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Farm Management

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. Chapter Objectives. To show how whole-farm planning differs from the planning of individual enterprises

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Farm Management

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  1. Farm Management Chapter 12 Whole-Farm Planning

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

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

  4. 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.

  5. 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

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

  7. 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

  8. 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.

  9. Estimating Gross Margin Enterprise budgets provide estimates of gross margin.

  10. 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.

  11. 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.

  12. Table 12-1Resource Inventory for Example Farm

  13. Table 12-2Potential Enterprises and Resource Requirements

  14. Table 12-3Estimating Gross Margin

  15. 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.

  16. Figure 12-2Constructing the whole-farm budget

  17. Table 12-4Example of a whole-farm budget

  18. Alternative Example of a whole-farm budgetUse this for your project

  19. 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.

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

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

  22. 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.

  23. 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

  24. 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

  25. Table 12-7Example of Liquidity Analysisfor a Whole-Farm Budget

  26. 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.

  27. Appendix Graphical Example of Linear Programming

  28. Table 12-8Information for Linear Programming Example

  29. Figure 12-3Graphical illustration of resource restrictions in a linear programming problem

  30. Figure 12-4Graphical solution for finding the profit-maximizing plan using linear programming

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