Farm Management

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Farm Management
Chapter 12
Whole-Farm Planning
© Mcgraw-Hill Companies, 2008
Chapter Outline
•
•
•
•
•
What Is a Whole-Farm Plan?
The Planning Procedure
Example of Whole-Farm Planning
Linear Programming
Other Issues
© Mcgraw-Hill Companies, 2008
Chapter Objectives
1. Show how whole-farm planning differs from
the planning of individual enterprises
2. Learn the steps and procedures to follow in
developing a whole-farm plan
3. Understand the uses for a whole-farm plan
and budget
4. Compare the assumptions used for shortrun and long-run budgeting
5. Introduce linear programming as a tool for
whole-farm planning
© Mcgraw-Hill Companies, 2008
What Is a Whole-Farm Plan?
A whole-farm plan is an outline or
summary of the type and volume of
production to be carried out on the
entire farm and the resources needed
to do it. When the expected costs and
returns for each part of the plan are
organized into a detailed projection,
the result is a whole-farm budget.
© Mcgraw-Hill Companies, 2008
The Planning Procedure
• Review goals and specify objectives
• Inventory resources
• Identify enterprises and technical
coefficients
• Estimate the gross margin per unit
• Choose the enterprise combination
• Prepare a whole-farm budget
© Mcgraw-Hill Companies, 2008
Resources
• Land: total number of acres, types of land,
fertility levels, climate, potential pests, tenure
arrangements and leases, etc.
• Buildings: number, type, condition
• Labor: quantity and quality
• Machinery: number, size, and capacity
• Capital: short-run and long-run availability
• Management: age, experience, and past
performance
• Other resources: markets, quotas,
specialized inputs
© Mcgraw-Hill Companies, 2008
Technical Coefficients
The technical coefficients for an enterprise
indicate how much of a resource is
required to produce one unit of the
enterprise. Technical coefficients are
important in determining the maximum
possible size of enterprises and the final
enterprise combination.
© Mcgraw-Hill Companies, 2008
Estimating Gross Margin
Enterprise budgets, discussed in detail
in Chapter 10, are important tools for
farm planning. Enterprise budgets
provide estimates of gross margin, or
returns above variable costs.
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Choosing the Enterprise Combination
Managers want to find the combination
of enterprises that will provide the
highest amount of profit through the
best use of the farm’s limited resources.
Linear Programming is a mathematical
technique that can be used to find the
optimal combination of enterprises.
© Mcgraw-Hill Companies, 2008
Example of Whole-Farm Planning
The following example will illustrate
the process of whole-farm planning.
The objective of the manager is to
choose the combination of crop and
livestock enterprises that will maximize
total gross margin.
© Mcgraw-Hill Companies, 2008
Table 12-1
Resource Inventory for Example Farm
Resource
Amount and comments
Class A cropland
Class B cropland
Pasture
Buildings
Labor
Capital
Machinery
Management
Other limitations
400 acres (not over 50% in cotton production)
200 acres
600 acres
Only hay shed and cattle shed are available
2,400 hours available annually
Adequate for any farm plan
Adequate for any potential crop plan, but all harvesting will be custom hired
Manager appears capable and has experience with crops and beef cattle
Any hay produced must be fed on farm, not sold
© Mcgraw-Hill Companies, 2008
Table 12-2
Potential Enterprises and
Resource Requirements
Class A Cropland
Class B Cropland
Quantity
Resource
Available
Cotton
Milo
Wheat
Milo
Wheat
Livestock (per head)
Beef
Stocker
cows
steers
Class A cropland (acres)
400
1
1
1
—
—
—
—
Class B cropland (acres)
200
—
—
—
1
1
0.5
—
Pasture (acres)
600
—
—
—
—
—
6
3
2,400
4
3
2.5
3
2.5
6
1
250
100
80
80
65
470
550
Labor (hours)
Operating capital ($)
© Mcgraw-Hill Companies, 2008
Table 12-3
Estimating Gross Margin
Class A Cropland
Cotton
(acre)
500 lb.
0.80
400
250
150
Milo
(acre)
80 cwt.
2.50
200
100
100
Class B Cropland
Wheat
(acre)
52 bu.
3.75
195
80
115
Milo
(acre)
66 cwt.
2.50
165
80
85
Wheat
(acre)
36 bu.
3.75
135
65
70
© Mcgraw-Hill Companies, 2008
Livestock
Beef
cows
(head)
—
—
675
470
205
Stocker
steers
(head)
—
—
620
550
70
Enterprise Combination for the Example
The procedure for choosing the
enterprise combination will be discussed
shortly. The results of the process are
that the manager will choose to produce
200 acres of cotton and 200 acres of
wheat on Class A land, 150 acres of milo
on Class B land, and 100 head of beef
cows. The beef cows require 50 acres of
Class B land.
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Figure 12-2
Constructing the whole-farm budget
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Table 12-4
Example of a Whole-Farm Budget
Plan 1
Gross income
Cotton-A
Milo-A
Wheat-A
Milo-B
Wheat-B
Beef cows
Stocker steers
Total gross income
Variable costs
Cotton-A
Milo-A
Wheat-A
Milo-B
Wheat-B
Beef cows
Stocker steers
Plan 2
$/Unit
Units
Total
$400
200
195
165
135
675
620
200
0
200
150
0
100
0
$80,000
0
39,000
24,750
0
67,500
0
Units
350
0
350
200
0
0
0
$211,250
$250
100
80
80
65
470
550
Total variable costs
Total gross margin
Other income
Other expenses
Property taxes
Insurance
Interest on debt
Hired labor
Depreciation
Cash rent
Miscellaneous
200
0
200
150
0
100
0
$50,000
0
16000
12000
0
47000
0
Total other expenses
$140,000
0
68,250
33,000
0
0
0
Units
200
0
200
100
0
200
0
$241,250
350
0
350
200
0
0
0
$87,500
0
28,000
16,000
0
0
0
$125,000
$86,250
$131,500
$109,750
$5,000
$5,000
$5,600
2,500
17,000
0
10,500
0
5,500
Net farm income
10% reduction in gross
income
Revised net farm income
Total
Plan 3
$5,600
2,500
17,000
3,500
10,500
15,000
6,000
Total
$80,000
0
39,000
16,500
0
135,000
0
$270,500
200
0
200
100
0
200
0
$50,000
0
16,000
8,000
0
94,000
0
$168,000
$102,500
$5,000
$6,200
3,000
23,000
3,500
10,500
0
6,000
$41,100
$60,100
$52,200
$50,150
$54,650
$55,300
-21,125
$29,025
-24,125
$30,525
© Mcgraw-Hill Companies, 2008
-27,050
$28,250
Linear Programming
Linear Programming (LP) is a
mathematical procedure that uses
a systematic technique to find the
most profitable combination of
enterprises. Linear programming
models have linear objective
functions that are maximized (or
minimized) subject to the resource
restrictions.
© Mcgraw-Hill Companies, 2008
Table 12-5
Linear Programming Tableau
for the Farm Planning Example
Gross Margin
Class A land
Class B land
Pasture
Labor
Rotation Limit
Units
Class A
cotton
(acre)
Class A
milo
(acre)
$/unit
acre
acre
acre
hour
acre
$150
1
0
0
4
1
$100
1
0
0
3
0
Class A
wheat
(acre)
$115
1
0
0
2.5
0
Class B
milo
(acre)
Class B
wheat
(acre)
Beef
cows
(head)
Stocker
steers
(head)
$85
0
1
0
3
0
$70
0
1
0
2.5
0
$205
0
0.5
6
6
0
$70
0
0
3
1
0
© Mcgraw-Hill Companies, 2008
Type
Limit
MAX
LE 400
LE 200
LE 600
LE 2400
LE 200
Table 12-6
Linear Programming Solution
to the Farm Planning Example
Activity
Cotton-Class A
Optimum
level
Reduced
Cost ($)
200
0.00
0
-15.00
Wheat-Class A
200
0.00
Milo-Class B
Wheat-Class B
Beef Cows
150
0
100
0.00
-15.00
0.00
0
-11.25
Milo-Class A
Stockers
Rows
Objective
(Total Gross Margin)
Level
of use
Slack
(unused)
Shadow
price ($)
$86,250
.
.
Class A Crop Land
400
0
115.00
Class B Crop Land
200
0
85.00
600
2350
200
0
50
0
27.08
0.00
35.00
Pasture
Labor
Rotation limit
© Mcgraw-Hill Companies, 2008
Shadow Prices and Reduced Costs
Linear programming routines provide other useful
information in addition to the optimal enterprise
combination.
Shadow prices tell the manager how much the
objective function would increase if one more unit of
a limited resource were available. A shadow price
is the marginal value product of the resource.
Reduced costs tell the manager how much the
objective function would decrease if the manager
chose to produce one unit of an enterprise that was
not selected.
© Mcgraw-Hill Companies, 2008
Other Issues
• Sensitivity analysis: analyzing how
changes in key assumptions affects
income and cost projections
• Liquidity analysis: analyzing the ability of
the business to meet cash flow obligations
• Long-run versus short-run budgeting
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Long-Run Budgeting
1.
2.
3.
4.
Use average or long-run prices
Use average or long-run yields
Ignore carryover inventories
Ignore borrowing and repayment of
operating loans, but incorporate interest
costs if significant
5. Assume enough capital investment each
year to maintain depreciable assets
6. Assume constant size of the operation
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Table 12-7
Example of Liquidity Analysis
for a Whole-Farm Budget
Plan 1
Cash inflows:
Cash farm income
Nonfarm income
Cash outflows:
Cash farm expenses
Term debt principal
Equipment replacement
Nonfarm expenses
Net cash flow
10% reduction in
cash income
Revised net cash flow
Plan 2
Plan 3
$216,250
20,000
$236,250
$246,250
20,000
$266,250
$275,500
20,000
$295,500
$155,600
10,500
17,000
38,500
$221,600
$181,100
10,500
17,000
38,500
$247,100
$209,700
20,500
17,000
38,500
$285,700
$14,650
$19,150
-21,625
-$6,975
© Mcgraw-Hill Companies, 2008
-24,625
-$5,475
$9,800
-27,550
-$17,750
Summary
Whole-farm planning and budgeting
analyze the combined profitability of
all enterprises in the farming operation.
Linear programming can be used to
select the optimal enterprise combination.
© Mcgraw-Hill Companies, 2008
Appendix
Graphical Example of
Linear Programming
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Table 12-8
Information for Linear Programming Example
Resouce Requirements
(per acre)
Resources
Land (acres)
Labor (hours)
Operating capital ($)
Gross margin ($)
Resource limit
Corn
Soybeans
120
1
1
500
30,000
5
200
3
160
120
96
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Figure 12-3
Graphical illustration of resource restrictions
in a linear programming problem
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Figure 12-4
Graphical solution for finding the profitmaximizing plan using linear programming
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