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
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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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