Farm Management

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Farm Management

• Chapter 12
• Whole-Farm Planning

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Chapter Outline

• What is a Whole-Farm Plan?
• The Planning Procedure
• Example of Whole-Farm Planning
• Linear Programming
• Other Issues

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Business Plans

• What is a business plan?
• Why should I create a business plan?
• What are the sections of a business plan?

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What is a Business Plan?

• A business plan is a document which highlights
  (for the given year)
• A plan of how the company will be run
• The goals of the company
• The money required to meet those goals
• The strategy employed to meet those goals
  (including marketing)

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Why Should I Create a Business Plan?

• A business plan forces a business to assess the
  market place
• It forces a business to identify a clear
  marketing strategy
• It also serves as a benchmark which the companies
  performance can be measured against.

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The Sections of a Business Plan

• There are seven essential sections of a business
  plan. These are the
• Executive Summary
• Business Description
• Define Your Market
• Identify and Analyse Your Competition
• Design and Development Plan
• Operations and Management Plan
• Financial Statements

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What is a Whole-Farm Plan?

• An outline the type and volume of
• Production
• The resources needed to do it.
• The expected costs and returns
• for each part of the plan
• These organized into a detailed projection,
• the result is a whole-farm budget.

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Whole farm Budget

• A whole-farm budget includes all the enterprises
  to be carried out on the farm, and projects total
  income and expenses instead of income and
  expenses per unit (enterprise budget) or the net
  changes in income and expenses as a result of a
  certain management change (partial budget).

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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

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Set the goals

• The best plan cannot be developed until the
  manager knows what that plan must try to do
• what goals should the plan try to attain.
  Certain goals may restrict the mix of
  alternatives that can be considered or require
  that certain enterprises be included in the plan
  while trying to maximize or minimize some overall
  goal.

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Figure 12-1Procedure for developing a whole-farm
plan
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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

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What should be Included?

• The type and quality of resources available
  including land, labor, buildings, equipment,
  livestock, and any special entitlements or
  restrictions

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Technical Coefficients

• 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.

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Estimating Gross Margin
Enterprise budgets provide estimates of gross
margin, or returns above variable costs.
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Fixed Coat is not included

• Since fixed costs will not vary with changes in
  the combination of enterprises, the combination
  that produces the highest gross margin (gross
  income minus variable costs) will also produce
  the highest profit (gross income minus all
  costs). However, for a whole farm budget fixed
  costs are needed to project total profit or net
  income as well as total cash outflows.

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Example 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.
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Table 12-1Resource Inventory for Example Farm
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Table 12-2 Potential Enterprises and Resource
Requirements
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Table 12-3 Estimating Gross Margin
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Figure 12-2Constructing the whole-farm budget
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Table 12-4 Example of a whole-farm budget
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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 restrictio
ns.
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Table 12-5Linear Programming Tableau for the
Farm Planning Example
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Table 12-6Linear Programming Solution to the
Farm Planning Example
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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.
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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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Sensitivity Analysis

• Any value that is highly variable and has a large
  impact on profit should be analyzed. Common
  values included in sensitivity analysis are
  selling prices, crop yields, livestock production
  rates, and prices of major inputs.

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Long-Run Budgeting

• 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
• Assume enough capital investment each year to
  maintain depreciable assets
• Assume constant size of the operation

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Table 12-7Example of Liquidity Analysisfor a
Whole-Farm Budget
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the difference between analyzing profitability
and analyzing liquidity

• Both include cash income and cash expenses.
  Profitability can be measured by net income,
  which also includes noncash income such as
  inventory changes and products consumed at home,
  and noncash expenses, such as depreciation. Net
  cash flow does not include noncash items, but
  does include loan funds received and repaid, the
  purchase and sale of capital assets, and nonfarm
  cash income or withdrawals.

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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.
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Appendix

• Graphical Example of
• Linear Programming

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Table 12-8Information for Linear Programming
Example
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Figure 12-3Graphical illustration of resource
restrictions in a linear programming problem
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Figure 12-4Graphical solution for finding the
profit-maximizing plan using linear programming
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All corn All Soybean Mixed
800
Soybeans
800
Corn