1. Explain the difference between whole-farm
planning and planning of individual
2. Learn how to develop a whole-farm budget.
3. Understand the uses for a whole-farm budget.
4. Compare the assumptions used for short-run
and long-run planning.
5. Show how linear programming can be used to
choose the most profitable combination of
What is a Whole-Farm Plan
• Whole-Farm Plan – 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.
• Whole-Farm Budget – When the
expected costs and returns for each part
of the plan are organized into a detailed
What is a Whole-Farm Plan?
• Enterprise budgets are the building blocks of a
whole-farm plan and budget.
• Partial budgets are useful for making minor
adjustments or fine-tuning a whole-farm plan.
• Whole-Farm Plan can be designed specifically
for the next year or if may reflect a typical year
over a longer time period.
Purpose of a Whole-Farm Plan
• Once a strategic plan has been developed the
next step is to develop a tactical plan to carry it
• Every manager has a plan of some kind:
• What to produce?
• How to produce?
• How much to produce?
• A whole-farm plan will hopefully increase
profits or help the farm come closer to
attaining other goals.
• Compares two alternatives at a time:
– The present plan compared with a change in the
• Represents a “typical” year:
– Outcome different in non-typical years.
• Non-proportional changes in costs and revenue:
– Economies and diseconomies of size.
• Opportunity costs:
– Included so not same as “accounting” profit.
• Additional risk:
– Is the additional average profit worth the additional
risk or variability of profit?
– Sensitivity analysis on revenues and costs help here?
• Additional capital requirements:
– Is the capital available or can it be borrowed?
– How will borrowing affect the financial structure of
• Risk, cash flow requirements, repayment
– Will this additional investment cause a capital
shortage in some other part of the business?
Six Steps in Developing a
1. Review goals and specify objectives.
2. Inventory available resources.
3. Identify possible enterprises and
4. Estimate gross margins.
5. Choose a combination of enterprises.
6. Prepare a whole-farm budget.
Review Goals and Specify Objectives
• Include both business and personal goals:
– Profit maximization.
– Maintaining long-term productivity of the land.
– Maintain health of operator and workers.
– Maintain financial independence.
– Allowing time for leisure activities.
• Specify performance objectives:
– Crop yields.
– Livestock production rates.
– Costs of production.
– Net income.
• The type, quality, and quantity of resources
available determines which enterprises can be
– Capital (money)
– Other Resources (markets, transportation,
consultants, market quotas, etc.)
Identify Enterprises and Technical Coefficients
• The resource inventory will show which
enterprises are possible:
– Don’t be restricted by custom and tradition.
• Estimate the resource requirements (technical
coefficients) per unit of each enterprise:
– 1 acre of crops, 1 head of livestock.
and Technical Coefficients
Estimate the Gross Margin per Unit
• Estimate the gross income and variable costs
per unit for each enterprise under
Gross margin = Total gross income – TVC
• Contribution toward fixed costs and profit
after variable costs have been paid.
• In the short-run, maximizing gross margin is
Gross Margin per Unit
Choose the Enterprise Combination
• Often determined by:
– Personal experience and preferences.
– Fixed investments in specialized equipment and
– Regional comparative advantage.
• Can experiment with different enterprise
combinations by developing many budgets and
We will look at LP as a tool to select enterprises
for this week’s lab!
Prepare the Whole-Farm Budget
1. To estimate the expected income, expenses, and profit for a
given farm plan.
2. To estimate the cash inflows, cash outflows, and liquidity of
a given farm plan.
3. To compare the effects of alternative farm plans on
profitability, liquidity, and other considerations.
4. To evaluate the effects of expanding or otherwise changing
the present farm plan.
5. To estimate the need for, and availability of, resources such
as land, capital, labor, feed, or water.
6. To communicate the farm plan to a lender, landowner,
partner, or stockholder.
Constructing the Whole-Farm Budget
Enterprise A Enterprise B Enterprise C
No. of units of A No. of units of B No. of units of C
X X X
Gross revenue per unit Gross revenue per unit Gross revenue per unit
Variable costs per unit Variable costs per unit Variable costs per unit
- Variable costs
= Gross margin
+ Miscellaneous income
- Fixed costs
= Net farm income
• Analyzing how changes in key budgeting
assumptions affect income and cost projections.
• Reduce the gross farm income by 10%:
– Decrease in production or selling prices.
• Construct several budgets using different
values for key prices and production rates:
– High, average, low approach?
• The ability of the business to meet cash flow
obligations as they come due.
– Cash farm income.
– Income from nonfarm work and investments.
– Cash farm expenses.
– Cash outlays to replace capital assets.
– Principal payments on term debts.
– Nonfarm cash expenses for family living costs and
• Profitable plans will not always have a
positive cash flow:
– Large interest payments in the first few
• Analyze liquidity for the first few years of
• Analyze liquidity for an average year.
Example of Liquidity Analysis
for a Whole-Farm Budget
Developing a Typical Year Budget
1. Use average or long-term planning prices for
products and inputs.
2. Use average or long-term crop yields and
livestock production levels. Be conservative.
3. Ignore carryover inventories of crops or
livestock, accounts payable and receivable, or
cash balances. Assume sales are equal to
Developing a Typical Year Budget
4. Assume that the borrowing and repayment of
operating loans can be ignored, because they
will offset each other in a typical year.
5. Assume that enough capital investment is
made each year to replace assets that wear
6. Assume that the operation is neither
increasing nor decreasing in size.
Short-Run vs. Long-Run
• Assume some • Very few farms or
resources are fixed. ranches are profitable
• Assume prices, costs,
• A plan that involves
and other factors are long-term investment
expected to hold true and financing
over the next decisions should
production period. project a positive net
income in an typical
• A mathematical procedure that uses a
systematic technique to find the “best”
possible combination of enterprises.
• Linear programming maximizes an
objective function, subject to specified
• Objective: Maximize gross margin.
• Constraints: Fixed resources available.
• The amount by which total gross margin
would be increased if one more unit of
that resource were available.
• Whole-farm planning and the whole-farm
budget analyze the combined profitability of all
enterprises in the farming operation.
• Planning starts with reviewing goals, setting
objectives, and taking an inventory of the
• Feasible enterprises must be identified, and
their gross income per unit, variable costs, and
gross margin computed.
• The combination of enterprises chosen can be
used to prepare a whole-farm budget.
• Whole-farm budgets can be based on either
short-run or long-run planning assumptions.
• Linear programming (LP) can be used to select
the combination of enterprises that maximizes
gross margin without exceeding the supply of