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Farm ManagementChapter 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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Chapter Objectives

1. Show how whole-farm planning differs from the planning of individual enterprises

2. Learn the steps and procedures to follow in developing a whole-farm plan

3. Understand the uses for a whole-farm plan and budget

4. Compare the assumptions used for short-run and long-run budgeting

5. 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 ofproduction to be carried out on theentire farm and the resources neededto do it. When the expected costs andreturns 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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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 enterpriseindicate how much of a resource is required to produce one unit of theenterprise. Technical coefficients areimportant in determining the maximumpossible size of enterprises and the finalenterprise combination.

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Estimating Gross Margin

Enterprise budgets, discussed in detailin Chapter 10, are important tools forfarm planning. Enterprise budgetsprovide estimates of gross margin, orreturns above variable costs.

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Choosing the Enterprise Combination

Managers want to find the combinationof enterprises that will provide the highest amount of profit through thebest use of the farm’s limited resources.Linear Programming is a mathematicaltechnique that can be used to find theoptimal combination of enterprises.

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Example of Whole-Farm Planning

The following example will illustratethe process of whole-farm planning.The objective of the manager is tochoose the combination of crop andlivestock enterprises that will maximizetotal gross margin.

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Table 12-1Resource Inventory for Example Farm

Resource Amount and comments

Class A cropland 400 acres (not over 50% in cotton production)Class B cropland 200 acresPasture 600 acresBuildings Only hay shed and cattle shed are availableLabor 2,400 hours available annuallyCapital Adequate for any farm planMachinery Adequate for any potential crop plan, but all harvesting will be custom hiredManagement Manager appears capable and has experience with crops and beef cattleOther limitations Any hay produced must be fed on farm, not sold

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Table 12-2 Potential Enterprises and Resource Requirements

Resource

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

Class A Cropland Class B Cropland Livestock (per head)

Quantity

Available Cotton Milo

Stocker

steersWheat Milo Wheat

Beef

cows

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Table 12-3 Estimating Gross Margin

(acre) (acre) (acre) (acre) (acre)

— —0.80 2.50 3.75 2.50 3.75 — —400 200 195 165 135 675 620250 100 80 80 65 470 550150 100 115 85 70 205 70

(head) (head)

500 lb. 80 cwt. 52 bu. 66 cwt. 36 bu.

steersBeef Stocker

Cotton Milo Wheat Milo Wheat cows

Class A Cropland Class B Cropland Livestock

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Enterprise Combination for the Example

The procedure for choosing the enterprise combination will be discussedshortly. The results of the process arethat the manager will choose to produce200 acres of cotton and 200 acres ofwheat on Class A land, 150 acres of miloon Class B land, and 100 head of beefcows. The beef cows require 50 acres ofClass B land.

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Figure 12-2Constructing the whole-farm budget

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Table 12-4 Example of a Whole-Farm Budget

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 $270,500Variable 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 16000 350 28,000 200 16,000 Milo-B 80 150 12000 200 16,000 100 8,000 Wheat-B 65 0 0 0 0 0 0 Beef cows 470 100 47000 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 $55,30010% reduction in gross income -21,125 -24,125 -27,050Revised net farm income $29,025 $30,525 $28,250

Units$/Unit

Plan 1 Plan 2 Plan 3

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Linear Programming

Linear Programming (LP) is a mathematical procedure that usesa systematic technique to find themost profitable combination of enterprises. Linear programmingmodels have linear objective functions that are maximized (or minimized) subject to the resourcerestrictions.

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Table 12-5Linear Programming Tableau

for the Farm Planning Example

Class A Class A Class A Class B Class B Beef Stockercotton 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 MAXClass A land acre 1 1 1 0 0 0 0 LE 400Class B land acre 0 0 0 1 1 0.5 0 LE 200Pasture acre 0 0 0 0 0 6 3 LE 600Labor hour 4 3 2.5 3 2.5 6 1 LE 2400Rotation Limit acre 1 0 0 0 0 0 0 LE 200

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

Activity Rows Slacklevel

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

Shadow price ($)

Optimum ReducedCost ($)

Levelof use (unused)

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Shadow Prices and Reduced CostsLinear 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 ofa limited resource were available. A shadow priceis 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 wasnot 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 prices2. Use average or long-run yields3. 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 12-7Example of Liquidity Analysis

for a Whole-Farm BudgetPlan 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 $295,500Cash 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 -27,550Revised net cash flow -$6,975 -$5,475 -$17,750

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Summary

Whole-farm planning and budgetinganalyze the combined profitability ofall enterprises in the farming operation.Linear programming can be used toselect 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

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

Resouce Requirements (per acre)

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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