Rural Economics Farm Management 1st Semester 2003

FARM MANAGEMENT AND ITS ROLE IN AGRICULTURE

Basics of Management

Management in general has varied definitions. In a broader sense “Management is viewed as those activities relating to the organisation and operation of a firm for the attainment of specific ends. It directs resources use after interpreting the goals of those controlling the firm”.

The most common features of the most management definitions are: organisation of resources and decision-making process.

Management Responsibilities include:

Operational / Operational
What to produce
How much to produce
When to produce
How to produce / Method of production
Timing of jobs
Selecting techniques
Choosing of staff

Why do some managers/farmers make money then others?

Why do some farm business grow and expand, while others struggle to maintain their size? Why the Difference? Usually this is due to the Management. Observation and analysis often had the same conclusion. The differences due to management can be shown in three main areas;

1. Production differences

includes choice of agricultural commodities to be produced and how they are produced.

2. Marketing differences (includes)

When, where, and how of purchasing inputs and selling commodities (prices differences)

3. Financing covers not only borrowing money and related questions of when, where and how much, but also the entire area of how to acquire the resources necessary to produce agricultural commodities.

The risks have to be considered in all the three areas – i.e. how a farm manager adapt to and handle the risks can have a major impact on profit.

Good or bad luck cannot explain all the differences observed in the profitability of farms even among those, which have about the same amount of land and capital available.

In every association or system, management is the key ingredient. The manager makes or breaks the business. In agriculture, management takes a different dimension especially with uses of many technological innovations, and mechanisation.

If the management is so important, than we must ask some questions such as:

What exactly is a management?

What managers do?

What are the differences between management and labour?

What knowledge and skills are needed to become a better management?

Why the difference among profits made by managers?

THE SCOPE OF THE MANAGER OR FARM MANAGEMENT ACTIVITIES

Once the management decision is made, it has to be translated into activities, or most likely, a series of activities. In agricultural and forestry business management, such farm management activities may be grouped into technical, commercial, financial, and accounting categories. (Refer table 4.1)

a) Technical Activities

These are comprised of all physical production activities. That is include responsibility for all production know how, seeing that productions accomplished on time, and adapting production processes to changing economic and technical conditions.

b) Commercial Activities

These include all buying and selling activities of the farm/business. This are involves procurement of inputs in the quantities and combinations necessary for efficient production, plus orderly storage, handling, marketing of commodities produced. It also includes the task of market forecasting and contracting for services of others.

c) Financial Activities

These are comprised of all activities related to the procurement of and use of financial or money capital. That is acquisition and use of capital, presumably in an optimal manner. This requires forecasting future investment needs and arranging for their financing. Such capital is normally used for the purchase of physical assets and running the farm/business.

d) Accounting

These activities involve the establishment and maintenance of farm/business records, including records of buying and selling, etc. Include physical, human, business, and tax records. This area may involve setting standards for certain enterprises or segments of the business.


Table 1 Classification of Agricultural and Forestry Business Activities.

Classification of
Activities / Description/Nature of Activities / Examples of Actual Decisions Made and Implemented.
Technical / Production of goods and services
Using land
Determining level of mechanization / . What to produce: enterprise choice and combination
. How much to produce: Amount to produce of each crop
. How to produce: Amounts of inputs to use on each crop. How to combine them, how to co-ordinate their production.
Capability-fertility
Tillage practices - conservation
Regulations -constraints
Capital requirements
Availability of services
Labour implications
Commercial / Acquiring inputs
Marketing products
Forecasting costs and prices. / Purchase of inputs (source, terms, quality, quantity, financing, etc.)
Sale of produce (form of produce; time to sell; place to sell; type of market - open market, contract, etc.
Inputs and Outputs
Financial / Acquiring funds
Using funds
Forecasting future needs / Purpose of funds/ quantity and terms
Source of financing
Lender position
Equity position and liquidity position
Repayment plan
Depreciation of assets
Expansion / contraction
Changing technology
Accounting / Keeping production records
Recording commercial and financial transactions
Tax reporting / Records of output of produce
Records of use of resources
Records of sales and purchases
Records of borrowing and repayments
Cash flow forecasting
Income and other taxes, wages and depreciation

Definition of Farm Management

Management is a widely used term but which is subject to many individual definitions. Of the many Farm Management definitions if we take one:

"Farm Management is the decision making process whereby limited resources are allocated to a number or production alternatives to organise and operate the business in such a way as to attain some objectives." Some of the definitions given by eminent farm Management authorities are: -

1) Farm Management is that branch of agricultural economics, which deals with the business principles, and practices of farming with an object of obtaining the maximum possible return from the farm as a unit under a sound-farming programme.

2) "Farm Management" is the study of the business principle in farming. It may be defined as the science of organisation and the management for continuous profit" - Warren

3) "It is the science which considers the organization and operation of the farm from the point of view of efficiency and continuous profit"- (Effersen).

4)  "Farm Management as the sub-division of economics which considers the allocation of limited resources within the individual farm is a science of choice and decision making, and thus is a field requiring studied judgement" - Heady and Jenson.

Farm management has become complex due to;

·  Frequent price changes in agri-commodities

·  New Technology

- Development of new seed varieties, new fertiliser.

- New breeds of cattle

- New chemicals for pests and weed control

- New animal health product and feed activities.

Changes like machinery, irrigation equipment, computers, govt. Policies. These are some of changing environment affecting the manager, and as a result the production is affected. Some managers respond it correctly, some incorrectly to the technology, price and other economic factors.

Role of Farm Management:

The main role of farm management is to help in realisation of the maximum not profit from the various enterprises on a farm. A typical farm is a combination of two or more enterprises and the chief aim of the farm manager would be to get the whole unit give the maximum total returns. It is not the return from anyone enterprise that determine the financial success of a farm, but it is the total return from all enterprises that counts its success or failure. A proper understanding of farm management principle helps in selection combination and execution of enterprises, which are consistent to a sound agricultural policy. The management study is undertaken:

1) To study the input-output relationship in agriculture and determine the relative efficiency of various factor combination.

2) To determine the most the profitable crop production and livestock raising methods.

3) To study the cost per hectare and per quintal or per kg.

4) To evaluate the farm resource and land use.

5) To study the comparative economics of different enterprises.

6) To determine the relation of size of farm to land utilisation, cropping pattern, capital investment and labour employment.

7) To study the impact of technical changes on farm business.

8) To find out ways and means for increasing the efficiency of arm business through better input -output relationship and proper allocation of resources among different uses.

Farm Management and its role for rural urban relationship.

Farm Management has an important role in establishing a favourable economic relationship between the rural and urban population. The level of management reached in crop farming, dairy farming, poultry farming, etc. determines the standards of living not only of rural population but also of city dwellers. Poor farm management practices are clearly reflected in the low productivity of land and livestock on one hand and backwardness o the rural community on the other. The standard of living of the urban population is adversely affected by inefficient farming as the city dwellers particularly of low-income group pay higher prices for the prime necessaries. Agro-based industries also suffer because of low quality of farm produce raised at high cost; where as efficient farm management aims at better combination amongst land, labour, and capital and source relatively higher output at a lower cost.

The prosperity of urban population leads to an increase in the demand for such farm products as milk and milk products, vegetable, egg, fruits and high quality food grains with the result that the type of farming is influenced in the direction of specialisation which may be localised or extensive. Farm business analysis shows that there is shift from extensive to intensive farming near the cities with the result that the cost per unit tend to decline because of the following reasons;

a) The overhead cost is spread over more units.

b) The method of cultivation is more scientific.

c) Farm labour and equipment are utilized more efficiently.

It will thus be seen that farm management practices influences the level of living of both rural and urban population. Rural prosperity is reflected in urban progress, whereas rural poverty and misery are the two sides of an inefficient farm management.

Elements in a Decision

1. Decision maker

The Manager or the farmer himself on our Bhutanese farm.

2. Goals or objectives

The production objectives set by the farmer/manager, which contributes to the fulfilment of long-term goals.

3. Conditions faced - environment

The decision-making environment within which all managers of any business have to make decisions. However, decisions are on a farm is made on somewhat complex or unique environment with many limitations placed by different risk creating factors. The most important is the limitation placed on a farmer's (Manager's) decision on the farm is "biological" and "physical" laws of nature. On the farm something cannot be changed by decisions, for example,

·  Nothing can be done to shorten the gestation period of livestock

·  Physical limit on the amount of feed livestock can consume in a day

·  Time of a particular crop to grow and mature, however, choice of variety can have some effect.

Farmer (Manager) on a farm therefore has to be aware of these limitations placed by the biological and physical laws of nature.

Weather, insects, diseases and variable prices are some examples of factors placing the farmer (manager) in a position of making decisions in an environment of risk and uncertainty.

4. Measuring stick of Efficiency

The performance of managers' can be measured by improvement or achievement of technical efficiency and economic efficiency.

Three general views on management, most commonly shared by the professional include such as:

Management = Job

Management = Resource

Management = Process

Job - The concept of management as a job derives from the idea of being paid for performing the tasks of running a business. For example, a hired Hotel Manager, who has little ownership of the business are employed to perform certain functions. These functions generally include planning, organising, controlling, motivating, staffing and communicating, but may include others.

Resource - The concept of management as a resource relates to an increasing awareness that the human factor is important in agricultural businesses. It is not uncommon to see two individuals with very similar land and other resources show very different results after very the same period of time. The key factor often noted is the difference in management, what has been called "intangible part of production expressed in the lives of persons." The quality of management to a large extent determines the profitability of a business.

Process - The concept of management as a procedure (problem solving steps) relates to the scientific method of problem solving. It involves the following steps:

2)  Clearly define the problem

3)  Gather objective facts and arrange them in relevant order

4)  Evaluate and analyse the data

5)  Draw conclusions or make decisions based upon the analysis

6)  Take appropriate action.

The other factors remaining equal the differences in management may result differences in production.

Since the modern agriculture management involves a whole complex of interacting forces and activities, it may be useful to expand the steps given above. The steps are:

1.  Formulation of goals and objectives of the farm

2.  Recognition and definition of problems or opportunities

3.  Gathering and organization of facts and relevant data/ information

4.  Identify and analyse alternative solutions or courses of action

5.  Selection of the best alternative or course of action based on the sound criteria

6.  Implementation. Acting on the decision

7.  Acceptance of responsibility for the decision regardless of the outcome

8.  Evaluation of the outcome of the decision

The decision making process can be grouped under the basic management functions such as: (1). Planning, (2). Implementation and (3). Control (Monitoring). Figure 1. Panning as the most basic management function relates to deciding on a course of action, procedure and policy.

1)  Goal Formulation

It would make little sense to start out on a trip without a pretty firm idea of where you are going. The establishment of goals and objectives is very important, as they give purpose and direction to decisions and actions. They must be defined to so as to serve as a measure of success or failure