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2nd lecture on Farm Management
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2nd lecture on Farm Management

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  • 1. Prepared by Mr. Peter Andrea Samuel MSc. Agriculture Production Chain Management-Livestock Chain Page 1 University of Juba College of Natural Resources and Environmental Studies Farm Management Course Introduction: A farm is a piece of land on which a farm household undertakes the agriculture activities as part of it livelihood. In addition to the land itself, a farm may include structures erected or built on the land such as fences to control livestock, wells, and buildings to house livestock or to store farm produce and a house in which the farm family or farm manager lives in. it includes the crops, livestock and other enterprises to support the livelihood of the farm family. In order to grow a crop or rear livestock, farmers need land and water, labour and capital. These are known as farm resources or factors of production. Resources are limited and farmers face problems of choice as to how to combine the resources they have in the best at the lowest cost in order to improve their income. Farm enterprises: Farm enterprises are the livestock and crop production activities associated with the farm, generally a farm is made up of several enterprises, and each farm enterprise has its own inputs and outputs. Inputs are the scarce resources used in the production process. Definitions of farm management: Farm management is defined as the science of organisation and managementof farm enterprises for the purpose of securing the maximum and continuousprofits. Farm management may be defined as the science that deals with the organisation and operation of the farm in the context of efficiency and continuous profits. Farm management is a branch of agricultural economics which deals with wealth earning and wealth spending activities of a farmer, in relation to the organisation and operation of the individual farm unit for securing the maximum possible net income. Functions of management: Farm and ranch managers perform many functions. Much of their time is spent doing routine jobs and chores. However, the functions that distinguish a manager from a mere worker are those that involve a considerable amount of thought and judgement. Farm management functions are summarise under the general categories of planning, implementation, control and adjustment. Planning: The most fundamental and important of the functions is planning. It means choosing a course of action, policy, or procedure. To formulate a plan, managers must first establish goals, or be sure they clearly understand the business owner’s goals; secondly they must identify the quantity and quality of resources available to meet
  • 2. Prepared by Mr. Peter Andrea Samuel MSc. Agriculture Production Chain Management-Livestock Chain Page 2 the goals. These resources include land, water, machinery, livestock, building and labour. Third, the resources must be allocated among several competing uses. The manager must identify all the possible alternatives, analyse them and select those that will come closest to meet the goals of the farm business. Implementation: Once a plan is developed, it must be implemented. This includes acquiring the resources and materials necessary to put the plan into effect, plus overseeing the entire process. Coordinating, staffing, purchasing and supervising are the steps that fit under the implementation function. Control: The control function includes monitoring results, recording information and comparing results to standard. It ensures that the plan is being followed and producing the desired results, provides an early warning so adjustments can be made if it is not. Outcomes and other related data become a source of new information to use for improving future plans. Adjustment: If the information gathered during the control process shows that outcomes are not meeting the manager’s objectives, adjustment need to be made. This may involve changing the technology being use or it may require changing enterprises. In some cases more detailed production and cost data will have to be collected to identify specific problem. Figure 1.illustrates the flow of action from planning through implementation and control to adjustment. It also shows that information obtained from the control function can be used for revising future plans.
  • 3. Prepared by Mr. Peter Andrea Samuel MSc. Agriculture Production Chain Management-Livestock Chain Page 3 Planning Implementation control Adjustment New information Figure 1. Management flow chart based on four functions of management. Farm management is concerned with the smooth and efficient running of the farm. It concludes: The day to day organisation of labour, crops, husbandry, machinery; Financial matters as well as The decision making process in the long run concerning changes in investment costs, performance, way of living etc. Steps in decision making In farm management the decision making process has seven generally recognised steps: Identify and define the problem or opportunity. Identify alternatives solutions. Collect data (facts or advises) and information, make observations. Analysing observations and testing possible solutions, making a decision. Implement the decision. Monitor and evaluating the result Accept responsibility. For example, a dairy farm manager recognises a low fertility and low milk production of his herd.
  • 4. Prepared by Mr. Peter Andrea Samuel MSc. Agriculture Production Chain Management-Livestock Chain Page 4 He observes that the animals eat tree leaves, bushes, paper, fence posts etc. suggesting mineral deficiency. He collects facts and advises on mineral administration in the area. Visits are made to farmers using minerals in dairy cattle feeding and he inquires about the rules of type, amount, method of administration and the expected results. When try out has been made and the milk yield, number of cows on heat, number of successful services has gone up and turns out to be productive and economic, the decision of mineral use can be made. Thereafter a lot of actions may be needed such as seeking the owner’s permission, instruction of the personnel, funds for investment of mineral boxes and/or supply of minerals. Then, the daily routine of the ad-lib access to minerals requires the necessary control and supervision, that there is always mineral supply in stock and in the mineral boxes. Finally, the manager monitors and evaluates the production results regularly comparing that to the actions made. A key element in a farmer’s decision about what to produce and how to do it is the objective of getting more, or even the most, out the limited amount of resources he has to work with The farm as an economic unit: input and output Farming is an activity in which the farmer uses resources such as seed, feed-stuff, fertilizer, labour, land etc., in order to produce valuable products such as eggs, meat, milk, cereals, beans, etc. The resources he put into the farm business are called input and the products which come out are called output. The following diagram helps to understand the process of the farm business: If the farmer wants to run his farm as an economic production unit, his aim should be to produce output of which the total value exceeds the total value of the input. In that way there will be a profit. There will be a loss if the total value of the input is higher than the total value of the output. The total value of the output is called gross output and the total value of all input is equal to the total costs. Gross Output − Total Costs = Profit/Loss which is Income for the farmer (this can be nil or negative). Here we only deal with the input and output of the farm. If a farmer buys a sewing machine, a bicycle or perhaps a car, which are only going to be used privately, they will not be considered as farm input. But products produced on the farm which are consumed by the farmer's family will still be farm output, because they could have been sold. INPUT THE FARM BUSINESS OUTPUT
  • 5. Prepared by Mr. Peter Andrea Samuel MSc. Agriculture Production Chain Management-Livestock Chain Page 5 These more or less independent activities within one farm business are called farm enterprises. So, often a farm business is made up of several farm enterprises. Each individual farm enterprise has its own input and output and sometimes we find that within one farm business the output of one farm enterprise is the input of another farm enterprise (for instance, maize is the output of a crop enterprise but when the same maize is used to feed dairy cattle it becomes the input of the dairy enterprise). costsis input expressed in kind (‘money’) which is applied in order toobtain output. Costs may be divided into land costs, costs of long-lasting input (e.g. buildings, machines, long-lasting living inventory (livestock, tree crops), planting material and feedstuff,and human labour. In other words, input used on the farm differs; some input lasts for over a year, other input can only be used once. Some are for general farm use and others will only be used in one of the farm's enterprises. For this reason we may also divide costs into two groups called variable and fixed costs. As follows: Variable costs are short-term costs (usually for less than one year) and are defined as costs that: 1. Occur only if something is produced (and do not occur if nothing is produced). 2. Tend to vary according to the size of the enterprise (in other words, with the volume of output). 3. Can easily be allocated to individual enterprises. For example, much labour is required in vegetable production. If a farmer has to hire labour then as production increases the need for hired labour increases too. Likewise, the fuel costs for a hand tractor increase as the use of the tractor increases; or the greater the area a farmer plants to a certain crop, the higher the fertilizer costs. Thus, variable costs in farming are usually costs for seed, fertilizers, sprays, livestock feeds, veterinary costs etc. Fixed costs (also called indirect costs) are long-term costs (they last for more than one year) and are defined as costs that: 1. Remain the same regardless of the volume of output. 2. Do not tend to alter with small changes in the size of an enterprise. The costs of a tractor hardly vary regardless of how much the tractor is used. The tractor may be used on any part of the farm. If a farmer grows an extra hectare of maize or keeps a few more cows, the farmer will hardly increase the tractor costs. If the farmer stops growing maize or keeping pigs it will not necessarily be possible to avoid all tractor costs. The wages of full-time regular farm personnel are also fixed once this personnel has been hired. Even though a person may be hired to look after a single enterprise, such as poultry, his or her wages will not vary directly with the number of birds kept or the number of eggs laid. If rent is paid for land, this is also a fixed cost because it has to be paid whatever small changes are made in the organization of the farm. Depreciation and repair of buildings and machinery are considered as fixed costs for similar reasons.
  • 6. Prepared by Mr. Peter Andrea Samuel MSc. Agriculture Production Chain Management-Livestock Chain Page 6 Thus, fixed costs in farming are the costs of land, farm buildings, fencing, machinery, permanent labour and farm tools. Also general overhead costs such as water and electricity charges are normally taken as part of the fixed costs. Opportunity costs Particularly in semi-subsistence farming, there is input which is not bought on the market, but which is generated by the farm (household) itself. Examples of such input are family labour and farm input produced on the farm (e.g. seed kept aside from the last harvest for use as sowing seed during the following growing season). The input mentioned above is not bought ‘on the market’ and thus does not imply cash expenses by the farmer. How do we value such input? To value such input, the term opportunity cost has been introduced; it is a way to indirectly calculate certain (variable) costs: The opportunity cost (also called the ‘shadow price’) of an input is equal to the income obtained by using the input in the best alternative way. Period covered: The length of the period over which we can calculate the value of the input and output is the time between the purchase of the chicks and the sale of the broilers. This is a production cycle for one batch of fattening chicks. In the case of a dairy or beef enterprise we can generally not identify a clear production cycle. In Principle, for livestock enterprises this is possible only in so-called all in - all out systems. In crop production we can identify the production cycles easily except in cases of perennial crops like tree crops. Usually, we start the calculation of farm results, that is the difference between the value of input and output, by calculating the results per year. If possible, we may further calculate results per production cycle Calculation of Fixed Costs: Fixed costs are incurred on items which last longer than one year and such items are also called durable capital items. If a farmer buys an implement that will be used for several years, then the costs of having this implement should be spread equally over the number of years he expect that implement to use. The costs of a capital item are built up of: 1. Depreciation costs. 2. Interest costs fixed costs. 3. Maintenance costs. Variable costs + Fixed costs = Total costs
  • 7. Prepared by Mr. Peter Andrea Samuel MSc. Agriculture Production Chain Management-Livestock Chain Page 7 4. Running costs= variable costs. Depreciation costs: areannual costs of long lasting items, suppose a farmer buys tractor for SSP 100,000. If the tractor last for ten years it is wrong to say that the cost of production in the year the tractor was bought should include all the SSP100,000. It is better to assume that the tractor cost SSP 100,000 divided by 10 each year. That is, the annual cost of having a tractor is SSP 10,000. Normally depreciation costs are recovered in the output of the farm. It is better that a farmer does actually save the depreciation costs each year so that when the time of replacement has come he will have saved enough money to pay for the replacement. The annual cost of depreciation of a capital item can be calculated as follows: ‘New value’ is the value of a new, similar capital item at the time when the calculation is made. It is not the value of the capital item at the time when it was bought. The scrap value of an implement is the value of that implement at the time it has come to the end of its useful life. Example The new value of a milking machine is SSP 50,000 and the scrap value is SSP 10,000. If the expected useful life is 10 years, how much are then the depreciation costs this year? See formula above. Depreciation cost= SSP 50,000 – SSP 10, 000 = SSP 4000 10 years As a rule of thumb we take the scrap value as a percentage of the new value, for machinery often20%. Interest costs At the time the farmer buys a capital item he actually makes an investment. Money is invested which would have yielded a return if it were invested outside the farm. For this reason we calculate a cost of interest on capital items no matter if the items have been bought on loan or with own funds. If an item has been bought on loan, the calculated interest costs have to be paid to the lending institution. Interest costs of capital items can be calculated as follows: New value + scrap value X rate of interest= annual interest costs. 2 Maintenance costs: New value- Scrap value= Annual depreciation costs Useful life in years
  • 8. Prepared by Mr. Peter Andrea Samuel MSc. Agriculture Production Chain Management-Livestock Chain Page 8 Maintenance costs are costs which have to be made every year to keep the capital items in goodworking order. Farmer’s bookkeeping records will show the amount spent on maintenance, which includes normal repairs.For planning purposes we often use standard figures expressed as percentages of the new value. These percentages differ according to the type of capital item. For example, we may estimate the annual maintenance costs of buildings at 2% of the new value per year while with farm machinery this percentage may be 10 to 15. Running costs Running costs are costs to operate a machine such as a tractor or a lorry. They include the costs of diesel, petrol, oil and lubricants. For planning purposes we use a standard figure expressed in an amount per working hour or kilometre. Example A Calculate the annual costs of a tractor bought for SSP 28000. Present new value SSP 50000 Scrap value SSP5000 Useful life 3 years Rate of interest10% Tractor use per year 720 hours Fuel costs 4 litres/hr at M 1.50 per litre Lubrication costs 7 litres of oil per 120 hr at M 2.50 per litre Maintenance costs 20% of new value Solution Annual costs = (a) depreciation costs + (b) interest + (c) operating costs a) Depreciation=New value -Scrap value= 50000- 5000= SSP 15000 useful life 3 years 3 b) interest =new value+ scrap value X rate of interest= 50000+5000 X 10% = SSP 2750 2 2 c) Maintenance = 20% of 50000 = SSP 10000 d) operating cost: Fuel = 720 hr × 4 L/hr = 2880 litres × 1.5 SSP = SSP 4320 Lubrication = 720 ÷ 120 × 7 L × 2.50 SSP = SSP 105+ Annual costs = a + b + c = SSP 32175