Chapter 12 by xiagong0815

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									Farm Management
    Chapter 12
Whole-Farm Planning
                  Chapter Outline
•   What is a Whole-Farm Plan?
•   The Planning Procedure
•   Example of Whole-Farm Planning
•   Linear Programming
•   Other Issues




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                  Chapter Objectives
1. To show how whole-farm planning differs
   from the planning of individual enterprises
2. To learn the steps and procedures to follow
   in developing a whole-farm plan
3. To understand the uses for a whole-farm
   plan and budget
4. To compare the assumptions used for
   short-run and long-run budgeting
5. To introduce linear programming as a tool
   for whole-farm planning
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    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.
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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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                   Figure 12-1
   Procedure 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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             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.


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          Estimating Gross Margin

     Enterprise budgets provide estimates
     of gross margin.




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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.


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  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.



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                       Table 12-1
          Resource Inventory for Example Farm

Resource            Amount and comments

Class A cropland    400 acres (not over 50% in cotton production)
Class B cropland    200 acres
Pasture             600 acres
Buildings           Only hay shed and cattle shed are available
Labor               2,400 hours available annually
Capital             Adequate for any farm plan
Machinery           Adequate for any potential crop plan, but all harvesting will be custom hired
Management          Manager appears capable and has experience with crops and beef cattle
Other limitations   Any hay produced must be fed on farm, not sold




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                                   Table 12-2
                            Potential Enterprises and
                            Resource Requirements


                                            Class A Cropland         Class B Cropland   Livestock (per head)

                           Quantity                                                        Beef       Stocker
Resource                   Available   Cotton      Milo    Wheat      Milo     Wheat       cows        steers


Class A cropland (acres)      400       1           1          1      —          —         —          —
Class B cropland (acres)      200       —          —           —      1          1        0.5         —
Pasture (acres)               600       —          —           —      —          —         6           3
Labor (hours)                2,400      4           3          2.5    3         2.5        6           1
Operating capital ($)                  250         100         80     80         65       470         550




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                               Table 12-3
                        Estimating Gross Margin

                           Class A Cropland             Class B Cropland       Livestock
                                                                               Beef    Stocker
                       Cotton       Milo      Wheat        Milo      Wheat     cows     steers
                       (acre)      (acre)     (acre)      (acre)    (acre)    (head)   (head)

 Yield                   500 lb.    80 cwt.    52 bu.     66 cwt.    36 bu.     —        —
 Price ($)                0.80      2.50       3.75        2.50      3.75       —        —
 Gross income ($)         400        200       195          165       135      675      620
 Total variable costs ($) 250        100         80          80        65      470      550
 Gross margin ($)         150        100       115           85        70      205       70




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     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 on Class A land,
       •200 acres of wheat on Class A land,
       •150 acres of milo on Class B land,
       •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                     Plan 2                Plan 3
                                          $/Unit   Units     Total    Units      Total      Units       Total

                  Gross income
                   Cotton-A               $400     200 $ 80,000       350       $140,000    200       $80,000
                   Milo-A                  200       0        0         0              0      0             0
                   Wheat-A                 195     200   39,000       350         68,250    200        39,000
                   Milo-B                  165     150   24,750       200         33,000    100        16,500
                   Wheat-B                 135       0        0         0              0      0             0
                   Beef cows               675     100   67,500         0              0    200       135,000
                   Stocker steers          620       0        0         0              0      0             0
                  Total gross income                   $211,250                 $241,250             $270,500
                  Variable costs
                   Cotton-A               $250     200 $ 50,000       350        $ 87,500   200       $50,000
                   Milo-A                  100       0        0         0               0     0             0
                   Wheat-A                  80     200   16,000       350          28,000   200        16,000
                   Milo-B                   80     150   12,000       200          16,000   100         8,000
                   Wheat-B                  65       0        0         0               0     0             0
                   Beef cows               470     100   47,000         0               0   200        94,000
                   Stocker steers          550       0        0         0               0     0             0
                   Total variable costs                $125,000                 $131,500             $168,000
                   Total gross margin                   $ 86,250                $109,750             $102,500
                  Other income                             $ 5,000               $ 5,000               $ 5,000
                  Other expenses
                   Property taxes                          $ 5,600               $ 5,600               $ 6,200
                   Insurance                                 2,500                 2,500                 3,000
                   Interest on debt                         17,000                17,000                23,000
                   Hired labor                                   0                 3,500                 3,500
                   Depreciation                             10,500                10,500                10,500
                   Cash rent                                     0                15,000                     0
                   Miscellaneous                             5,500                 6,000                 6,000
                   Total other expenses                    $ 41,100              $60,100              $ 52,200
                  Net farm income                          $ 50,150              $54,650              $ 55,300
                  10% reduction in gross
                   income                                   -21,125               -24,125              -27,050
farm management   Revised net farm income                  $ 29,025              $ 30,525             $ 28,250   17
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   Alternative Example of a whole-farm budget
           Use this for your project
                                     Whole Farm Budget Report


                  Enterprise 1 Enterprise 2 Enterprise 3 Enterprise 4   Total


      Revenue


      Variable
      Expenses

      Gross
      Margin
      Other
      Revenue
      Other
      Expenses
      Net Farm
      Income



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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
       restrictions.
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                               Table 12-5
                     Linear Programming Tableau
                    for the Farm Planning Example



                          Class A   Class A   Class A   Class B   Class B    Beef    Stocker
                          cotton      milo     wheat      milo    wheat      cows     steers   Type   Limit
                 Units     (acre)    (acre)    (acre)    (acre)   (acre)    (head)    (head)

Gross Margin     $/unit   $150      $100      $115       $85       $70      $205      $70      MAX
Class A land     acre        1         1         1        0         0         0        0        LE 400
Class B land     acre        0         0         0        1         1         0.5      0        LE 200
Pasture          acre        0         0         0        0         0         6        3        LE 600
Labor            hour        4         3         2.5      3         2.5       6        1        LE 2400
Rotation Limit   acre        1         0         0        0         0         0        0        LE 200




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                            Table 12-6
                  Linear Programming Solution
                  to the Farm Planning Example


     Activity         Optimum   Reduced    Rows                    Level      Slack    Shadow
                       level    Cost ($)                           of use   (unused)   price ($)
                                           Objective
     Cotton-Class A    200       0.00      (Total Gross Margin)   $86,250        .        .
     Milo-Class A        0      -15.00     Class A Crop Land         400         0     115.00
     Wheat-Class A     200        0.00     Class B Crop Land         200         0      85.00
     Milo-Class B      150        0.00     Pasture                   600         0      27.08
     Wheat-Class B       0      -15.00     Labor                    2350        50       0.00
     Beef Cows         100        0.00     Rotation limit            200         0      35.00
     Stockers            0      -11.25




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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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                  Long-Run Budgeting
1. Use average or long-run prices
2. Use average or long-run yields
3. Ignore carryover inventories
4. 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      Plan 2     Plan 3

         Cash inflows:
          Cash farm income         $216,250   $246,250   $275,500
          Nonfarm income             20,000     20,000     20,000
                                   $236,250   $266,250   $295,500
         Cash outflows:
          Cash farm expenses       $155,600   $181,100   $209,700
          Term debt principal        10,500     10,500     20,500
          Equipment replacement      17,000     17,000     17,000
          Nonfarm expenses           38,500     38,500     38,500
                                   $221,600   $247,100   $285,700
         Net cash flow             $ 14,650   $ 19,150   $ 9,800
         10% reduction in
          cash income               -21,625    -24,625    -27,550
         Revised net cash flow       -6,975     -5,475    -17,750


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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
                   Table 12-8
 Information for Linear Programming Example


                                           Resouce Requirements
                                                 (per acre)
 Resources               Resource limit   Corn            Soybeans

 Land (acres)              120              1              1
 Labor (hours)             500              5              3
 Operating capital ($)   30,000           200            160
 Gross margin ($)                         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 profit-
    maximizing plan using linear programming




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