f o r the
y e a rs 1 9 $ 0 -'5 2 and 19l*0-'l*2.
The 1 9 3 0 -'3 2 p e rio d i l l u s t r a t e s th e in d e b t­
e d n ess o f th e o p e ra to r t h a t would r e s u l t i f lo a n s a re given to m eet o p e r­
a tin g expenses and to m a in ta in fa m ily l i v i n g a t th e e s tim a te d l e v e l .
In
t h i s type o f p e r io d , a t e r r i f i c s t r a i n i s p la c e d on th e so lv e n c y o f th e
f ir m .
D uring such p e r io d s , th e fa m ily c o u ld red u ce i t s fa m ily l i v i n g
below th e e s tim a te d l e v e l i n o rd e r to m a in ta in c o n tro l o f r e s o u r c e s .
57
T able X X III.
A ccum ulations o f Annual Income A v a ila b le A fte r
Payments on Debt D uring th e Three S e le c te d
P e rio d s Under th e Three Farm O rg a n iz a tio n s .
A lt e r n a t iv e
No. I
A lte r n a tiv e
No. I l l
P erio d
O r ig in a l
1950
1951
1952
S 2,081*
I*,581
7,01*0
$
800
3,311*
0
890
1,302
1930
1931
1932
$ 1 ,5 5 7
1,21*2
1*33
$ -3 ,5 9 7
- 5,128
-8 ,6 2 1
$-l*,9l*7
-It, 61*2
-7,71*8
$
$
19k0
191a
191*2
I
$ 2,887
8,911*
16,231*
0
o
3,365
ll*,0l*7
$
0
8,21*5
22,259
I n te r p r e t a t io n o f th e B alance S h eets
G eneral c o n c lu sio n s can be drawn from th e s e b a lan c e s h e e ts b ased on
th e p e rc e n ta g e change i n n e t w o rth .
The p e r c e n t changes i n n e t w orth
im ply t h a t by a d o p tin g a d a iry -h o g e n t e r p r i s e , such as a l t e r n a t i v e s I and
I I I , i n th e farm o rg a n iz a tio n w ith th e u se o f borrow ed fu n d s, th e n e t w orth
would d e c re a se more th a n th e o r i g i n a l o r g a n iz a tio n i n a downward p r ic e
movement, such as th e 1 9 3 0 -r 32 p e r io d .
The n e t w orth changes would be
a p p ro x im a te ly two tim es as g r e a t w ith a l t e r n a t i v e No. I , and ap p ro x im a te ly
th r e e tim es as g r e a t w ith a l t e r n a t i v e No. I l l , w ith a movement s im ila r to
th e 1 9 5 0 -'5 2 p e rio d .
W ith a p r ic e movement such as 1 9 b 0 -'b 2 , th e change
i n n e t w orth o f a l t e r n a t i v e No. I over th e o r ig i n a l o rg a n iz a tio n would be
s lig h t.
But a l t e r n a t i v e No. I l l would have been about a 1 .5 tim es as
g r e a t a change i n n e t w orth as e i t h e r th e o r ig i n a l o r a l t e r n a t i v e No. I .
58.
The o r i g i n a l o rg a n iz a tio n had no in d e b te d n e s s , and. hence sh o u ld n o t p r e s e n t
a problem o f d e te rm in in g th e so lv en c y o f th e f ir m .
The p e r c e n t changes i n
:n e t w orth and changes i n w orking r a t i o s a re g iv e n i n Table XXIV.
I n t e r p r e t a t i o n o f A lte r n a tiv e No. I
The e f f e c t o f th e d i f f e r e n t ty p e s o f p r ic e movements upon th e c a p it a l
p o s itio n s h a l l be n o te d f o r a l t e r n a t i v e No. I .
The ty p e o f in d e b te d n e ss
w i l l be a s h o r t- te r m lo a n b ased on th e w orking and c u r r e n t a s s e t s .
Assume
t h a t th e le n d in g firm e v a lu a te s th e w orking and c u r r e n t a s s e ts a t o n ly h a l f
o f th e e s tim a te d v alu e g iv e n in Table XIX, and w i l l le n d to t h i s amount.
The farmer* s w orking r a t i o , as d eterm in ed by th e v a lu e s g iv e n in Table XX
would have to be a t l e a s t 2 to I to r e t a i n a c c e ss to s h o r t- te r m c r e d i t .
The w orking r a t i o s f o r th e two p e rio d s 1950-*52 and 19L 0-'L 2 would alw ays
be g r e a te r th a n 2 to 1$ h en ce, th e farm fir m would n o t fa c e a c r i t i c a l
f i n a n c i a l problem ,
bn th e o th e r hand, w ith a downward p r ic e movement such
as th e 1930-*32 ty p e , th e w orking r a t i o o f th e farm er would f a l l below 2
to I .
I f th e income i s n o t la r g e enough to cover o p e ra tin g c o s ts p lu s th e
e s tim a te d l e v e l o f fa m ily l i v i n g , th e farm er would p la c e a s t r a i n on th e ,
l i n e o f c r e d i t f o r th e firm d u rin g t h i s p e rio d .
The farm h o u seh o ld may
lo w e r i t s l e v e l o f l i v i n g and n o t s e t a s id e any re s e rv e s f o r d e p r e c ia tio n .
o f a s s e ts f o r m a in ta in in g e n t i t y o f th e fir m .
G e n e ra lly sp e a k in g , th e
h a rd s h ip s t h a t th e farm h ousehold would b e a r i n o rd e r to c o n tin u e t h i s
ty p e o f o p e ra tio n would b® dependent upon th e e x p e c ta tio n s f o r th e f u t u r e .
I n t e r p r e t a t i o n o f A lte r n a tiv e No. I l l
The e f f e c t o f d i f f e r e n t ty p e s o f p r ic e movements on t h i s a l t e r n a t i v e
o rg a n iz a tio n i s s im ila r to a l t e r n a t i v e No. I .
I f th e 2 to I w orking r a t i o
T able XXIV. — P ercen t Change in Net Worth and Changes in Working R a tio s o f th e Three Farm
O rg a n iza tio n s During th e Three S e le c t e d P e r io d s .
Changes in Working R atio
P e rio d
O rg a n iz a tio n
P e rc e n t
Change in
Net W orth
A pr. I ,
Year I
A pr. I ,
Year 2
A pr. I ,
Year 3
—
—
lt.lt
3 .1
7 .1
5 .7
-
—
O ct. I ,
Year 3
1950- ' 5 2 ty p e
p r ic e movement
O rig in a l
A lte r n a tiv e No. I
A lte r n a tiv e No. I l l
6 .5
12 .6
21.3
1930-»32 ty p e
p r ic e movement
O rig in a l
A lte r n a tiv e No. I
A lte r n a tiv e No. I l l
-1 1 .7
-2 3 .3
-1 6 .3
it.3
3 .0 2
3 .9
3 .9
2 . It
2 .5
1 .7
1 .8
19bO-*l|2 ty p e
p r ic e movement
O rig in a l
A lte r n a tiv e No. I
A lte r n a tiv e No. I l l
lit.6
lt5.8
7U.3
I t.5
3 .2
3 .0 6
'13.3
-
-
_
60
.
i s to be m a in ta in e d , fa rm e rs co u ld ad o p t a d a iry -h o g e n te r p r is e w ith th e
u se o f c r e d i t p ro v id e d th e p r ic e movement were n o t s im ila r to th e 1 9 3 0 -r 32
p e r io d .
The fir m ’ s w orking and c u r r e n t a s s e ts co u ld be as low as $12,000
p ro v id e d th e p r ic e s were to move i n a manner s im ila r to th e 19^0^*32 or
I 9 it0 - , ii2 p e r io d . . „
•
The assum ption t h a t th e le n d in g firm would le n d to th e f u l l amount
o f i t s a p p ra is e d v a lu e has been s e le c te d a r b i t r a r i l y .
I f th e le n d in g firm
were to l i m i t th e amount o f fu n d s, th e w orking r a t i o o f th e farm er would
change.
I f i t were n e c e s s a ry to o p e ra te w ith a t l e a s t a 3 to I working
r a t i o , th e a s s e ts o f th e borrow er would have to be g r e a te r i n o rd e r to
borrow th e n e c e s s a ry fu n d s.
A 3 to I w orking r a t i o would make th e borrow­
e r more v u ln e ra b le to f i n a n c i a l s t r a i n w ith a p r ic e movement s im ila r to
1 9 3 0 -'3 2 .'
61,
PART I I I .
CONCLUSIONS
The. c o n c lu sio n s from t h i s s tu d y can be drawn from th e ta b l e s g iv en in
P a rt I I .
These c o n c lu s io n s a re r e l a t e d to e f f e c t upon income i f p r ic e s
moved in a manner s im ila r to th e th r e e s e le c te d p e r io d s .
The income f ig u r e s
g iv e n a re th e incom es a v a il a b le a f t e r d e d u c tin g e s tim a te d fa m ily l i v i n g
c o s ts o f $1800 a n n u a lly from n e t cash farm incom e. . W ith a 1 9 S 0 -'$ 2 ty p e
p r ic e movement, th e average annual income (from T able XXI) i n a l t e r n a t i v e
No. I would have been $305 g r e a te r th a n t h e ' o r i g i n a l p la n .
A lte r n a tiv e
No. I l l would have produced an averag e income $1235 g r e a te r th a n th e o r i g ­
i n a l p la n .
W ith a downward p r ic e movement, such a s th e 1 9 3 0 -'3 2 p e r io d , th e
o r i g i n a l p la n would have produced an annual income o f $lW l, -while th e a v e r­
age income w ould have been a d e f i c i t i n a l t e r n a t i v e s I and I H '.
A lte rn a ­
t i v e No. I w ould have an annual income o f -$1202, w h ile a l t e r n a t i v e No. I l l
would have an annual income o f -$33 3 .
W ith a d e f i c i t av erag e income, i t
would n o t be p o s s ib le to re p a y any d e b ts t h a t may have been in c u r r e d .
The
so lv en c y p o s itio n o f th e firm m ight be endangered w ith a l a r g e o u ts ta n d in g
d e b t, such as i t . i s assumed th e farm er would have i n t h i s a n a ly s is .
W ith a movement o f p r ic e s s im ila r to th e 1 9 ^ 0 -’ i|2 p e rio d , th e average
incom es would have been h ig h e r in th e two a l t e r n a t i v e s th a n i n th e o r i g i n a l .
A lte r n a tiv e No. I produced an average income o f $1900 more th a n th e o r i g ­
i n a l , w h ile th e average, income o f a l t e r n a t i v e No. I l l was $ l|il! i g r e a te r .
A lte r n a tiv e No. I l l a ls o had a g r e a te r av erag e incomes
S lte rh a M v e No* I .
$22lU more th a n -
62.
The annual accu m u lation s o f income or th e d eb t p o s it io n o f th e opera­
to r g iv e n in T able XXHI in d ic a t e s t h a t w ith p r ic e movements s im ila r to th e
I S ^ O 152 and 191*0-'1*2 p e r io d s , th'e o p era to r w ould have been a b le to pay­
o f f th e d eb t in c u r r e d .
With a r i s i n g p r ic e l e v e l , such a s th e 19l*0-'l*2
p e r io d , th e accu m u lation o f incom es a f t e r rep a y in g th e d eb t w ould have
b een o n ly $2187 l e s s i n a lt e r n a t iv e No. I' than in th e o r i g i n a l , which had
no d eb t to rep a y .
A lt e r n a t iv e No. I l l had an accu m u lation o f income t h a t
was $6025 g r e a te r than th e o r ig in a l p la n , even a f t e r repaym ent o f th e d eb t.
But w ith a downward movement o f p r ic e s* such a s th e 1 9 3 0 -'3 2 p e r io d ,
th e r e would have been no accu m u lation s o f income i n a lt e r n a t i v e s I and
H I.
I n f a c t , lo a n s f o r o p e r a tin g c o s t s and m aintenance o f fa m ily l i v i n g
w ould have in c r e a s e d th e s i z e o f d eb t u n t i l th e e n t i t y o f th e firm would
be i n a c r i t i c a l p o s i t i o n .
The w orking r a t i o (T ab le XXV) i n a lt e r n a t i v e No. I would s t e a d i l y
d ecre a se from I*.3 on A p r il I o f th e f i r s t y e a r , to 1 . 7 on O ctober I o f th e
t h ir d y e a r .
The 1 . 7 w orking r a t io in d ic a t e s a v e r y weak in te r m e d ia te c a p i­
t a l p o s i t i o n , - I n a lt e r n a t i v e No. I l l , th e w orking r a t io w ould change from
a r e l a t i v e l y str o n g p o s it io n o f 3 .0 2 on A p r il I o f th e f i r s t y e a r , to a
weak p o s it io n o f 1 .8 on O ctober I o f th e t h ir d y e a r .
The w orking r a t io s
on A p r il I o f th e t h ir d y ea r in d ic a t e t h a t th e w orking r a t i o s o f th e s e two
a lt e r n a t i v e s are above th e 2 t o I minimum.
was a n e g a tiv e amount.
The income i n th e th ir d y ea r
Due to th e in c r e a s e in in d e b te d n e s s, th e w orking
r a t io d e c lin e d below th e 2 to I minimum.
I f a 2 to I w orking r a t io i s
n e c e s s a r y to m a in ta in e n t i t y o f th e fir m , th e s e two a lt e r n a t i v e s would
le a d th e fir m in t o in s o lv e n c y w ith a 1930.-' 32 type p r ic e movement.
The
63.
w orking r a t i o s w ith th e o th e r two p e rio d s would have in c re a s e d from th e
f i r s t y e a r , in d ic a tin g an improvement i n th e c a p it a l p o s itio n o f th e firm
.The changes i n w orking r a t i o s t h a t o c c u rre d a re a ls o r e f l e c t e d in th e
changes i n n e t w o rth . .
The changes t h a t a re r e f l e c t e d i n th e n e t w orth p o s itio n have a r e l a
tio n s h ip s im ila r to t h a t o f th e accu m u latio n s i n income and changes in
w orking r a t i o .
The changes i n n e t w o rth (from Table XXTV) show t h a t th e
o r i g i n a l o r g a n iz a tio n would n o t have as g r e a t a p o s itiv e a change i n n e t
w o rth a s a l t e r n a t i v e s I and I I I w ith a ty p e o f p r ic e movement s im ila r to
1 9 $ 0 -'3 2 o r 1 9 L 0 -'li2 .
But w ith a downward p r ic e movement, such as th e
I 9 3 0 -t 32 p e rio d , th e two a l t e r n a t i v e o rg a n iz a tio n s would have a g r e a te r
n e g a tiv e change i n n e t w o rth th a n th e o r i g i n a l farm o r g a n iz a tio n .
The
g r e a te r n e g a tiv e change i n n e t w orth i n th e s e two a l t e r n a t i v e s can be
a t t r i b u t e d to th e n e g a tiv e incomes re c e iv e d p lu s ' th e in c r e a s e s i n d e b t
needed to m a in ta in fa m ily l i v i n g and o p e ra tin g c o s ts .
The g e n e ra l c o n c lu s io n s from th e s e t a b l e s would seem to in d ic a te
t h a t th e a d o p tio n o f a d a iry -h o g e n te r p r is e w ith borrow ed c a p i t a l would ■
be eco n o m ica lly f e a s i b l e w ith an upward p r ic e movement, such as th e
191^0-' bZ p e rio d , o r a g e n e r a lly s ta b l e movement t h a t o c c u rre d i n th e
19f?0-r !?2 p e rio d .
B ut w ith a downward p r ic e movement, th e borrow ing o f
funds to e s t a b l i s h a d a iry -h o g e n te r p r is e may je o p a rd iz e th e e n t i t y o f
th e f ir m .
G eneral I m p lic a tio n s o f th e Study
The d i r e c t i o n i n which p r ic e s f o r l iv e s to c k and li v e s t o c k p ro d u c ts
w i l l move r e s t s w ith f u tu r e su p p ly made a v a ila b le , and th e demand t h a t
w i l l be e x e r te d b y changes i n p o p u la tio n growth and w ith th e g en era l l e v e l
d om estic p ro d u ctio n and incom e»
income w i l l have i s u n c e r t a in .
The e f f e c t t h a t d om estic p ro d u ctio n and
But i t appears t h a t th e eleven ' W estern
S t a t e s are l i k e l y to be a r e l a t i v e l y d w in d lin g sou rce o f su p p ly o f l i v e ­
s to c k f o r th e r e s t o f th e co u n try
d evelopm en t. I /
} even w ith
a maximum r a t e o f ir r i g a t i o n
The assum ption w i l l be more v a lid i f w e ste r n p o p u la tio n
in c r e a s e s r e l a t i v e to n a tio n a l p o p u la tio n as i t has in th e p a s t , and i f
th e r e i s no m a te r ia l d ecrea se i n consum ption o f meat per ca p ita *
For I n d iv id u a l Farmers
Farmers co n tem p la tin g -a g r a ssla n d ty p e o f farm ing sh o u ld be co n scio u s
o f th e p o s s ib le e f f e c t s t h a t th e movement o f p r ic e s may have upon h i s .
fin a n c ia l p o s itio n .
I f c a p it a l i s borrowed f o r in v estm en t i n l i v e s t o c k
and b u ild in g s , and th e p r ic e s r e c e iv e d f o r p rod u cts sh o u ld go down, th en .
th e income may n o t be la r g e enough to m eet o p e r a tin g c o s t s , fa m ily l i v i n g ,
and repayment o f th e borrowed fu n d s.
. c o n d itio n s im prove.
The firm may become in s o lv e n t , b e fo r e
I f i t i s ex p ecte d t h a t p r ic e s fo r d a iry -h o g prod u cts
w i l l improve or be g e n e r a lly s t a b l e , th en i t w ould seem t h a t th e ad op tion
o f th e s e e n t e r p r is e s w ould be h ig h ly p r o f it a b le i n r e l a t io n to th e cash,
crop o r g a n iz a tio n .
A lthough th e ty p e o f a n a ly s is p r e se n te d above may n o t be v ery v a lu ■ a b le to a farm er under th e p e c u lia r c o n d itio n s he f a c e s , i t d oes i l l t y s t r a t e one method o f approaching th e problem .
y
I/
The farmer* s own s u b j e c t iv e
See H. E. S e lb y and D. T." G r l # i t h , L iv e s to c k P ro d u ctio n in R e la tio n
t o Land Use & I r r ig a t i o n in th e E lev en W estern S t a t e s , U . S . Department
o f A g r ic u ltu r e , Bureau o f A g r ic u ltu r a l Econom ics, D iv is io n o f Land
Econom ics, B e rk eley , 1946, p« 1 5 , F igu re 10«
62.
p r o b a b i l i t y w ith r e s p e c t to f u tu r e e v e n ts may be s u b s t i t u t e d f o r th o se
p re s e n te d h e re .
For C r e d it A gencies
A g r ic u ltu r a l c r e d i t a g e n c ie s co u ld be o f s e r v ic e i n h e lp in g th o se
fa rm e rs who ap p ear to be i n a re a s o n a b le sound f i n a n c i a l c o n d itio n to
a d o p t a program f o r th e e s ta b lis h m e n t o f a g ra s s la n d ty p e o f o r g a n iz a tio n .
The e x te n s io n o f c r e d i t would have to be c o n d itio n e d by th e e x p e c ta tio n s
w ith r e s p e c t to c o s ts and r e t u r n s .
A sound a p p r a is a l system m ust be e s ta b
l i s h e d t h a t re c o g n iz e s th e tr u e v a lu e o f a s s e t s .
Repayments m ust be
g e a re d to th e income p a t t e r n o f a p a r t i c u l a r farm .
T h is may mean t h a t
th e. o u ts ta n d in g lo a n b a la n c e w i l l be allo w ed to r i s e d u rin g p e rio d s when
c o s ts exceed r e t u r n s .
T h is may be dependent upon th e s iz e o f th e o u t­
s ta n d in g b a la n c e and th e s e c u r i t y o f th e b o rro w e r.
Commercial banks a re
r e s t r i c t e d by m onetary and f i s c a l p o l i c i e s t h a t make i t im p o ssib le f o r
them to g r a n t c r e d i t f o r an ex ten d ed p e rio d o f tim e ..
P ro d u c tio n C re d it
A s s o c ia tio n s may be i n a b e t t e r p o s i t i o n to a s s i s t farm ers*
L im ita tio n s o f th e Study
The Budget Method
.
..
..
However u s e f u l th e b u d g et ty p e o f a n a ly s is may be i n d e te rm in in g th e
ty p e o f o r g a n iz a tio n t h a t r e tu r n s th e g r e a t e s t n e t farm incom e, i t has
c e r t a i n w eaknesses w hich sh o u ld be re c o g n iz e d .
Budgets a re somewhat un­
r e l i a b l e when a p p lie d to f u tu r e r e s u l t s due to th e u n c e r ta in t y o f p r ic e s
and y i e l d s , a lth o u g h y ie ld s on i r r i g a t e d farm s may be more c e r t a i n th a n
f o r d ry lanid a r e a s .
A llow ance may be made b y ta k in g v a r i a b i l i t y in to
66.
a cco u n t when th e b u d g et i s s e t u p e
V a ria tio n may be ta k e n in to acco u n t e i t h e r by th e c o e f f i c i e n t o f v a r i ­
a tio n ab o u t th e mean o r by th e c o e f f i c i e n t o f v a r i a t i o n ab o u t tr e n d s .
The
u se o f th e c o e f f i c i e n t o f v a r i a t i o n ab o u t th e mean i s l i m i t e d because i t
i s u s u a ll y b a se d on a long, tim e averag e i n w hich th e p a ra m e te rs o f th e d i s ­
t r i b u t i o n may have an e x tre m e ly wide ran g e r e l a t e d c o n s i s t e n t l y to " tim e " .
The c o e f f i c i e n t o f v a r i a t i o n about th e mean would th e n be q u ite l a r g e , and
w ould n o t ta k e in to c o n s id e r a tio n th e tr e n d s t h a t may have o c c u rre d over
tim e .
The c o e f f i c i e n t o f v a r i a t i o n a b o u t a tr e n d would be more a c c u ra te to
-
-
a p p ly in .b u d g e t a n a ly s is i f th e tr e n d c o n tin u e s o v er f u tu r e tim e .
Both
m easures may g iv e a com parison o f v a r i a b i l i t y , b u t th e y t e l l n o th in g o f
th e sequence o f e v e n ts .
The a n a ly s is p re s e n te d h e re a p p lie s o n ly to th e " ty p ic a l" farm s, and
th e r e f o r e does n o t n e c e s s a r i l y c o in c id e w ith any one farm .
T h is makes th e
a c c u ra c y and adequacy o f th e a n a ly s is d i r e c t l y dependent upon th e av erag es
p re s e n te d h e r e .
The c o n s tr u c tio n o f a b u d g et a ls o r e q u ir e s c o n sid e ra b le
tim e i n assem bling and com piling d a ta .
T h is m ig h t n o t be so d i f f i c u l t a
ta s k f o r an e x p e rie n c e d farm er who may have more com plete knowledge on th e
p ro d u c tio n r e l a t i o n s h i p s s p e c i f i c to h i s farm th a n t h a t g iv e n by county
a v e ra g e s.
The u s e o f o n ly a th r e e y e a r tr e n d i n th e movement o f p r ic e s i s
l i m i t e d i n d e te rm in in g w hat th e f i n a n c i a l re q u ire m e n ts may be and th e e f f
e f f e c t upon n e t w orth a f t e r th e a d o p tio n o f a li v e s t o c k o p e r a tio n . • A th r e e
y e a r p e rio d would be i n d i c a t i v e as to what an e n tre p re n e u r c o u ld e x p e c t h is
f i n a n c i a l p o s i t i o n w i l l b e , b u t f o r a more com plete, stu d y , i t would be d e-
67.
s i r a b l e to fo llo w a r e o r g a n iz a tio n f o r a much lo n g e r p e rio d o f tim e .
A
f u r t h e r re s e a rc h e f f o r t to determ in e th e e f f e c t o f income v a r i a t i o n upon
n e t w prth and e q u ity p o s itio n ov er a 10 o r 1 ^ -y e a r p e rio d would g iv e a
b e t t e r p ic tu r e o f th e f i n a n c i a l f e a s i b i l i t y o f a d o p tin g d a iry -h o g e n te r ­
p r i s e s in to th e farm u n i t .
A s tu d y o f t h i s ty p e would in v o lv e r e a d ju s tin g
th e in v e n to ry o f a s s e ts f o r each y e a r a s p r ic e changes o c c u rre d .
I f th is
ty p e o f s tu d y w ere c a r r ie d o u t, th e e f f e c t o f in d e b te d n e ss and changes i n
v a lu e o f a s s e t s upon th e e q u ity p o s itio n o f th e o p e ra to r w ould g iv e a more
r e a l i s t i c approach th a n le a v in g a s s e ts a t a c o n s ta n t v a lu e .
•>
APPENDI X
69.
APPENDIX A
The Theory o f th e Firm
The th e o ry o f th e fir m i s an a n a l y t i c a l to o l o f economic th e o ry t h a t
s e t s f o r t h th e n e c e s s a ry c o n d itio n s f o r th e m ost e f f i c i e n t u s e o f re s o u rc e s
o r th e m ax im izatio n o f p r o f i t s from a g iv e n q u a n tity o f r e s o u r c e s , s t a t e o f
te c h n o lo g y , and p r ic e s f o r p ro d u c ts and f a c t o r s .
As a to o l to so lv e econ­
omic p ro b lem s, th e u se o f th e co n cep ts and p r i n c i p l e s o f th e th e o ry o f th e
firm t o a b u s in e s s e n t e r p r i s e as a guide f o r th e e f f i c i e n t com bination o f
re s o u rc e s i s in v a lu a b le .
The f i e l d o f farm management p a r a l l e l s th e th e o ry o f th e fir m to th e
e x te n t t h a t b o th a re . concerned w ith e f f i c i e n c y o f re s o u rc e u s e .
To work
w ith in th e framework as s e t up by th e th e o ry o f th e fir m , th e b a s ic a s - •
sum ption i s made t h a t th e e n t r e p r e n e u r . s t r i v e s . f o r m ax im izatio n o f p r o f i t s
from a v a ila b le r e s o u r c e s .
As a p p a re n t ip. th e problem s i t u a t i o n o f t h i s
s tu d y , th e c o n d itio n o f s u r v iv a l o f th e fir m may be in c o n s i s t e n t w ith maxi­
m izing p r o f i t s i n th e ^s h o r t- r u n " , b u t i t sh o u ld be c o n s is te n t w ith maxi­
m iz a tio n o f p r o f i t s i n th e " lo n g -ru n " .
To o b ta in an Optimum a l l o c a t i o n o f r e s o u r c e s under p e r f e c t co m p e titio n ,
two b a s ic c o n d itio n s must be met:
(I)
th e p r o p o r tio n a l com bination o f i n ­
p u ts must be th e ch ea p est com bination o f th e s e in p u ts t h a t y i e l d a g iv e n
q u a n tity o f p ro d u ct, and (2 )
th e m argin al c o s t o f p ro d u ctio n must be
eq u a led to m argin al rev en u e; m argin al revenue i s eq u al to th e p r ic e o f th e
p ro d u ct.
D e c isio n s r e l a t i v e to re s o u rc e com bination w ith in e n t e r p r i s e s and
re s o u rc e a l l o c a t i o n among e n t e r p r i s e s r e q u ir e knowledge a b o u t th e te c h n ic a l
70
r e l a t i o n s h i p betw een in p u ts and o u tp u ts o r th e p ro d u c tio n f u n c tio n .
The
p ro d u c tio n f u n c tio n i s a q u a l i t a t i v e r e l a t i o n s h i p as w e ll as a q u a n tita tiv e
re la tio n s h ip .
C e rta in k in d s o f in p u ts m ust be combined to o b ta in a c e r t a i n
k in d o f p ro d u c t.
T his i s a q u a l i t a t i v e r e l a t i o n s h i p .
A p ro d u c t can be
produced i n a m u ltitu d e o f w ays, depending on th e p a r t i c u l a r com bination
o f re s o u rc e s and te c h n iq u e s employed.
A q u a n t i t a t i v e r e l a t i o n s h i p im p lie s
q u a n t i t i e s o f in p u ts v a r ie d to o b ta in v a ry in g q u a n t i t i e s o f p ro d u c t.
U nder th e s im p le s t case o f com bining one v a r ia b le in p u t w ith a group
o f f ix e d in p u ts , and p ro d u cin g o n ly one p ro d u c t, th e e q u ilib riu m l / p o s i­
t i o n o f a fir m i s re a c h e d when th e v a lu e o f th e m a rg in a l p ro d u c t i s eq u al
to .th e p r ic e o f th e f a c t o r .
Value o f th e m arg in al p h y s ic a l p ro d u c t i s
o b ta in e d by m u ltip ly in g th e m arg in al p h y s ic a l p ro d u c t b y th e p r ic e o f th e
p ro d u c t.
When th e v alu e o f th e m a rg in a l p h y s ic a l p ro d u c t i s eq u al to th e
p r ic e o f th e f a c t o r , th e n , g iv e n o n ly one v a r ia b le f a c t o r , m a rg in a l c o s t
i s e q u al to m a rg in a l re v e n u e . .Hence th e maximum n e t r e t u r n s a re o b ta in e d
when th e added revenue i s e q u al to th e added c o s t .
A nother c o n d itio n n e c e s s a ry f o r a s ta b l e e q u ilib riu m p o s itio n i s t h a t
m a rg in a l '■physical p ro d u c t m ust be d e c re a s in g o r t h a t m a rg in a l c o s t m ust be
• in c r e a s in g p e r u n i t o f ( added) o u tp u t.
T h is c o n d itio n i s c o n s is te n t w ith
th e law o f d im in is h in g r e t u r n s w hich i s a b a s ic e m p iric a l g e n e r a liz a tio n
d e riv e d from any p ro d u c tio n p ro c e s s .
V
The law o f dinp.nish in g r e tu r n s s t a t e s
E q u ilib riu m p o s itio n o f a p ro d u c tiv e s e r v ic e i s d e fin e d i n th e a l t e r ­
n a tiv e c o s t th e o r y . I f a p ro d u c tiv e s e r v ic e i s u se d s im u lta n e o u s ly ^ in
two o r more i n d u s t r i e s , th e v a lu e s o f th e m arg in al p ro d u c ts o f a u n i t
o f s e r v ic e i n each f i e l d m ust be e q u a l.
u,
t h a t as e q u al in c re m en ts o f a v a r ia b le in p u t a re combined w ith a fix e d
q u a n tity o f o th e r in p u ts , th e m a rg in a l p h y s ic a l p ro d u c t o f th e v a r ia b le
in p u t m ust e v e n tu a lly d e c lin e , l /
A t h i r d c o n d itio n which m ust be m et f o r
th e e q u ilib riu m p o s itio n o f th e fir m i s t h a t av erag e p ro d u c t m ust be dim­
in is h in g and t h a t av erag e c o s t m ust be a minimum o r in c r e a s in g . 2 /
T his s e t s ' f o r t h th e n e c e s s a ry c o n d itio n s f o r th e e q u ilib riu m p o s itio n
w ith o n ly one v a r ia b le in p u t i n th e p ro d u c tio n o f one p ro d u c t.
But i f th e
th e o ry i s r e l a t e d to a farm o rg a n iz a tio n w hich u s e s more th a n one v a r ia b le
in p u t and may produce more th a n one p ro d u c t, c e r t a i n c o n d itio n s a re n e c e s ­
s a r y to a r r iv e a t a minimum c o s t f o r any l e v e l o f o u tp u t and m ax im izatio n
of p ro fits ,
• Given th e p r ic e o f f a c t o r s and p ro d u c ts u n d er a g iv en s t a t e o f te c h ­
n o logy, th e minimum c o s t re s o u rc e com b in atio n can be d eterm in ed f o r any,
l e v e l o f o u tp u t.
The p ro d u c tio n p ro c e s s in v o lv in g two v a r ia b le s can be-
lo o k e d upon g r a p h ic a lly a s a th r e e d im en sio n al f ig u r e where th e q u a n t i t i e s
o f v a r ia b le s a re m easured on th e % and Y a x e s, and th e q u a n tity o b ta in a b le
from v a rio u s com bination o f in p u ts a re shown as p ro d u c t c o n to u rs which
m easure d is ta n c e on a t h i r d (Z) a x is . 3 /
Where f a c t o r s o f p ro d u c tio n sub­
s t i t u t e f o r each o th e r a t an in c r e a s in g r a t e , i n th e p ro d u c tio n o f a s in g le
I/
2/
3/
See John A. H opkins, E lem ents o f Farm Management, P r e n tic e - H a ll, I n c . ,
New Y ork, T h ird E d itio n , 19h9> C hapter 1 0 ,
<
J b R. H ick s, Value and C a p ita l, O xford: C larendon P r e s s , 1916, p . S i.
See K enneth E. Bould in g . Economic A n a ly s is , (R ev ised E d i tio n ) , H arper
and B r o s ., P u b lis h e r s , New Y ork, 1915, p. 679, F ig u re 88.
72.
p ro d u c t th e c o s t i s a minimum when th e r a t i o o f th e f a c t o r p r ic e s i s i n ­
v e r s e ly e q u al to th e m arg in al r a t e o f s u b s t i t u t i o n o f th e f a c t o r s .
For
th e m in im iz a tio n o f c o s ts from a g iv e n s e t o f re s o u rc e s , th e p ro d u c tiv e
s e r v ic e s m ust be combined as to e q u a te th e r a t i o s o f t h e i r m arg in al p h y s i­
c a l p ro d u c ts in v e r s e ly w ith th e p r ic e r a t i o s o f th e f a c t o r s .
F o r f u r t h e r a n a ly s is , where th e ch o ice in v o lv e s th e a llo c a tio n o f
g iven re s o u rc e s betw een com peting p ro d u c ts , th e y should be so a rra n g e d as
to o b ta in th e g r e a t e s t m a rg in a l v a lu e p ro d u c t from th e v a r ia b le in p u ts .
The c h o ic e •c r i t e r i o n i n t h i s case i s p ro v id e d by th e p r ic e r a t i o s o f t h e .
p ro d u c ts .
Maximum p r o f i t s a re a t t a i n e d , w ith c o s ts o r re s o u rc e s f ix e d in
q u a n tity , when th e m a rg in a l r a t e o f p ro d u c t s u b s t i t u t i o n i s in v e r s e ly e q u al
to th e p ro d u c t p r ic e r a t i o .
U nder th e s e c o n d itio n s th e v a lu e m arg in al p ro d ­
u c t o f v a r ia b le in p u ts from th e com peting e n t e r p r i s e s a re e q u a l.
I f th is
e q u a li ty does n o t h o ld , th e n i t would be p o s s ib le to in c r e a s e n e t income
by p ro d u cin g one more u n i t o f (s a y ) p ro d u c t X, and one l e s s o f (sa y ) prod­
u c t I ( o r v ic e v e r s a ) .
I n o rd e r to be a t an a b s o lu te optimum, th e " n e t
m a rg in a l v a lu e p ro d u c t" , w hich i s th e d if f e r e n c e betw een th e v a lu e o f th e
m a rg in a l p ro d u c t o f a f a c t o r and th e c o s t o f a f a c t o r , sh o u ld be e q u al to
z ero f o r a l l f a c t o r s , f o r h e re an a d d itio n a l d o l l a r in v e s te d i n any a l t e r ­
n a tiv e p ro d u c t w ould y ie ld a d o l l a r i n r e t u r n .
The a n a ly s is r e p r e s e n ts th e s h o r t- r u n s i t u a t i o n i n which o n ly th e
v a r ia b le c o s ts m ust be m et.
I n th e lo n g -r u n a l l c o s ts a re v a r ia b le .
A d a p ta tio n o f th e Theory o f th e Firm
A g r ic u ltu r a l eco n o m ists have d iv e r g e n t o p in io n s as to ( I ) th e shape
and (2 ) th e s t a b i l i t y o f f u n c t io n a l r e la t io n s h ip s o f th e th e o r y o f th e firm
•'V
73.
i n th e case o f an a g r i c u l t u r a l firm .
The farm fir m i s th e u n i t o f in q u ir y
h e r e , b u t i f th e a g g re g a te O utput f u n c tio n o f th e fir m i s a co n ce p tu a l
m in ia tu re o f th e a g g re g a te o u tp u t f u n c tio n o f th e in d u s tr y , th e n i t i s
p o s s ib le to c a r r y on th e a n a ly s is w ith th e a g g re g a te in d u s tr y .
For i n ­
s ta n c e , i t i s o f te n s t a t e d t h a t a g g re g a te o u tp u t i s u n re sp o n siv e to p r ic e
ch anges, w hich te n d s to make th e a g r i c u l t u r a l su p p ly f u n c tio n have an e l a s ­
t i c i t y n e a r ly e q u al to z e ro .
The a u th o rs l / o f t h i s t h e s i s s t a t e in gen­
e r a l term s t h a t when a g g re g a te demand i s s tr o n g , income e x p e c ta tio n s a re
f a v o r a b le , which makes i t p o s s ib le f o r th e fir m to in v e s t in a pool o f
u n u sed , im proved te c h n o lo g y .
T h is new te c h n o lo g ic a l advance c r e a te s a
new p ro d u c tio n f u n c tio n w ith a s h i f t to th e r i g h t f o r a g g re g a te su p p ly o f
th e in d u s tr y .
But once th e te c h n o lo g ic a l advance h as s p e n t i t s e l f , ag g re­
g a te o u tp u t s e t t l e s down a t a new (h ig h e r) l e v e l which i s (o r te n d s to be)
a c o n s ta n t w ith r e s p e c t to w ide' v a r i a t i o n i n farm p ro d u c t p r ic e s due p a r t l y
to th e f a c t t h a t many fa rm e rs a re o p e ra tin g in th e a re a where in n o v a tio n s
make new p ro d u c tio n p r a c t i c a l , i r r e s p e c t i v e o f th e l e v e l o f farm p r ic e s .
T his a n a ly s is im p lie s t h a t a g r ic u ltu r e i s a c o m p a ra tiv e ly " w a te r - tig h t
com partm ent".w ith no movement o f re s o u rc e s betw een a g r ic u ltu r e and nona g r i c u l t u r a l s e c to r s o f th e economy d u rin g th e s h o r t- r u n p e r io d .
P r o fe s s o r S c h u ltz ta k e s an o p p o s ite v ie w p o in t to t h i s h y p o th e s is ,
a
He s t a t e s t h a t a g r i c u l t u r e i s a h ig h ly c o m p e titiv e in d u s tr y which makes
I/
W illa rd W. Cochrane and W illiam B utz, "O utput R esponses o f Farm
F irm s", J o u rn a l o f Farm Economics, XXXIIi (N o v ., 1951)* p . Ul5, and
W alter W. W ilcox, " E ff e c ts o f Farm P r ic e Changes on E f f ic ie n c y i n
F arm ing", J o u rp a l o f Farm Economics, XXXIlI, (F e b ., 1951)* p . 5 5 .
i t n e c e s s a ry f o r fa rm e rs to adopt new te c h n iq u e s o r f i n d th em selv es a t a
d isa d v a n ta g e w ith th o se who do so; th e r e f o r e , new te c h n iq u e s o f p ro d u c tio n
a re n o t s to r e d up in "p o o ls" to be u s e d a t some l a t e r d a te , b u t th e y a re
b e in g ad o p ted c o n s ta n tly , l /
The q u a n tity o f in p u ts com m itted i n th e a g g re g ate to farm p ro d u c tio n
from one y e a r to th e n e x t i s q u ite s t a b l e , 2 /
T h is would seem to in d ic a te
t h a t in a d d itio n to th e a d o p tio n o f new te c h n iq u e s , which in c r e a s e s p ro ­
d u c tio n , th e a g g re g a te o f in p u ts rem ain s f a i r l y c o n s ta n t due to th e f l e x i ­
b i l i t y o f f a c t o r p r ic e s and th e s u b s t i t u t i o n o f cheaper in p u ts f o r d e a r e r
in p u ts .
Viewed h i s t o r i c a l l y , a g r i c u l t u r e i s n o t th e w a te r tig h t com part­
ment commonly presum ed.
Farm in p u ts have become in c r e a s in g ly dependent
upon th e non-farm s e c to r o f th e economy.
Farm p ro d u c tio n expenses as a
p e r c e n t o f g ro ss income have r i s e n from U8 p e r c e n t in 1910 to 6 l p e r
c e n t i n 1950. 3 /
B oth o f th e s e c o n f l i c t i n g h y p o th e se s may have some v a l i d i t y .
The
n a tu re o f p h y s ic a l p ro d u c tio n f u n c tio n s a t a p a r t i c u l a r tim e i s n o t a
fu n c tio n o f p r ic e a t t h i s moment, b u t was d eterm in ed by an e a r l i e r a tte m p t
to p r e d i c t f u tu r e p r i c e s .
For t h i s re a s o n , th e c o s ts t h a t were v a r ia b le
i n th e i n i t i a l p la n n in g s ta g e , up to th e p r e s e n t, have become f ix e d c o s ts
and have no b e a rin g upon f u tu r e v a r ia b le c o s ts .
]/
T. W. S c h u ltz , Economic O rg a n iz a tio n o f A g r ic u ltu r e , McGraw-Hill Book
C o ., New York, 1953*. P« 112.
' ' ' ^
2/
I b i d . , p . IOli, Table 7 -2 .
3/
I b i d . , p . IOU, Table 7*0.
75..
A lthough th e in p u ts i n a g r ic u ltu r e a re q u ite s t a b l e , fa rm e rs do r e -
-
s t r i c t in p u ts i n p e rio d s when th e farm p r ic e s i t u a t i o n becomes ad v erse
r e l a t i v e , to o th e r p r i c e s .
D uring two a d v erse p e r io d s , 1920 to 192li and
1931 to 193L, n e a r ly a l l in p u ts were r e s t r i c t e d from th e p re v io u s y e a r , l /
D uring a d v erse p r ic e p e rio d s fa rm e rs te n d to s u b s t i t u t e fa m ily la b o r f o r ^
o th e r ty p e s o f in p u ts w herever p o s s ib le .
D uring a d e p re s s io n , th e su p p ly
curve f o r a g r i c u l t u r a l la b o r i s h ig h ly i n e l a s t i c b ecau se la b o r e r s do n o t
have th e o p p o rtu n ity f o r employment e lse w h e re .
S ince th e a l t e r n a t i v e r e ­
tu r n i n some o th e r in d u s tr y may be z e ro , th e farm la b o r e r w i l l work f o r
o n ly "b o ard and keep" f o r h im s e lf .
E x p e c ta tio n s a re im p o rtan t, i n e x p la in ­
in g why fa rm e rs m a in ta in p ro d u c tio n , ■ P ro d u c tio n and income can be s u b s t i ­
t u t e d f o r f u tu r e r e tu r n s th ro u g h d is in v e s tm e n t o f th e farm .
S o il d e p le tin g
cro p s may be s u b s t i t u t e d f o r g ra s s e s and legum es, which have a lo n g e r p ro ­
d u c tio n p e r io d .
I r r a t i o n a l farm in g p r a c t i c e s may be j u s t i f i e d by th e
p e r ilo u s c a p i t a l p o s i t i o n o f many fa rm e rs and th e d e s ir e to m a in ta in s u r­
v iv a l o f th e firm to r e a l i z e th e l e v e l o f f u tu r e incom e.
I r r a t i o n a l p ro ­
d u c tio n e x i s t s i f re s o u rc e s can be a rra n g e d i n a manner w hich would allow
th e same p ro d u c t from few er r e s o u r c e s .
The p re se n c e o f h ig h f ix e d c o s ts i n a g r ic u ltu r e w ould mean t h a t farm s
m ight c o n tin u e p ro d u c tio n even i f p ro d u c t p r ic e s d e c lin e d .
The f ix e d
c o s ts i n th e c o s t s t r u c t u r e o f a firm have no e f f e c t upon th e m arg in al
c o s t c u rv e .
The c l a s s i f i c a t i o n of, la n d , fa m ily la b o r , and d e p r e c ia tio n
o f b u ild in g s and equipm ent--due to w e ath e r and o b so lesc en c e r a t h e r than
l/
I b i d . , p . 212-3, Table 1 3 -2 , it.
• 76.
u se as f ix e d c o sts ,w o u ld s p e c if y o n ly t h a t p ro d u c tio n be m a in ta in e d a t some
l e v e l o f s e l l i n g p r ic e above average v a r ia b le c o s t.
The f i x i t y o f la n d and
l a b o r f a c t o r s may n o t n e c e s s a r ily r e p r e s e n t f ix e d c o s ts to any in d iv id u a l
fa rm e r, b u t when th e s e re s o u rc e s f a l l in p r o p o r tio n to p ro d u c t p r ic e , th e
o p p o rtu n ity r e tu r n may be - as g r e a t by m a in ta in in g p ro d u c tio n .
A nother f a c t o r c o n tr ib u tin g to th e m aintenance o f p ro d u c tio n i s th e
i n t e r r e l a t i o n s h i p betw een firm and h o u seh o ld .
Many farm f a m ilie s s u f f e r
s e v e re h a rd s h ip s d u rin g m ajor p r ic e r e c e s s io n s to m a in ta in c o n tro l o f r e ­
s o u rc e s .
To av o id d e s tr u c ti o n o f th e home, th e blow to p r e s t i g e , and many
other* p s y c h o lo g ic a l l o s s e s , farm f a m ilie s lo w ered t h e i r s ta n d a rd o f l i v i n g
to extrem e l e v e l s to av o id th e consequences m entioned above.
P ro d u c tio n i s m a in ta in e d a ls o because many o f th e f a c t o r s u sed i n p ro ­
d u c tio n a re as f l e x i b l e p r i c e —
w ise as a re p ro d u c t p r i c e s .
An im p o rta n t
p o r tio n o f a g r i c u l t u r a l o u tp u t i s n o t o n ly a p rim ary p ro d u c t b u t a lso
becomes a re s o u rc e u s e d in a g r i c u l t u r e .
When fe e d cro p s d e c lin e f o r th e
s e l l i n g fa rm e r, th e y a ls o drop f o r th e fa rm e r who employs them as a r e ­
so u rce i n li v e s t o c k p ro d u c tio n .
I n t e r - y e a r a d ju stm en ts a re made betw een
com peting e n t e r p r i s e s to r e f l e c t f a c to r - p r o d u c t p r ic e r a t i o s .
These a re some o f th e more im p o rta n t f a c t o r s c o n tr ib u tin g to c o n s ta n t
a g r i c u l t u r a l p ro d u c tio n .
Complementary and su p p lem en tary e n te r p r is e s on
fa m ily farm s a ls o c o n tr ib u te to m aintenance o f p ro d u c tio n a t any l e v e l o f
p ric e s .
Y et th e s e e n t e r p r i s e s cann o t be s a id to r e f l e c t i r r a t i o n a l i t y .
The fo re g o in g d is c u s s io n has endeavored to e x p la in how th e e q u i l i ­
brium p o s itio n o f th e f ir m i s c o n s ta n tly changing due to f a c t o r s m entioned
above.
The f u n c tio n s o f th e v a r ia b le s a re changing c o n s ta n tly and*may
tak e uncommon sh a p e s.
T h is d o e s n 't in v a lid a t e th e o r y o f th e fir m .
It
m erely p o s i t s t h a t f i x e d c o s t s dom inate in a g r ic u ltu r e and v a r ia b le c o s t s
are o f such sm a ll s ig n if ic a n c e t h a t changes in p r ic e s and c o s t s are o f
lit t le e ffe c t.
T his may b e ' e m p ir ic a lly tr u e and n o t in v a lid a t e th eo ry o f
th e fir m , fo r th e l a t t e r c o n ta in s w ith in i t p r in c ip le s o f management where
" a ll" c o s t s are f i x e d .
These f a c t o r s s u g g e st th e need fo r a d a p ta tio n fo r
g r e a te r r e le v a n c e .
.
.
R isk and U n c e r ta in ty in A g r ic u ltu r a l P rod u ction
The p ro d u ctio n o f farm p ro d u cts r e q u ir e s tim e .
The farm er must commit
r e s o u r c e s a t tim e (t-^) fo r a prod u ct fo rth co m in g a t a fu tu r e d a te ( t ^ ) .
He
must th en t r y to e s tim a te fu tu r e p r ic e s f o r ( l ) p ro d u cts, and (2 ) r e s o u r c e s
n o t y e t f i x e d i n h is o p e r a tio n s .
P lan s must be made where u n c e r t a in t y i s p r e s e n t,
Farmers are unable
to eq u ate m argin al v a lu e p rod u cts w ith m argin al c o s t o f r e s o u r c e s becau se
o f ; ( l ) la c k o f knowledge o f r e le v a n t in p u t-o u tp u t r e l a t i o n s h i p s ; (2 ) un­
c e r t a in t y o f fu tu r e p r ic e s f o r p ro d u cts and p ro d u ctiv e s e r v ic e s ; and (3)
c a p it a l l i m it a t io n s .- l /
The l a s t rea so n comes from th e f i r s t tw o.
R isk d e s c r ib e s an e x p e c ta tio n s u b je c t to a p r o b a b ilit y d is t r ib u t io n ,
th e param eters o f w hich are s t a t i s t i c a l l y m easu rab le.
Hence i t i s in s u r ­
a b le , e x t e r n a l ly or i n t e r n a l l y 'and th u s a p a r t o f th e firm'] s c o s t s tr u c tu r e
U n c e r ta in ty in c lu d e s t h a t range o f e v e n ts in which th e en trep ren eu r
d oes n o t have s in g le - v a lu e d e x p e c t a t io n s , and where, th e param eters o f th e
l/
E a rl 0 . Heady, Economics o f A g r ic u ltu r a l P ro d u c tio n and R esource U se,
P r e n tic e - H a ll, I n c . , New Y ork, 1952, p . 11 5 . .
78.
p r o b a b i l i t y d i s t r i b u t i o n can n o t be p r e d ic te d e m p ir ic a lly .
The p r o b a b i l i t y
o f an e v e n t becomes m erely th e " su b je c tiv e ." p r e d ic tio n on th e p a r t o f th e
fa rm e r. I /
Farm ers v is u a l iz e f u tu r e p o s s ib le p r ic e s and y ie ld s i n an o r­
d in a l r a t h e r th a n i n a c a r d in a l s e n s e .
They may v is u a l iz e a m ost p ro b a b le
e x p e c te d e v e n t, b u t th e deg ree o f u n c e r ta in t y may n o t be th e same f o r any
two in d iv id u a ls even i f th e p ro b a b le p r ic e s a re e q u a l.
One in d iv id u a l may
a t t a c h some form o f g r e a te r s u b je c tiv e p r o b a b i l i t y to a p r ic e o r y i e l d th a n
■a n o th e r in d iv id u a l.
The. ty p e s o f u n c e r t a i n t y f a c in g farm p ro d u c tio n p la n n in g a re p r ic e
u n c e r t a i n t y , y i e l d u n c e r ta in t y , and te c h n o lo g ic a l u n c e r ta in t y .
Heady o u t­
l i n e s s e v e r a l s u b je c tiv e p r o b a b i l i t y d is tr ib u tio n s , t h a t an e n tre p re n e u r may
have co n cern in g y i e l d and p r i c e . 2 /
D iffe re n c e s i n u n c e r ta in t y o r l o s s
p ro s p e c ts can be p ic tu r e d i h a s e t o f p r o b a b i l i t y d i s t r i b u t i o n s such as
th o se in d ic a te d i n F ig u re I ; th e e x p ec te d p r ic e (o r y ie ld ) i s p l o t t e d
alo n g th e h o r iz o n ta l a x is w h ile th e " s u b je c tiv e p r o b a b ility " (th e ex p ected
v a lu e s o f p r ic e s o r y ie ld s i n th e f u tu r e ) i s p l o t t e d alo n g th e v e r t i c a l
a x is .
•
F ig u re IA r e p r e s e n ts a norm al d i s t r i b u t i o n o f e x p e c te d y i e l d o r p r ic e
and th e v a rio u s p r o b a b i l i t i e s t h a t a fa rm e r a tta c h e s to v a lu e s b e in g more
o r l e s s th a n th e mean.
F ig u re IB r e p r e s e n ts a skewed d i s t r i b u t i o n i n
w hich th e fa rm e r a n t i c i p a t e s t h a t p r ic e s w i l l be h ig h e r th a n th e mode (X2) .
I n IC th e g r e a t e r p r o b a b i l i t y i s i n th e d i r e c t i o n o f lo w er p r ic e s ( y i e l d s ) .
I/
I b i d . , p . IUfBo
2/
I b i d . , p . IfBO.
79.
The "U -shaped" d i s t r i b u t i o n o f ID s u g g e sts t h a t th e r e i s an eq u al p o s s i­
b i l i t y o f e i t h e r low (x^) o r h ig h (x^) p r ic e s ( y i e l d s ) .
s im ila r c o n n o ta tio n s to IB , w h ile IF i s s im ila r to 1C.
The IE f ig u r e has
The changes o f
p r ic e s ( y ie ld s ) b ein g h ig h e r o r low er a re th e same i n IG and 1H, g r e a te r
p r o b a b i l i t y i s a tta c h e d to p r ic e s ( y ie ld s ) b e in g n e a r th e modal v alu e (xg)
f o r 1G.
1.0
1.0
D
C
B
A
1.0
1.0
=1 = 2*3
E xpected P r ic e o r Y ie ld
F ig u re I .
R e la tio n o f s u b je c tiv e p r o b a b i l i t y (fre q u e n c y )
d i s t r i b u t i o n s and u n c e r ta in ty .
80.
The d is c u s s io n above has been i n term s o f u n c e r ta in t y o f p r ic e o r
y i e l d e x p e c ta tio n s .
S im ila r p r o p e r tie s o f th e p r o b a b i l i t y d i s t r i b u t i o n
may c h a r a c te r iz e th e income o f th e e n t e r p r i s e .
The amount o f c a p ita l and
th e income in v o lv e d a re a ls o im p o rta n t in d e te rm in in g a p e r s o n 's s e le c tio n
o f chance outcomes over more c e r t a i n r e t u r n s .
F ig u re 2 su g g e s ts h y p o th eses
o f th e manner i n which people w ith d i f f e r e n t incomes m ight r e a c t to a given
s e t t i n g o f u n c e r ta in t y .
T his may be e x p re sse d i n term s o f in d if f e r e n c e
c u rv e s.
H
0)
/O O
O
C
- P 0)
CO C
OO
U n c e r ta in ty
F ig u re 2 .
R e la tio n o f income to u n c e r ta in ty .
The m ost p ro b a b le income i s m easured on th e OY a x is and th e range
( u n c e r ta in ty ) o f income i s m easured on th e OX a x is .
The in d if f e r e n c e
cu rves r e l a t e th e l e v e l o f u t i l i t y to e x p e c te d income and th e u n c e r ta in t y
o f incom e.
I n t h i s f i g u r e , where th e range o f incomes i s 00, th e m ost
p ro b a b le p r ic e i s 0B.
T his p u ts th e in d iv id u a l on in d if f e r e n c e curve I I .
81.
OP i s w hat Lange c a l l s th e " e f f e c ti v e incom e", l /
The d if f e r e n c e between
OP and OB (PB) i s th e u n c e r ta in t y premium which th e in d iv id u a l a tta c h e s to
t h i s range o f income.
Management m ust fo rm u la te some k in d o f p la n in t h i s ty p e o f an e n v ir ­
onment.
Inasm uch as th e f u tu r e f o r e c a s ts a re th e s u b je c tiv e v a lu a tio n o f
th e fa rm e r, th e "economic h o riz o n " o f th e fa rm e r i s l i m i t e d by h is e q u ity
r a t i o s and h is ris k -rb e a rin g a t t r i b u t e s .
Economic h o riz o n i s th e tim e p e rio d
o v er which in d iv id u a ls p la n some form o f economic a c t i v i t y .
v a ry w ith th e ty p e o f e n t e r p r i s e s e l e c t e d .
Time p la n s .
I n t h i s p a r t i c u l a r s tu d y th e
tim e span o f a liv e s to c k e n te r p r is e would be lo n g e r th a n t h a t o f a crop
e n t e r p r i s e on th e same farm .
In v e stm e n ts m ade‘i n l i v e s t o c k , p a s tu r e s and
•b u ild in g s depend upon th e f u tu r e r e tu r n s t h a t can be e x p e c te d from th e s e
re so u rc e s.
The im pact o f u n c e r ta in t y Upon th e u se o f re s o u rc e s w i l l be
d is c u s s e d i n th e fo llo w in g s e c tio n .
C a p ita l'U s e
C r e d it, b o th u se d and u nused, i s a means whereby th e e n tre p re n e u r may
o b ta in a g r e a te r q u a n tity o f re s o u rc e s to combine w ith th e management f a c ­
to r.
Unused c r e d i t may be c l a s s i f i e d as a form o f l i q u i d i t y to ta k e advan­
ta g e o f (p ro te c t" a g a in s t) fa v o ra b le (u n fa v o ra b le ) o p p o r tu n itie s t h a t may
a r i s e i n th e f u t u r e .
The r e s u l t o f u s e d c r e d i t i s c o n d itio n a l ow nership
on th e p a r t o f th e p u rc h a s e r, s u b je c t to th e d e b t c o n tr a c t h e ld by th e
le n d e r .
I / ' O scar Lange, P ric e F l e x i b i l i t y and Employment, The P r in c i p ia P r e s s ,
T n c ., B loom ington, I n d ia n a , 19hh,. p . 31.
"
82?
A g r ic u ltu r a l c r e d i t i s u s u a ll y c l a s s i f i e d in to ( l ) s h o r t terin c r e d i t ,
o r (2) lo n g term c r e d i t .
The e f f e c t i v e le n g th o f lo a n i s o f te n ob scu red
where lo a n s a re renew ed.
The renew al o f lo a n s has given r i s e to a t h i r d
c la s s o f c r e d i t known as " in te rm e d ia te " c r e d i t .
T his ty p e h as developed
f o r th e p u rp o se s o f p ro v id in g f o r payment i n two o r th r e e sea so n s i f
w a rra n te d by th e income and s e c u r ity o f th e b o rro w e r. l /
S h o rt term lo a n s
a re u s u a ll y made f o r p ro d u c tio n o f cro p s o r li v e s t o c k se c u re d by a c h a t t e l
m ortgage upon c ro p s , l i v e s t o c k , m achinery, and o th e r r e l a t i v e l y s h o r t­
liv e d a s s e ts .
Long term c r e d i t i s b a se d on r e a l e s t a t e , and i s u s u a ll y
se c u re d by a farm m ortgage.
These lo a n s may ru n from th r e e to t h i r t y o r
fo r ty y e ars.
The e x te n s io n o f b u s in e s s c r e d i t 2 / b y le n d e r s i s d ependent upon c e r­
t a i n a t t r i b u t e s o f th e borrow er as w e ll as th e economic p o s itio n o f th e
le n d e r s .
The p o s i t i o n o f le n d e r s i s d eterm in ed by th e g e n e ra l economic
en v iro n m en t, which may d eterm in e t h e i r l i q u i d i t y p r e f e r e n c e , e x i s t i n g
m onetary and f i s c a l p o l i c i e s , to g e th e r w ith b an k in g a t t i t u d e s and p o l i c i e s .
Given th e economic environm ent o f th e le n d e r s , g e n e ra l c o n s id e ra tio n s o f
th e p o s itio n o f th e borrow er m ust be ta k e n i n t o a cc o u n t.
th e s e as 1
l/
Baker
lis ts
( l ) th e a p p lic a n ts n e t w orth p o s i t i o n ; (2-j s o c ia l c h a r a c t e r i s t i c s
W illiam G. M urray, A g r ic u ltu r a l F in a n c e , (Ames: Iowa S ta te C ollege
P r e s s , 1 9 ^ 9 ), pp» l i | —
1 8 , f o r c l a s s i f i c a t i o n o f c re d it*
2 / A d i s t i n c t i o n betw een b u s in e s s c r e d i t and w e lfa re c r e d i t i s g iv en by
■ C. B . . B aker, op,, c i t , , Chap. I and I I .
3/
I b i d , , p . 203.
83.
o f th e a p p lic a n t and h is fa m ily j and (3 ) l i q u i d i t y o f th e a s s e t s tr u c tu r e
o f th e fir m , which d e te rm in e s (a ) repaym ent p la n s t h a t a re p o s s ib le , and
(b) le n g th o f lo a n n e c e s s a ry .
A w eakness i n any one o f th e s e f a c t o r s may
prove f a t a l to a p ro s p e c tiv e lo a n , i r r e s p e c t i v e o f th e s tr e n g th o f th e
o th e r f a c t o r s . ■
Assume f o r th e p r e s e n t t h a t th e f i r s t two f a c to r s a re g iv e n and i n a
fa v o ra b le p o s i t i o n .
The t h i r d f a c t o r i s dependent upon s e v e ra l f a c t o r s .
A ty p ic a l le n d e r i s concerned w ith v a rio u s m easures d e riv a b le from a
b a la n c e s h e e t, b e g in n in g w ith th e n e t w o rth .
A change i n n e t w orth i s
d e term in e d by s u b tr a c tin g a l l expenses (in c lu d in g l i v i n g ) from th e g ro ss
farm incom e, p lu s o r minus changes i n in v e n to ry .
Changes i n n e t w orth
r e f l e c t e a rn in g (and " s a v in g " ) c a p a c ity , b u t repaym ent c a p a c ity i s depend-,
e n t upon th e n e t cash farm incom e.
T his i s th e d if f e r e n c e betw een th e
cash income and a l l cash e x p en se s.
Cash expenses i n t h i s d e f i n i t i o n i s
m eant to in c lu d e o n ly th o se re s o u rc e s t h a t a re h ire d o r b o u g h t, e x c lu d in g
any payment f o r fa m ily la b o r o r o p e ra to rs management.
But to. d eterm ine
repaym ent c a p a c ity th e n e t cash farm income m ust be r e f in e d s t i l l f u r t h e r
by d e d u c tin g fa m ily l i v i n g e x p e n se s.
T his i s a d i f f i c u l t f ig u r e to a r r iv e
a t, f o r fa m ily l i v i n g expenses v a ry w ith d i f f e r e n t farm f a m ilie s , th e l e v e l
o f income, and o th e r f a c t o r s .
W hatever l e v e l i s m a in ta in e d i s p e c u lia r
to each in d iv id u a l fa m ily , b u t some s ta n d a rd sh o u ld be e s ta b lis h e d to
m a in ta in th e h e a lth and m orale o f th e farm h o u seh o ld .
Repayment c a p a c ity can be e x p re ss e d as a fu n c tio n o f th e s e f a c t o r s :
( l ) q u a n tity o f p ro d u c t p roduced, (2 ) p r ic e s re c e iv e d f o r th e s e p ro d u c ts ,
(3) q u a n tity o f re s o u rc e s u sed i n th e p ro d u c tio n p ro c e s s , (L) p r ic e s p a id
8L
f o r r e s o u r c e s , e x c lu d in g a r e t u r n to fa m ily la b o r and o p e ra to rs la b o r and
management, (5 ) th e l e v e l o f l i v i n g , and ( 6 ) p r ic e s p a id f o r " in p u ts " em­
p lo y e d in "producing" t h a t l e v e l o f l i v i n g . . In f u n c tio n a l te rm s , repaym ent
c a p a c ity would be d eterm in ed by s u b tr a c tin g th e sum o f p ro d u c ts , ( 3 ) (It) and
( 5 ) ( 6 ) from th e p ro d u c t, ( l ) ( 2 ) . l /
No f u n c tio n a l r e l a t i o n s h i p w i l l be d ev elo p ed h ere f o r th e s e f a c t o r s ,
b u t i t can be re a s o n a b ly assumed t h a t l i v i n g c o s ts f l u c t u a t e i n th e same
d i r e c t i o n b u t more m o d e ra te ly th a n do f l u c t u a t i o n s i n n e t farm incom e. 2/
C a p ita l Use and U n c e rta in ty
A g r ic u ltu r a l econom ists have i m p l i c i t l y assumed t h a t th e u se o f more
c r e d i t i n . a g r i c u l t u r e would r e p r e s e n t an improvement i n re s o u rc e combina­
t i o n and e n te r p r is e com bination in th e farm firm in th e sen se t h a t s c a le
o f o p e ra tio n s co u ld be expanded, and c a p i t a l in p u ts co u ld be s u b s t i t u t e d
f o r la b o r . 3/
F arm ers’ re a s o n s f o r n o t borrow ing more c a p i t a l a re l i m i t e d by u n c e r­
t a i n t y c o n s id e r a tio n s .
E q u ity l i m i t a t i o n s f a l l in to t h i s c a te g o ry because
th e d e c lin e i n ow ners' a s s e t s i n r e l a t i o n to l i a b i l i t i e s c au se s a d d itio n a l
borrow ing to in c r e a s e th e f i n a n c i a l v u l n e r a b i l i t y o f th e fir m a t an i n ­
c re a s in g r a t e .
T his p r i n c i p l e has been term ed b y K a le c k i, " th e p r in c ip le
l/
I b i d . , p . li|3 o
2/
I b i d . , Chap. V, f o r f u n c tio n a l r e l a t i o n s h i p s .
3/
See D a r r e llF . F ienup, R esource P r o d u c tiv ity on Montana Dry-Dand Crop
Farm s, M ontana S ta te C o llege E xperim ent S ta tio n , Mimeo C ir c u la r 66,
Ju n e, 1952, pp. !47-U9 .
82.
o f in c r e a s in g r i s k " , l /
T h is p r i n c i p l e s u g g e s ts t h a t as a fir m in c r e a s e s
i t s u s e o f borrow ed c a p i t a l , th e chance o f l o s s o f i t s own c a p i t a l i n ­
c re a se s.
A h y p o th e tic a l a r ith m e tic example may be d ev elo p ed to i l l u s t r a t e
th e p r i n c i p l e .
-Suppose t h a t th e t o t a l in v e stm e n t i n a fir m i s $ 1 0 ,0 0 0 .
Xn th e f i r s t case c o n s id e re d , th e owner has in v e s te d $8 ,0 0 0 and borrow ed
th e rem ain in g $ 2 ,0 0 0 . . X f th e outcome i s a l o s s o f 10 p e r c e n t to th e firm
($ 1 ,0 0 0 ) j th e owner s u f f e r s a l o s s o f 12% p e r c e n t
I n th e second
c a s e , th e owner has in v e s te d $2,000 o f h is own fu n d s and borrow ed th e r e ­
m aining $ 2 ,0 0 0 .
A l o s s o f 10 p e r c e n t to th e fir m would r e s u l t in a 20
p e r c e n t l o s s to th e owner
Xn th e t h i r d . a l t e r n a t i v e c o n sid e re d ,
th e owner has in v e s te d $1,000 and borrow ed th e rem ain in g $ 9 ,0 0 0 .
A lo s s
o f 10 p e r c e n t to th e firm would r e s u l t i n a 100 p e r c e n t l o s s to th e
—
e
a
-
An optimum i n borrow ing to expand th e s iz e o f firm i s found where th e
e x p e c te d (m a rg in a l) p r o f i t i s j u s t e q u a l’ to th e e x p ec te d (m a rg in a l) " lo s s "
from added r i s k .
I n K a le c k i1s a n a ly s is , t h i s p o in t i s re a c h e d when th e
m a rg in a l v a lu e p ro d u c t o f c a p i t a l e q u a ls th e i n t e r e s t r a t e ( a c o n sta n t)
p lu s m a rg in a l r i s k (a n in c r e a s in g f u n c tio n o f s iz e o f in v e s tm e n t).
T his
p r i n c i p l e i s i l l u s t r a t e d i n F ig u re 3 .
The p r iv a te c a p i t a l o f b e g in n in g fa rm e rs o r th o se a lre a d y in b u s in e s s
d i f f e r s g r e a t l y , b u t th e e q u i t y - r i s k p r i n c i p l e a p p lie s to a l l fa rm e rs .
A
b e g in n e r w ith $ii,000 c a p i t a l can n o t expand to th e c a p i t a l b ase o f th e b e ■ g in n e r w ith $1 2 ,0 0 0 , due to th e in c r e a s in g r i s k p r i n c i p l e .
l/
M. K a le c k i, op. c l t . , pp. 92-106.
86.
In v estm en t
F ig u re 3.
E q u ilib riu m i n s iz e o f firm .
i = i n t e r e s t r a t e ( c o n s ta n t)
r = ra te of r is k
W hile th e p r in c ip le o f in c r e a s in g r i s k e x p la in s l i m i t s i n th e u se o f
a g r i c u l t u r a l c a p i t a l a t one p o in t i n tim e , sw ings i n th e b u s in e s s cy cle
a ls o a f f e c t th e v a lu e o f re s o u rc e s upon which th e e q u ity i s d ep en d en t.
A
f a l l in v alu e o f a s s e t s has th e same e f f e c t , i n term s o f th e e q u ity p r i n ­
c i p l e , as an in c r e a s e i n th e amount o f fu n d s borrowed a t a giv en p r ic e
le v e l.
R isk A version
The " p r in c ip le o f in c r e a s in g r i s k " i s r e f l e c t e d i n two phenomena
a s s o c ia te d w ith u n c e r ta in t y .
One, r i s k a v e r s io n , i s th e s i t u a t i o n in
which l i m i t a t i o n s a re imposed i n t e r n a l l y (w ith in th e firm ) to re s o u rc e
u se which r e q u ir e s a re d u c tio n in th e p e r c e n t o f e q u ity .
Farm ers may
r e f u s e to borrow funds in th e q u a n t i t i e s to e q u ate m arg in al c o s t to mar­
g in a l r e tu r n s because o f th e u n c e r ta in t y su rro u n d in g th e r e s u l t s o f f u tu r e
y ie ld s and p r i c e s .
A nother c a te g o ry can be c l a s s i f i e d as f a c t o r l i m i t a t i o n s
97.
such as i n a b i l i t y to r e n t la n d , la c k of l im it e d l a b o r , and r e s t r i c t i o n o f
o p e ra to r* s age o r h e a lth a s a l i m i t a t i o n i n th e management f a c t o r , l /
C a p ita l R a tio n in g
The o th e r phenomenon, c a p i t a l r a t i o n i n g , i s th e s i t u a t i o n i n which
l i m i t a t i o n s a re imposed e x t e r n a l l y b ecau se o f th e u n c e r ta in t y o f f u tu r e
income o f th e b o rro w er, w hich may cause th e e q u ity p o s itio n o f th e borrow ­
in g fir m to be i n an u n fa v o ra b le p o s itio n i n r e l a t i o n to th e amount o f funds
borrow ed.
For th e s e re a s o n s , lo a n s i n a g r ic u ltu r e a re ex ten d ed on an i n ­
s t i t u t i o n a l b a s is re v o lv in g around v a lu e o f s e c u r i t y r a t h e r th a n around
c a p i t a l p r o d u c tiv ity .
R ules o f thumb which a re u sed s t a t e t h a t th e farm er
m ust have a s s e t s t h a t p ro v id e an e q u ity o f li0-50 p e r c e n t o f h is t o t a l
c a p i t a l , dependent upon th e ty p e o f s e c u r i t y g iv e n .
The a s s e ts a re u s u a ll y
v a lu e d by some ,*normal*' c o n c e p t, r a t h e r th a n th e c u r r e n t v a lu e .
I/
E a rl Heady and E. R. Swanson, "R esource P r o d u c tiv ity i n Iowa Farm ing",
A g r ic u ltu r a l E xperim ent S ta tio n R esearch B u l le tin 388, IoWa S ta te
C o lle g e , Ames, Iowa, June 1952, pp. 77Q -I.
88
APPENDIX B
Gross R e c e ip ts o f A lt e r n a t iv e No. I .
I t was n e c e s s a r y to f o llo w through th e budget procedure i n t h i s
a lt e r n a t i v e in o rd er t o d eterm ine th e e x a c t amount th a t each e n t e r p r is e
c o n tr ib u te d t o th e g r o ss farm incom e.
I t was assumed th a t th e crop i n ­
come in t h i s a lt e r n a t i v e was from a w heat e n t e r p r is e .
A p p lic a tio n o f th e
same in p u t-o u tp u t r e la t io n s h ip g iv e n i n th e o r i g in a l li v e s t o c k budget to
th e li v e s t o c k budget in t h i s a lt e r n a t i v e gave a g r o ss income t h a t was
$11 l98 l e s s th an th e amount g iv e n in th e p rev io u s stu d y .
To c o r r e c t t h is
d if f e r e n c e , ad ju stm en ts were made by ta k in g th e p ercen ta g e th a t each en­
t e r p r i s e c o n tr ib u te d towards th e g r o s s income from l i v e s t o c k tim e s th e
$ lli9 8 .
The g r o s s r e c e ip t s from each p ro d u ct are as f o ll o w s t
Wheat - - - - - - - - -
-
$215
B u t t e r f a t - - - - - - - ----------- $1*598
W o f # 1 1 9 6 --------------- -------------5 9 9
$5197
B eef from Cows - - - - - ------------ $ 9 0 0
o f # 1 1 9 6 ------------ -------------117
$1017
Y ea rlin g s - - - - - - - ----------- $ 3 7 0 8
3 2 .3 2 o f $ 1 1 * 9 8 ----------- ----------- 1*81*
$1*192
Sows - - - - - - - - - - ----------- $1*86
I*.2 3 2 O f # 1 1 * 9 8 -----------
$550
TM
P i g s -------------------------------- -------- $ 1 7 9 1
1 5 . 6 2 o f $ 1 1 * 9 8 ----------- ----------- 231*
#2025
89
APPENDIX C
G ross R e c e ip ts o f A lte r n a tiv e No. I l l
I t was a ls o n e c e s s a ry to d e term in e th e amount t h a t each e n te r p r is e
c o n tr ib u te d to th e g ro s s farm income in t h i s a l t e r n a t i v e .
t h a t th e cro p income was from a s u g a r b e e t e n t e r p r i s e .
I t was assumed
A p p lic a tio n o f
th e same in p u t- o u tp u t r e l a t i o n s h i p giv en i n th e o r i g i n a l liv e s to c k b u d g e t
to th e liv e s to c k b u d g et i n t h i s a l t e r n a t i v e gave a g ro ss income t h a t was
$601 l e s s th a n th e amount g iv e n i n th e p re v io u s s tu d y .
To c o r r e c t t h i s
d i f f e r e n c e , a d ju stm e n ts were made by ta k in g th e p e rc e n ta g e t h a t each
e n te r p r is e c o n tr ib u te d tow ards th e g ro ss income from liv e s to c k tim es th e
$601.
The g ro ss r e c e i p t s from each p ro d u c t a re as fo llo w s t
Sugar B eets - - - - - - -
• $297k
B u t t e r f a t - - - - - - - - ------- $U282
2 7 .IU^ o f $601 -------------- -----------,1 6 3
$W 5
o mi
_=r m
& 1
Sows - - - - - - - - - - - ■ ------- $972
10.61* o f $ 6 0 1 ------------- ------------- _kk
$1016
P i g s ............................................. ■ --------$3678
210
3 k .9* o f $601 ................... -------
$3888
I
$3$78
I
Y e a rlin g s - - - - - - - - ------- $3Wi9
129
21.h% o f $601 ................... -------
I
$87$
I
I
I
B eef from Cows - - - - - $.77* o f $ 6 0 1 -----------------
90
APPENDIX D
In d ex es Used to A d ju s t C osts
C ost Item
Index Item
1 9 5 0 -'5 2
1 9 3 0 -'3 2 &
P e rio d (b)
19UO-'U2 P e rio d s (a )
Seed
F e rtiliz e r
C o n tra c t Labor
F u e l, o i l , g re a s e & r e p a ir s
H a rv e stin g & H auling
Seed
F e rtiliz e r
Wage R ates
Motor S u p p lie s
M otor V e c h ic le s )ave
Farm M achinery )
Seed
Farm Chem icals
Wages
Motor S u p p lie s
M otor V e c h ic le s )
Farm M achinery )a v e *
V e te rin a ry
Mash
M achinery R e p a irs
H ired Labor
Taxes
Farm S u p p lie s
Feed
Farm M achinery
Wage R ates
Commodities,
I n t e r e s t , Taxes
& Wage R ates
Farm S u p p lie s
Feed
Farm M achinery
Wages
Taxes
In su ra n c e
B u ild in g R ep airs
d itto
B u ild in g and
Fencing M a te ria ls
Farm M achinery
Taxes
B u ild in g M a te ria ls
H a rv e stin g
Farm M achinery
(a ) The Farm C ost S i t u a t i o n , U nited S ta te s D epartm ent o f A g r ic u ltu r e ,
B ureau o f A g r ic u ltu r a l Economics, W ashington D. C ., M arch, 1952, p . 2.
(b ) Indexes o f P r ic e s P a id by Montana Farm ers and R an ch ers, 1935 to 195I j
Montana S ta te C o lleg e A g r ic u ltu r a l E xperim ent S ta tio n , Bozeman, Montana,
i n c o o p e ra tio n w ith Bureau o f A g r ic u ltu r a l Economics, U .S .D .A ., O ffice
o f Hie A g r ic u ltu r a l S t a t i s t i c i a n , H elen a, Montana, 1952, p . 39»
Appendix Table I . - Budget Summary o f R e c e ip ts.
E n terp rise
1950-' 52 ty p e p r ic e
Movement
2
T ~
3
O rig in a l Organization,
1 9 3 0 -'3 2 ty p e p r ic e
Movement
2
I
1940- *42 ty p e p r ic e
Movement
I
2
3
3rops
S . B eets
Wheat
Hay
S628L
7U0
88
$6$21
782
HO
$1726
798
94
$5993
581
74
$4921
384
59
$4411
350
47
$6267
872
67
$8356
1036
82
$9013
1304
114
L iv e sto ck
B u tte r fa t
Cows
Y ea rlin g s
Sows
P ig s
$1238
293
1093
lli6
U79
$1421
337
1328
150
494
$1494
336
1251
142
467
$1065
240
893
154
505
$766
168
625
102
335
$532
126
469
60
198
$1674
1194
135
444
$2046
387
1440
222
729
$2418
471
1752
308
1010
2U5
321
P o u ltry
Eggs
Meat
nh
307
180
286
178
246
170
180
144
161
123
256
184
327
206
.4 1 2
252
Home Consumed
U62
534
520
4 l6
294
215
523
667
830
$12292
$10337
$7978
$6692
$15498
$17884
Gross Farm
Income
$11247
$12184
$11937
Appendix Table I I .
Budget Summary o f R e c e ip ts-A lte r n a tiv e No. I
I 936-132 ty p e p r ic e
Movement
I
2
3
19UO-, l*2 ty p e p r ic e
Movement
2
I
3
E n te r p r is e
1950-' 52 ty p e p r ic e
Movement
2
I
3
Crops
Wheat
$215
$226
$230
$168
$111
$101
$252
$299
$376
$1196
992
Lio5
U95
1823
$5160
1210
1987
510
1878
$51*23
1139
1*698
1*83
1776
$3867
811*
33 5U
523
1922
$2780
570
23L8
31*7
1276
$1933
1*27
1761
203
753
$6080
1088
W*85
1*59
1691
$71*32
1312
51*08
753
2771*
$8783
1597
6581
iol*5
381*7
P o u ltry
Eggs
Meat
2U5
175
308
180
287
178
21*6
170
180
11*1*
161
123
256
181*
327
206
1*12
252
Home Consumed
L62
53b
520
1*16
29k
215
523
667
830
$13008
$11*993
$H*73li
$111*80
$8050
$5679
$11*020
$19178
$23723
L iv esto c k
B u tte r f a t
Cows
Y e a rlin g s
Sows
P igs
Gross Farm
Income
Appendix Table I I I . - Budget Summary o f R e c e ip ts.
E n te r p r ise
1 9 $ 0 - ' 52 t y p e p r i c e
Movement
2
I
~T~
A lte r n a tiv e No. I l l
1 9 5 0 -'3 2 ty p e p r ic e
Movement
2
~T~
1 9 4 0 - ' U2 t y p e p r i c e
Hd v em en t
2
~T~
3
C rop s
S . B e e ts
$3131
$3219
$3351
$2986
S2U52
$2198
$3123
$U l6U
$UU90
L iv e s to c k
B u tte r fa t
Cows
Y e a r li n g s
Sows
P ig s
S38LL
8%
3$0lt
932
3500
S U U ii
io U i
U256
961
3605
$U637
980
U oio
909
3 U ll
$3307
700
2862
96U
3690
$2378
U90
200U
6U0
2UU9
$165U
368
1503
378
1UU6
$5200
$6356
936
3828
8U8
32U6
1129
U615
1392
5326
$7512
13 7U
5617
1930
7387
P o u ltr y
E ggs
M eat
$ 2 li5
175
$308
180
$287
178
$2U6
170
$180
IUU
$161
123
$256
18 U
$327
20 6
$U12
252
Home Consumed
$162
$53U
$520
$U16
$29U
$215
$523
$667
$830 •
$166U 6
S185U5
$18283
$ l5 3 U l
$11031
$80U6 $ l8 lU U
$2U 182
G r o ss Farm
Incom e
$2980U
Appendix Table IV .- Budget Summary o f Expenses.
E n terp rise
D ir e c t Crop Exp.
Sugar b e e ts
Wheat
Oats
B arley
Hay
P astu re
T o ta l D ir e c t Exp6
D ir e c t L stk . Exp.
C a ttle
Hogs
P o u ltr y
T o ta l D ir e c t Exp6
1 9 5 0 - ' 5 2 ty p e p r ic e
Movement
2
Jl
3
$362$
$3881i
182
190
91
95
88
91
68
98
$L152
$221
IiUi
188
$553
I n d ir e c t E xpenses
Mach. D epr. &
r e p a ir s
$1330
H ired Labor
ii09
T otal I n d ir e c t Exp, $ 1 7 3 9
fix e d Expenses
Taxes
B u ild , d ep r. &
r e p a ir s
In su ran ce
Water Charge
T otal F i x e d E xp 6
T otal E x p e n s e s
68
98
$LIi26
$2#
163
19ii
PT?
$1381
U96
1 9 3 0 - '3 2 t y p e p r i c e
Movement
I
3
z
I
$Ii08 ii
196
9h
98
70
98
SUbliO
$3U50
171
70
85
6U
95
$3935
$26$
$210
132
170
PT?
161
223
PH9
$1363
O rig in a l O rganization
l9 U 0 -'U 2 ty p e p r ic e
Movement
I
2
3
$3576
178
73
$3 8 U3
177
72
88
68
95
P3C 3
$UU99
78
5U
77
$3519
$2725
132
53
68
U6
80
PT oC
$173
95
127
$165
87
101
$231
1U3
201
P tF
$253
216
P?9
$29U
18 6
25 9
P39
$1263
233
$1U 96
$1283
U25
$1682
$1283
311
$159U
P T oB -
$1287
U96
$1783
$1311
6U6
$1957
$1287
395
$ 3093
155
62
P m
89
69
95
$ l|08 d
160
208
85
102
81
IOU
$5079
$1880
U57
$1820
$397
$li3li
SU06
$3U2
$291
$255
$371
$393
$U 5l
60
157
30$
$919
65
165
305
$969
61
162
305
52
152
305
bh
1U5
305
39
IU l
305
56
155
305
16 5
305
p m
PFT
ITBF
PCo
per
59
159
305
$916
PB?
$7363
$7887
$80U3
$6980
$6293
$5693
$7250
$7671
$876U
68
Appendix Table V .- Budget Summary o f Expenses.
1 9 5 0 - ' 5 2 ty p e p r ic e
1 9 3 0 -•3 2 ty p e p r ic e
I
2
1 9 L 0 - *U2 ty p e p r ic e
Movement
, Movement
D rgan ization
A lte r n a tiv e s I and I I I
Movement
3
I
2
3
$U71
3599
li72$
$L 21
UU38
$372
2k8l
k l7 1
2
3
$U88
U0U2
UBkl
$520
$608
Uk21
5035
5195
5k38
“ T"
A lte r n a tiv e No. I
Crops ( d ir e c t )
L iv e sto c k ( d ir e c t )
I n d ir e c t & F ix ed
TOTAL
*#6
3887
19#
$529
5137
$5L5
1562
53
$9351
$9617
$10121
$8755
$7636
$702k
$9371
$9976
$112kl
$2133
3310
6329
$2286
3663
6558
$2103
3 88k
67&L
$2033
3065
6032
$1818
236k
5665
$ 1603
2113
532L
$2107
3kk2
6179
$22 k 3
3765
6U27
$262k
kk23
69k3
$11772
$12507
$13071
$11130
$9817
$90 Uo
$11728
$12U 35
$13990
h302
2777
A lte r n a tiv e No. I H
Crops ( d ir e c t )
L iv e sto c k ( d ir e c t )
I n d ir e c t & F ix ed
TOTAL
96.
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' r Hl)/!
Itl:!;;
1 '/Jiv
' ' V,
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