Conservation of natural resources for
sustainable Agriculture
what you should know about…
Farm Management and Economics
aspects of Conservation Agriculture
Introduction
Production and input use in conservation agriculture
Farm management and conservation agriculture
Farm planning - gross margin
Farm planning - partial budgeting
Farm planning - cash flow
Risk and uncertainty
Economic Benefit
INTRODUCTION
Farmers are continually exposed to new information that affects how their farms are
organised, what commodities are produced, how they are produced, what inputs should be
used, how much of each input should be used, how to finance the business, and how and
when to market their production.
Small farmers have traditionally been producers of staple foods and originally, they aimed to
supply their own food needs and some have managed to produce surpluses for sale. Today,
this sector is highly heterogeneous, differentiating according to well-being level and different
grades of orientation towards the market. Moreover, small farmers has traditionally lacked a
business and marketing orientation because effort was concentrated on traditional
production, which is characterised by a rural market supply that, usually do not respond to
market demands.
This Training Manual is a tool aimed at supporting small farmers in the adoption and/or
adaptation of Conservation Agriculture techniques through the improvement of farm
management and marketing techniques. By doing so, farmers can be better prepared to
detect opportunities for traditional products in rural economies by adopting a business
approach which includes formal agronomic, commercial and economic evaluations for
potential market options. In this specific case, the Training Manual uses the diversification of
agricultural production through the use of Conservation Agriculture techniques.
Conservation Agriculture techniques aims to conserve, improve and make more efficient use
of natural resources through integrated management of available soil, water and biological
resources combined with external inputs. It contributes to environmental conservation as
well as to enhanced and sustained agricultural production and can be referred to as resourceefficient/ resource effective agriculture.
What is Conservation Agriculture?
Changes in the farmers' behaviour maybe due to prices, weather, government policy and
programmes, exports, international events, and other factors. In any case, price changes are a
major source of risk that exists in agricultural production.
New technology provides a constant source of information on new agricultural techniques,
new seeds variety, new biological or chemicals agents for weed control, etc. Farmers cannot
simply memorise the answers, but they must learn to continually rethink their decisions as
environmental and economic condition change.
Conservation agriculture is an alternative to traditional land use and management. It is a
practical method to reduce soil erosion, restore organic matter and conserve soil moisture
and soil fertility. The method is based on the following:1
1
a)
Maintaining a permanent or semi-permanent organic soil cover to protect the soil
physically from sun, rain and wind and to feed soil biota,
b)
No-Tillage (or Minimum Tillage): the idea is based on the elimination of mechanical
tillage in order no to disturb soil micro-organisms and soil fauna activities.
c)
Crop Rotation: a varied crop rotation is also important to avoid disease and pest
problems.
Extracted from Conservation Agriculture web page (http://www.fao.org/ag/ags/AGSE/Main.htm)
Rather than incorporating biomass such as green manure crops, cover crops or crop residues,
the dead biomass, left on the soil surface, serves as physical protection of the soil surface and
as substrate for the soil fauna. In this way, mineralization is reduced and suitable soil levels
of organic matter are built up and maintained.
When adopting conservation agriculture, farmers usually have in mind some technical
aspects such as erosion, re-seedling, lost of soil fertility and productivity, extensive use of
chemicals, etc. These aspects are simply steps of farm management and economic reasoning,
because at the end of the day farmers are effectively loosing money. In several situations,
farmers can choose between two solutions:
ƒ to adopt a stop-gap measure (e.g. wind-breaks, contours, etc.); or
to choose a more radical and definitive measure. In this case, besides making changes the
farm's structure, farmers will have to change the way of "thinking agriculture".
Unfortunately, short-term solutions and immediate benefits always attract farmers and the
full technical and economic advantages of conservation agriculture can be seen only in the
medium- long-term run, when its principles (no-tillage, permanent cover crop and crop
rotation) are well established within the farming system.
In fact, if the two systems (conventional and conservation agriculture) are applied in two
plots with the same agro-ecological and fertility conditions, no great differences in
productivity during the first years are to be expected. However, after been cultivating the
same crops in the same areas for several years, the differences between the two systems
became more evident.
Along with this "way of thinking agriculture", enough technical and agronomic factors that
could positively influence the farmers in the adoption of Conservation Agriculture principles,
have been found. It is, however, important to demonstrate to farmers that the technical and
agronomic aspects are directly related to the management and economic ones and, therefore,
any technical and agronomic improvement obtained by using the Conservation Agriculture
principles need to be quantified in monetary and economic terms.
In spite of the obstacles related to short-term solutions, several reasons may lead towards a
change from conventional to conservation agriculture in the production system. The most
convincing one is generated by the farm management and economic point of view. With
conservation agriculture, farmers could have:
Some short-term benefits in saving variable costs, especially related to reduced machinery
use and labour;
Several long-term benefits in saving fixed costs, as the less investment is necessary in
machinery and equipment as well as broad environmental benefits.
Of all the aspects embracing conservation agriculture, farm management and economics are
probably the most important as well as the least developed aspects. The economic aspects
would determine whether or not a farmer would adopt the new technology. Some farmers
may be easier convinced when they see the calculations on paper. This means that extension
workers and facilitators should feel comfortable when they analyse how the economic
situation would change when technological changes are introduced and adopted by farmers.
Before analysing the farm management and economic aspects of Conservation Agriculture, it
is necessary to divide the adoption/adaptation process of into four theoretical phases. This
theoretical division2, represented in Fig. 1, would facilitate the reasoning when analysing the
farm activities and the impacts of new technologies in the production process.
2
Prepared by Walter de Oliveira and John Dixon
a)
First Phase - Improvement of tillage techniques: During this first phase, no increase in
farm output is foreseen. Decrease in labour, time and farm animal or mechanical traction
power (reduction of production costs) would occur. An increase in chemicals use to contrast
weed grow and diseases might be requested. Furthermore, there may be an increase in family
expenses to compensate a probable (but not certain!) reduction of production in comparison
with the conventional agriculture;
b)
Second Phase - Improvement of soil conditions and fertility: Decrease in labour, time
and farm animal or mechanical traction power (reduction of production costs). Increase in
yield and consequently increase in net farm income;
c)
Third Phase - Diversification of Crop Pattern: Increased and more stable yields,
increased net farm income and in soil fertility.
d)
Fourth Phase - Integrated Farming System: Stability in production and productivity.
The full technical and economic advantages of conservation agriculture could be seen by the
farmer.
Transition Phases - Conventional to Conservation Agriculture
Phase 4
Production
(output)
Phase 3
Total Costs
Phase 2
Phase 1
1
2
3
4
5
6
7
Years
Table 1, summarises how gross output, variable and fixed costs and net farm income
would change during the transition phases from conventional to Conservation
Agriculture.
Table 1 - Theoretical Transition Phases from Conventional to ConAgri
Gross Output
Total Variable Costs
Gross Margin
Total Fixed Costs
Total Costs
Conventional
Phase 1
Agriculture
2,000
1,400
600
190
1,590
CA
1,800
1,300
500
190
1,490
410
310
Farm Income
NB: Hypothetical farm
Phase 2
Phase 3
Phase 4
CA
2,200
1,200
1,000
200
1,400
CA
2,300
1,100
1,200
200
1,300
CA
2,400
1,000
1,400
200
1,200
800
1,000
1,200
T h eoretical T ransition Ph ases
3 ,0 0 0
2 ,5 0 0
G ross I ncom e
2 ,0 0 0
V ariable C osts
G ross M argin
1,5 0 0
F ix ed C osts
1,0 0 0
T otal C osts
500
F arm I ncom e
0
C onventional
Phase 1
Phase 2
Phase 3
Phase 4
Farming Systems Dynamics and Conservation Agriculture
A farming system is a natural resource management unit operated by a farm household,
and includes the entire range of economic activities of the family members (on-farm, offfarm agricultural as well as off-farm non-agricultural activities) to ensure their physical
3
survival as well as their social and economic well-being .
An understanding of farming systems is vital to improve old paths for farm development
5
and to identify and to implement new ones . Conservation agriculture, viewed as an
alternative to traditional land use and management, needs to be adapted and implemented
within the existing major farming systems. This new technique should be shaped and
adapted into the resources and constraints of the existing farming system.
The first natural step would be to identify the existing farming systems. However, to date,
farms have usually been classified on the basis of agro-ecological factors (such as
climate, soil, slope, altitude and, not unrelated to these factors, the crop and livestock
systems used) overlaid, to a lesser extent, with socio-economic criteria. Inevitably such
an approach leads to a plethora of farm types.
3
Farming Systems Indicators for Sustainable Natural Resources Management - H. Wattenbach & K.H Friedrich - AGS Division (FAO)
5
A History of Farming System Research - FAO
A History of Farming System Research - FAO
6
A different approach, which emphasizes the farm-system structure from a farm
management and farm-household perspective, is proposed here. This approach classifies
the different farming systems based on:
1) the main purpose of the farm,
2) the degree of independence and
3) the “size” of the farm.
Under this approach and from a structural viewpoint, there are basically six major types
of farm system to be found around the developing world with dozens of subtypes
constituting a continuum of farm types between the extremes of a totally subsistence to a
7
totally commercial orientation :
Farm types
The six basic farm types are:
Type 1 Small subsistence-oriented family farms.
Type 2 Small semi-subsistence or part-commercial family farms, usually of one half
to two hectares, but area is not a good criterion: the same basic structure can
be found on much larger 20- to 30-hectare farms.
Type 3 Small independent specialized family farms.
Type 4 Small dependent specialized family farms, often with the family as tenants.
Type 5 Large commercial family farms, usually specialized and operated along
modified estate lines.
Type 6 Commercial estates, usually mono-crop and with hired management and
absentee ownership.
.
7
Farm Management for Asia: a Systems Approach. (FAO Farm Systems Management Series - 13) Douglas J. McConnell & John L. Dillon
PRODUCTION AND INPUT USE IN CONSERVATION AGRICULTURE
Farming is an activity in which resources such as seeds, feedstuff, fertilisers and labour,
are used to produce valuable products such as wheat, eggs, meat, cotton, vegetables and
fruits. The adoption of conservation agriculture should be seen in this context.
The resources used in the farm are called input and the products obtained are called
output.
Input
Output
The farm
The farmer must run his farm as an economic production unit, so his aim must be to
produce output of which, the total value of outputs exceeds the total value of the inputs.
Doing so, he/she will have a profit. Of course, if the total value of the inputs is higher
than the total value of outputs there will be a loss.
The total value of the output is called gross output and the total value of all input is
called total costs.
Total Value Output
minus
Total value Input
Profit or Loss
equal
In the same way:
Gross Output
minus
Total Costs
equal
Profit or Loss
Here we only consider input and output from the farm. If a farmer buys a bicycle, which
is only going to be used privately, it will not be considered as farm input. But products
produced on the farm and consumed by the farmer’s family will still be farm output
because they could have been sold.
Production and yield
Yields obtained under conservation agriculture are equal or slightly higher compared to
conventional systems (figure 1.1).
CT
6000
DS
Yield (kg ha-1)
5000
4000
3000
2000
1000
0
Maize
Figure 1.1.
Soya
Wheat
Average yields of maize, soybean and wheat under different tillage
systems during 9 years (1985-1994) in Cruz Alta, Brazil (Ruedell,
1995)
Depending on the cover crop a reduction in yield may occur such as in the example
below, where immobilization of nitrogen was probably the cause of a decrease in maize
yield under wheat and radish straw, which was overcome when nitrogen fertilizer was
applied (figure 1.1a).
CT
6000
DS
-1
Maize yield (kg ha )
CT 90 kg N
5000
DS 90 kg N
4000
3000
2000
1000
0
Fallow
Radish
Wheat
Oats
Lupin
Vetch
Figure 1.1a
Maize yield obtained under conventional tillage and direct sowing, with and
without 90 kg of nitrogen fertilizer (Calegari et alt)
Based on these data, maize can produce a yield with oats, lupine and vetch as a winter
cover crop (without fertilization), which is comparable or higher to those obtained with
-1
conventional tillage and a fertilizer treatment of 90 kg ha . The yield increase was highly
correlated with the phosphorus content of the leaves and the phosphorus availability in
the soil. This occurred because of higher moisture content in the soil under the mulch
layer, which led to higher phosphorus uptake by plant roots.
Not only cover crops have positive residual effects on the main crops, but grain crops can
have residual effects on each other, as the following example shows. The effect of a
maize crop in the rotation on the soybean yield is shown in figure 1.1b, compared to a
soybean yield without maize in rotation in the same area.
1st year after maize
2nd year after maize
5000
without maize
Soya yield (kg ha-1 )
4000
3000
2000
1000
0
87/88
88/89
89/90
90/91
91/92
92/93
93/94
Figure 1.1b
Average soybean yield in rotation with maize and different cover crops (Ruedell,
1995)
Crop yields under conservation agriculture are less variable through the stabilizing effects
of favourable conditions of soil properties and micro-climate. Improvements in crop
growth and vigour are due to direct and indirect effects. Direct effects are due to
improvements in nutrient and water content, as indirect effects are due to favourable
rooting environment and possible weed suppression and reduction in pests and diseases.
Key Management Changes
As mentioned before, when adopting Conservation Agriculture techniques, farmers do so
in response to changes in their "way of thinking agriculture". They have in mind both
technical (e.g. erosion, lost of soil fertility re-seeding, extensive use of chemicals, etc.)
and economic aspects (increasing profit by reducing the use of labour, fertiliser and
chemicals and by increasing yield), which are directly influenced by the technical
aspects.
Farmers, in managing their farms, would need to develop an understanding of its
environment in order to tailor strategies to its strengths and needs. The major changing
environments to which farmers must adapt are:
ƒthe physical environment in relation to resource use, depletion and pollution;
ƒthe social environment in relation to socially oriented special-interest groups;
ƒthe information and communication environment with its exponential growth in
technology, coverage and accessibility and
ƒthe political environment with its increasingly better-informed constituency
demanding transparency and accountability.
Technological Changes
Technological change is an improvement in the state of knowledge such that production
possibilities are enhanced. The chief source of technological changes to which farmers
might have access are:
- “Learning by using”
- Private and public research and development:
- Imported research and development:
Because of the opportunities for increased outputs, reduction in production costs and
higher income levels which a technological change can offer, it is important to take into
consideration the process of adoption/adaptation and diffusion of technical innovations.
The economic potential of conservation agriculture, in terms of costs of production,
profit, yield, soil conservation, etc. is very important. However, unfamiliarity with
conservation agriculture practices might make the initial impact on yield and input usage
uncertain.
It should not be forgotten that, since the adoption/adaptation decision must take place in
an uncertain environment (vagaries of nature), the farmer’s attitude to risk and in
particular the degree of risk aversion must also be taken into consideration.
Moreover, the potential conservation agriculture adopter/adapter may be confronted with
constraints in terms of purchasing power, of access to credit and information, and poor
communications links with product and input markets. IN this regards, the availability of
inputs in the quantity and at the time required may prove to be important considerations
in the adoption/adaptation process.
Managing Changes in Input Use
In principle, the cost of some inputs (e.g. for seed purchase) should not differ in
conservation agriculture compared to conventional tillage. However, differences are often
observed and can be explained through:
x in conservation agriculture less seed is needed because the losses in the field are
reduced;
x sometimes more seed is needed because the plant density in conservation agriculture is
optimal and might be higher than under traditional dibble stick planting;
x in conservation agriculture cover crops play an important role and if the seeds for
cover crops are not produced on-farm, the farmer needs to buy them elsewhere.
As with the cost of seeds, fertilizer costs are considered to be the same under
conservation agriculture compared to conventional tillage. However, as the organic
matter of the soil increases under conservation agriculture, so will the moisture content of
the soil. Both aspects lead to an increased fertilizer efficiency, which will reduce fertilizer
need in the long run.
Farmers who are used to apply herbicides under conventional system will also use them
under conservation agriculture. Experience shows that in these cases herbicide costs will
reduce over time. Herbicides are important, but farmers using conventional tillage
methods use similar amounts of herbicides as no-tillage farmers. In Honduras a strong
decline in the use of herbicides is observed (figure 1.4). Farmers who no longer burn their
fields prior to preparation spend less money on herbicides. Farmers who adopted the
Quezungual system (an indigenous agro forestry system in Honduras) spend even less,
both for land preparation and total costs for herbicides.
Total herbicide cost
during season
Herbicide cost for
land preparation
Herbicide cost (U$ ha-1)
60
50
40
30
20
10
0
Burned fallow
Slashed fallow
Quezungual
FIGURE 1.4
Herbicide costs in different production systems in Lempira
Sur, Honduras (CDR, 2000).
Those farmers, who have never used herbicides because they are simply not available or
very expensive, are likely to adopt alternative practices for weed control, like the use of
knife rollers.
When conservation agriculture is practised correctly, pest and disease incidence will be
less compared to conventional tillage due to crop rotation and the use of cover crops.
Consequently, the cost for treatment will also be reduced.
Costs of inputs would make the difference on the total production costs. In a system
where herbicides would replace land preparation activities the overview could look like
figure 1.4a.
Conventional system
9%
4% 1%
Conservation agriculture
M echanization
23%
Fuel
4% 1%
21%
5%
Fertilizer and seeds
8%
19%
H erbicides
Insecticides
55%
Labour
50%
Figure 1.4a
Changes in different production costs for two systems (Montoya, 1984).
Land and Related Problems
8
The problem of soil degradation is considered a serious economic problem throughout the
developing countries. From an economic viewpoint, the problem is manifested through
declining yields and increased production costs, which substantially lower farm incomes.
The socio-economic, as well as ecological consequences can be catastrophic. For
example, in the southern part of Brazil, large portions of mechanically cultivated land has
been abandoned from annual cropping operations in as little as seven years immediately
9
following deforestation as soils have rapidly eroded . In Paraguay, in naturally less fertile
steeper areas where poor small farmers have been using manual and animal-powered
10
cultivation for a long time, the process of degradation has been much slower. The
problem, however, regards also temperate areas, as recognised in Europe by the European
11
Conservation Agriculture Federation .
There are many and complex reasons why soils become degraded, loose their productive
value for economic agricultural production and impact negatively on the environment.
Factors known to contribute to the processes of soil degradation range from physical and
agro-ecological, to socio-economic, political, cultural, technical and farm management
decision making.
Causal factors of soil degradation can be classified into two types:
8
W J Sorrenson -Economics of Conservation Agriculture (Draft Paper)
Derpsch et al - 1991
10
Sorrenson et al - 1998
11
ECAF, 1989
9
1) Physical factors: which are not under direct human control which are often
influenced by the climate, and
2) Human factors: those caused by direct human intervention.
Although the extent of soil degradation tends to be site specific, the regions where soils
degrade the most rapidly generally have a number of common characteristics. These
commonly include:
ƒfrequent torrential rainfall;
ƒsteep slopes;
ƒreduced vegetative cover through increased agriculture;
ƒabundance of poor soils highly susceptible to erosion;
ƒrainy periods out-of-phase with periods of vegetative cover;
ƒreduction in extensive sustainable agriculture;
Probably the most significant cause of soil degradation has been soil erosion by water
and wind, although soil erosion is not the only cause of soil degradation. A major
determinant of soil quality is the amount of organic matter contained in the soil and this is
known to vary rapidly to changes in soil management. More intensive agriculture
methods, especially using modern techniques of cultivation and cropping, cause a
decrease in soil organic matter content.
Besides direct impacts of soil erosion, a number of off-site affects also arise. Examples
12
are siltation , contamination of groundwater by sediment and chemicals, declining
groundwater aquifers, deposition of eroded material in river beds, lakes or artificial dams
and reservoirs.
Often soil erosion causes abandonment of cropland, commonly followed by overgrazing,
which in turn provokes more severe erosion. Sometimes conventional soil conservation
measures inadvertently worsen the situation. In Southern Brazil and in some
Mediterranean regions for example, it is commonly observed that soil erosion has
increased spectacularly following the breakdown of terraces which were constructed to
reduce soil erosion occurring in conventional annual cropping systems.
Labour
The positive impact of conservation agriculture on the distribution of labour during the
production cycle and, even more important, the reduction in labour requirement is the
main reason for the adoption of Conservation Agriculture n Latin America, especially for
farmers who rely fully on family labour.
The substitution of conventional by conservation agriculture allows a more even
distribution of labour over the year, because of the reduction of ploughing and harrowing
activities and the use of cover crops and herbicides. The example in figure 1.4.2 shows no
differences in labour requirements in January and February months - the harvest time of
beans in Paraná (Brazil). Under conservation agriculture, cover crops are sown in April
and managed in September, which requires some hours of fieldwork.
The next bean crop is sown in October/November, resulting in labour peaks for the
conventional system, as the land needs to be prepared. Also, more labour is needed in the
12
Siltation: the covering of crop and other agricultural land below eroded areas.
conventional system for weeding activities in December. The total labour saved was
approximately 50 hours per hectare.
Labour (hours ha-1)
50
40
30
20
10
0
J
F
M
A
M
J
J
A
S
O
N
D
FIGURE 1.4.2
Labour distribution over the year for bean production under
conservation agriculture and conventional tillage in Paraná, Brazil
(Fatima Ribeiro et al 1993)
Besides the reduction in the total time required, conservation agriculture techniques
would also reduce the number of activities needed for the production cycle, as shown in
the example in Table 1.4.2a.
Table 1.4.2a - Mechanised operations and the time required (hours/ha) for each of them
under different production systems (Rego, 1998).
Operation
Knife roller
Direct seeding
Spraying
Harvest
Ploughing/disking
Levelling
Conventional planting
Earthling
Total
Conservation agriculture
0.89
0.76
1.2
0.93
3.78
Conventional tillage
0.6
0.93
1.37
1.38
0.89
1
6.17
Especially in areas where family labour is becoming a constraint, because of migration,
HIV-AIDS, etc. conservation agriculture could be a good option for farmers. The
reduction in on-farm labour requirement allows farmers to:
x extend the cultivated area,
x hire themselves out in off-farm employment,
x diversify their activities, including processing of agricultural products, or
x reduce the cultivated area due to increased yield and allow the marginal area to
regenerate.
Table 1.4.2b gives a simple overview of the labour requirements, using animal and
mechanized traction in land preparation activities. In particular, in the case of animal
traction, the reduction in labour can reach as much as 86%. Time required to prepare the
land using a tractor is reduced with 58% under conservation agriculture.
Table 1.4.2b - Time requirements for land preparation activities under conventional
tillage and conservation agriculture (adapted from Skora Neto, 1993).
Conventional tillage
Operations
Time required (hours
ha-1)
Tractor
Ploughing
1.5
Harrowing
(2x)
1.4
Conservation agriculture
Operations
Time required (hours
ha-1)
Tractor
Knife
0.9
roller
Spraying
0.3
2.9
Animal
Traction
Ploughing
Harrowing
(2x)
Furrowing
25
5
3
33
1.2
Animal
Traction
Knife
roller
Spraying
3
1.5
4.5
In production systems that use manual labour or animal traction the time the farmer uses
for, e.g. walking in the field, is also reduced considerably, as is shown in Table 1.4.2c.
Table 1.4.2c - Covered distances (km) by farmer for the cultivation of one hectare of
maize, using animal traction under conservation and conventional agriculture (Melo,
2000).
Operation
Conservation agriculture
Conventional tillage
Ploughing
40
Harrowing
15
Furrowing
10
Planting
5
5
Fertilization
10
10
Knife roller
7.5
Weeding
30
Nitrogen application
10
10
Bending over of the cobs
10
10
Harvest
15
15
Total distance (km)
57.5
145
Planning Farm Labour
Labour costs normally correspond to a high percentage of the total costs of production on
the farm. It is therefore essential to carefully plan the use of family and hired labour. More
efficient use of labour can be planned on two levels: the individual enterprise and the
whole farm. At the individual enterprise level, labour planning is used to improve the
performance of the different operations associated with the enterprise. Here the problems
are essentially practical and deal with the way operations is conducted. At the whole farm
level best use of labour throughout the year is assessed. These two levels, however, are
closely linked. Any change in the type of farm enterprises selected and farm operations
requires farmers to examine the labour resources and requirements.
In planning the use of labour on the farm over a season, labour profiles are drawn up. The
labour profile shows graphically the seasonal labour requirements of each enterprise and
the total demand of all enterprises for each month of the year.
A procedure for constructing a labour profile can be as follows:
1. Calculate the total number of person-days required for each enterprise. An example of
average or standard labour requirements for different enterprise in is given in Table
1.4.3.
2. Breakdown the total person days requirements into monthly figures for each enterprise
in turn.
3. Construct a labour profile for all farm enterprises together (see Example in Fig 1.4.3).
4. Assess the person days available to the farmer from the family labour supply.
5. Examine the labour supply and demand profiles and formulate a strategy for dealing
with labour shortfalls and surpluses.
Realising that many of the farm operations are carried out by women the labour profiles
could be disaggregated and broken down by gender.
It is necessary to consider the peaks and troughs of seasonal labour availability in relation
to the farm labour requirements. By adopting no-tillage techniques and modifying the
cropping pattern, making changes to the enterprise operations it is possible to achieve a
better allocation of labour and ensure its more efficient use. Periods of trough for
example, may be used for conducting more general farm maintenance operations. And
labour requirements during peak periods (e.g. transplanting, weeding or harvesting
period) could be met through the employment of either part-time or casual labour or
alternatively the introduction or more efficient use of mechanisation.
Table 1.4.3 - Labour Profile
Total
Labour Requirements (person/day/acre)
Cassava
Yams
Cabbages
Hot Pepper
Availability Surplus (+)
month
month (*)
Deficit (-)
Jan
2
25
10
0
37
50
Feb
5
20
10
15
50
45
13
-5
Mar
5
30
5
30
70
45
-25
Apr
May
5
3
10
5
5
10
30
35
50
53
45
45
-5
-8
Jun
3
15
0
30
48
45
-3
Jul
0
15
0
30
45
45
0
Aug
0
0
0
35
35
45
10
Sep
0
25
0
25
50
45
-5
Oct
0
5
0
30
35
45
10
Nov
5
5
0
0
10
45
35
Dec
5
5
0
0
10
50
40
Total
33
160
40
260
493
550
(*) Labour availability = 2 adults (one works full-time and the other only 50% )
Labour Profile
80
70
person/days
60
50
Required
40
Available
30
20
10
0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Machinery and Equipment
In the majority of the farms where conservation agriculture is practiced, fewer operations
are executed in the field. For this reason farmers need less equipment and the costs of
both labour (see above) and fuel are reduced. Besides the fact that the number of tools
can be reduced, in case of mechanized farming also the size of the tractor can be reduced;
for ploughing a heavier tractor is needed compared to direct seeding.
Likewise, in animal draft systems, fewer animals are needed, or different type of animals
can be used: in stead of one pair of oxen a pair of donkeys might be sufficient.
Less field operations result in less wear and tear of the equipment, which in turn will have
a longer life span and the costs for maintenance and repair are reduced considerably.
Table 1.4.4 gives one example of an estimation of machinery and fuel costs for Soya and
maize crop under conventional tillage and conservation agriculture. The costs for lime
and fertilizer application, insecticide spraying, harvest and internal transport are not
included in the calculation, as they did not differ between the two systems.
Table 1.4.4 - Estimation of costs for machinery and fuel in maize and soybean crop in Campos
Geraís, Brazil. (Montoya, 1984)
Soybean
Maize
Specification
CT
Quantity
U$/ha
CA
Quantity
U$/ha
CT
CA
Quantity
U$/ha Quantity
U$/ha
Maintenance
of terraces
Ploughing
Harrowing
(2x)
Planting
0.7 h/ha
2.44
-
0.7 h/ha
2.44
-
2 h/ha
1.6 h/ha
7.28
7.31
-
2 h/ha
1.6 h/ha
7.28
6.44
-
1 h/ha
4.88
1 h/ha
9.74
1 h/ha
3.93
1 h/ha
Herbicide
application
Total
1.6 h/ha
6.79
1.6 h/ha
6.27
0.8 h/ha
3.14
1.6 h/ha
Fuel
82.3 l/ha
28.70
Lubricants
Total
Total reduction
21.30
16.01
49.6 l/ha
4.77
26.07
12.84
23.2
3
86.8 l/ha
2.87
15.71
U$ 23.05 per ha (=7.75%)
22.4
6
5.14
27.6
17.0
6
58.7 l/ha
U$ 15.11 per ha (=4.82%)
The differences that occur for planting are due to the fact that the rental of the specialized
planters is higher that conventional machinery. The different cost for herbicides in
soybean is caused by the fact that in the conventional tillage one herbicide is incorporated
in the soil. This is no longer used in conservation agriculture. In maize in the
conventional system herbicides are applied only once, compared to two times under
conservation agriculture.
The following table is a comparison between the use of animal and machinery when
conservation agriculture is adopted. The information is referred to the average yield and
the yield from a demonstration filed (DF) in Brazil. Note that, for small farmers, the gross
margin derived from the use of animal traction double the one derived from machinery
traction.
T able 3.3 a
Av erage
Av erage
N T/CA M achiner y traction
N T/CA Animal traction
Yie ld (kg/ha)
8 03
9 25
Yie ld DF
G ross
Variable
(kg /ha)
O utput (R $ ) Cos ts (R $ )
2 ,0 35
1,4 13
7 81
2 ,6 81
1,8 26
6 91
G ross
G ross
M argin/ha
M argin/kg
(R $ )
6 32
1,13 5
10.7
9
6.27
(R $ )
0 .29
0 .41
15.1
8
3.48
18.6
6
Conservation Agriculture
Animal & Machinery Traction
2,800
2,600
2,400
2,200
2,000
NT/CA M achinery
tra ction
1,800
NT/CA Animal
tra ction
1,600
in R$ 1,400
1,200
1,000
800
600
400
200
0
Average Yield (kg/ha)
Average Yield DF
(kg/ha)
Gross Output (R$)
Variable Costs (R$)
Gross Margin/ha (R$)
FARM MANAGEMENT AND CONSERVATION AGRICULTURE
Management is a widely used term. Common definitions of management use phrases
such as "making decisions to increase profit", "making the best use of available
resources", "using, managing and allocating resources", etc. The above definitions
provide some insight into management and the things that managers do:
ƒFirst, they imply the existence of an objective (or objectives);
ƒSecond, there are resources that can be used or allocated; and
ƒThird, the resources to be used or allocated imply more than one possible use.
Farm Management is doing something with limited resources available (e.g. land, labour
and capital). It can be defined as the activity that combines planning, implementation and
operation activities of a farm. Farmers should know how to combine these resources for the
right outcome.
Regardless of definition, management takes time and work. It is just as critical to success as
planting, growing, harvesting and marketing a crop or a livestock product. Farmers should
be able to recognise their mistakes, be accountable for their actions, and be willing to
change their thinking based on better information. In other words, they should continue to
learn how to combine available resources to achieve their objectives.
The successful management of a farm would also require the manager to have the
following qualities:
ƒability to self-organise and to motivate people involved in the farm activities to
achieve specific objectives and targets;
ƒunderstanding of technical issues involved in the production and marketing of farm
products;
ƒability to communicate with other people involved in similar production and
marketing activities to ensure a continuous flow of clear information;
ƒability to make decisions.
Individual farmers already possess some or maybe all of these qualities. However, the
farmer, in order to achieve the desired objectives, must develop marketing and production
plans, make estimates about future events and forecasts and constantly re-adapt his/her
decisions to a continuously changing environment.
The changes in the environment are linked to several factors, which can be summarised
under four headings:
ƒTechnical - yield variability due to diseases, weather, variety, breeding or
technology;
ƒPrices - changes due to supply and demand in the Farm management is concerned
market place;
with
achieving
the
right
ƒInstitutional - factors concerning governments combination of available inputs
and banks;
(land, labour, and capital) in
ƒHuman - individuals make unique contributions
(crop
and/or
to the farm. Changes in staff involved in the farm production
livestock).
can seriously affect its performance.
The common functions of management that help farmers deal with changes in the
environment are:
a) Planning: This is considered the most fundamental and important principle. It entails
deciding on a course of action, policy, and procedure and assessing the future physical
and financial performance, for each enterprise and for the farm as a whole. Plans are
prepared based on resources available and on personal objectives.
b) Implementation: Plan implementation includes the purchase of the inputs and
materials necessary to put the plan into effect and overseeing the process. This is a
very important function within the farming context because in dealing with live plants
and animals, the farmer is faced with a large number of day by day decisions that need
to be taken.
c) Control: The control function includes monitoring and taking corrective action when
necessary. Monitoring often requires the keeping of records of activities that occur
such as the use of inputs, changes in stock, sales and purchases. Such information is
analysed to clarify what is occurring or has taken place on the farm. The results of the
plan are monitored to see if it is being followed and producing the desired results or,
alternatively, an early warning is provided so that adjustments can be made.
The process of planning, implementation and control is iterative and cyclical.
Fig. 1 - The Functions of Management
PLANNING
IMPLEMENTING
NEW
INFORMATION
OPERATING
CONTROLLING
Applying Farm Management Techniques to Conservation Agriculture
The adoption of conservation agriculture means that farmers pass from a labour-intensive
system to a more complex knowledge-intensive system. Consequently, either the possibility
for off-farm paid employment or the possibility for on-farm diversification of activities can
strongly influence farmers' decision towards adoption of conservation agriculture.
Another consequence is that farmers will have to learn a lot in the first few years of
adoption and this might be a barrier to entry. Farmers tend to adopt technology packages in
a stepwise manner. Given the complexity of conservation agriculture (crop rotation, cover
crops, weed management, direct seeding, etc.), it is unlikely that farmers are willing to
jump from one system to another, especially farmers with traditional systems. In these
cases, less sophisticated conservation agriculture practices would be more acceptable to
farmers.
Farm Income and Profitability of Conservation Agriculture
Conservation agriculture techniques provide an effective control of land degradation,
reducing soil erosion, and increasing efficiency, productivity, and soil organic matter,
together with a substantial improvement in environmental quality due to the sustainable use
and management of natural resources.
However, even after all the extensive field tests carried over in Brazil, there is still some
doubt regarding the sustainability of Conservation Agriculture in comparison to
conventional agriculture. By definition, an agricultural system can be defined sustainable
when it provides itself with all chemicals and biological needs in a way that the energetic
balance is positive or even. This broad definition would indicate, from the technical
viewpoint, that the agricultural system could have a high efficiency in the use of inputs.
With a positive energetic balance, the agricultural system would have no waste or losses
during its life process and, therefore it would have a long useful life.
However, in order to have a high efficiency in the use of inputs, little losses and
consequently a long useful life, we need to establish a technical-economic tripod that would
support the sustainability of the whole farming system:
Farming System
Technical
Economic
Energy
In all tests carried out in the field, the three factors composing this tripod have proved to be
more favourable for the conservation than to the conventional agriculture systems.
Obviously, when adopted, Conservation Agriculture would produce small economic
advantages for the farmer. However, the advantages would increase significantly during the
years of constant and correct use of CA principles (as explained at the beginning in the four
theoretical stages).
Is Conservation Agriculture Viable?
In Table 2.1.2, referring to a production cost for 1 hectare of maize in a demonstration field
in a farm in the region of Campos Gerais (Paraná - Brazil), it can be noted that both
conventional and conservation systems are able to produce the same output (R$ 720), that
is there is no difference in yield (kg/ha) between the two systems. The advantages of CA
will be noted only under mechanisation (agricultural practices) and in the fixed costs, while
the disadvantages can be related to an increase in the use of chemicals (20%).
Table 2.1.2- Comparative Production Costs (in Brazilian Reais - R$)
Crop: Maize
Year: 1996-1997
Location: Campos Gerais - Parana (Brazil)
Description
Conventional Agriculture
Q.ty
Output (Kg/ha)
R$
Conservation Agriculture
Q.ty
R$
%
Variation
7,200.00
780.00
7,200.00
780.00
20.00
60.00
20.00
60.00
Variable Costs
Seeds (Kg/ha)
Lime (Kg/ha)
0.00
0.00
375.00
131.00
10-30-20 + Zn (Kg/ha)
330.00
115.00
320.00
112.00
Nitrogen (kg/ha)
120.00
52.00
80.00
28.00
Hyperphosphat (kg/ha)
300.00
105.00
0.00
Chemicals (total cost):
40.00
0.00
48.00
Round-up (l/ha)
0.00
0.00
Lorsban (l/ha)
0.00
0.00
1.00
Primoleo (l/ha)
0.00
0.00
4.00
Gramoxone (l/ha)
0.00
0.00
1.00
Endrex (l/ha)
1.00
0.00
0.00
Thiodan (l/ha)
1.00
0.00
0.00
Gesaprin (l/ha)
3.00
0.00
0.00
Laço (l/ha)
0.50
0.00
0.00
Agric. Practices (total cost):
147.00
Knife roller (h/ha)
0.00
0.00
Direct seeding (h/ha)
0.00
0.00
-20.00
1.50
128.00
12.93
2.31
0.76
Treatment (h/ha)
0.60
1.20
Harvest (h/ha)
0.93
0.93
Other Operations (h/ha)
3.75
0.00
Conventional seeding (h/ha
0.89
0.00
Total Variable Costs
519.00
507.00
Fixed Costs
100.00
100.00
Total Costs
619.00
607.00
Net Income
161.00
173.00
Source: Plinio Guerra - Economia e Gerencia no Manejo dos Solos
7.45
Income and Production Costs
800
600
400
200
0
Income
Variable
Costs
Fixed Costs Net Income
Conventional
780
519
100
161
Conservation
780
507
100
173
The comparison exercise shows how the single cost (e.g. fertilisers, chemical and fixed
costs) contributes differently to the total cost in the two systems. However, the economic
advantage could be further increased if the farmer would:
a) Better plan the farm activities: planning is a very broad term and includes a series of
agro-economic factors, such as: seeding time, crop diversification, collective purchase
of equipment, machinery and inputs, proper distribution of field activities, collective
sell of products, costs control, etc.
b) Choose appropriate varieties and hybrids to be used
c) Optimise the use of chemicals: this is a very important point. The final objective of
Conservation Agriculture is to produce food without using chemicals. There are
several ways to optimise the use of chemicals, such as using adequate technology and
dosages for applications, knowledge of weeds and pests biology, biological control of
pests, crop monitoring, etc.
d) Rationalise the use of fertilisers: soil fertilisation should not be based only on the use
of NPK fertilisers, but it should also be based on simple techniques such as control of
erosion, crop rotation, lime application, increased organic matter. These techniques
can help to optimise the use of fertilisers and minerals.
e) Rationalise the use of machinery and equipment: the cost for the use of equipment and
machinery can be reduced if the time used for specific activities is not wasted or not
proper used. Moreover, special care should be given to equipment/machinery
maintenance and use. The objective is to avoid the maintenance costs to be higher than
the amortisation cost of a new equipment or machinery.
The Concept of Farm and its Enterprises
A farm is a piece of land on which a farm household undertakes agricultural activities as
part of their livelihood. In addition to the land itself, a farm may include structures erected
on the land: wells, irrigation channels, fences to control livestock, buildings to house
livestock or to protect equipment or to store farm produce and a house in which the farm
family live. The farm also includes the crops, livestock and other resources to support the
livelihood of the farm family. Some of the operations conducted on the farm include the
cultivation of fields, orchards and vegetable gardens, the raising of livestock as well as
combinations of these activities. Farms vary in size from smallholdings of less than a
hectare involved in subsistence production to large plantations covering thousands of
hectares. The common feature of the farm is its “unity of management”. The concept of
the farm is of central importance to farm management.
The essential features of a farm are: the farmer as decision maker and manager; the
productive resource base (land, labour, capital); and farm inputs and outputs. Within a
farm, several activities such as maize, potatoes, yams, beans, dairying, poultry production
etc. can be identified. These activities are called farm For example, maize is the
enterprises.
output of a crop enterprise
Generally a farm is made up of several enterprises. Each but when the same maize is
farm business has its own inputs and outputs and used to feed dairy cattle, it
becomes the input of the
sometimes the output of a farm enterprise is the input of dairy enterprise.
another. Inputs are the things put into the production
process: the use of the land, the labour of the farmer and their family and any workers that
may be hired, the mental effort put into planning and managing, the seed for the crops and
feed for animals, fertilisers, insecticides and other supplies, tools and implements and
draught livestock or tractors. All the things that go into agricultural production are inputs.
The outputs are the crop and livestock products the farm produces.
The farm business
Input
Output
It is very important to understand the farm household objectives and the methods by
which these objectives are achieved. One of the basic decisions to be made by the farmer
is what to produce or what combination of enterprises? The list of possible enterprises can
also be restricted due to technical (e.g. weather, variety, breeding, technology), economic
(prices of inputs and outputs), institutional (governments and banks) and human factors
(labour, technical knowledge).
What is Farm Management?
The role of the farmer is twofold. He or she is at the same time cultivator and manager.
The first role of the farmer is to take care of plants and livestock in order to get useful
products. For plants, this includes the preparation of the seedbed, the sowing of the crop,
the elimination of weeds, the management of soil moisture and measures for the control of
pests and diseases. For livestock, it includes controlling their breeding, herding and
feeding, protecting from diseases and where necessary, housing them.
Another role of the farmer is as manager. Just like any business, farming requires
management. Where the skills of cultivation are mostly physical, the skills of
management involve activities of the mind backed up by the will. They involve primarily
the making of decisions, or choices between alternatives. The decisions each farmer must
make as manager include choosing between different crops that might be planted in each
field, choosing what livestock are to be kept on the farm and deciding how to distribute
available labour time among different tasks, especially at times of the year when several
tasks need to be carried out at the same time. They involve choices as to what and how
many draft animals need to be kept for work in the fields.
As agriculture becomes more market driven, and commercial in nature, the farmer must
develop better skills in buying and selling. Farmers must decide whether or not to
purchase improved seeds, fertilisers and pesticides or new implements. They must decide
whether or not to employ additional labour to work in the field. They must decide how
much of each crop to be kept for home consumption and how much to be sold. They must
decide when to sell the produce and to whom to sell them.
The kind of decisions taken by farmers as managers can be summarised as:
x making choices of different types of crops and livestock activities;
x how to best use the resources available to the farmer in production and post
harvesting operations;
x selecting the most appropriate technology to use; and
x deciding where and whom to sell their produce and at what prices.
These are only some of the wide range of day to day choices that managers have to make.
Common definitions of management include “making decisions to increase profits”,
“making the best of available resources” and “using, managing and allocating
resources”. There are many others. These decisions imply a number of factors:
ƒFirstly, the existence of a goal or goals;
ƒSecondly, that there are resources such as land, labour and capital that can be
used or allocated;
ƒThirdly, that the resources to be used or allocated imply more than one possible
use.
Farm Management is a complex activity. It is about doing something with the limited
resources available to the farmer. Farmers need to know how to combine these resources
optimally in order to attain a satisfactory outcome. Farmers require improved management
skills to become more competitive as farming becomes more market driven. Farmers need
to develop their managerial ability so that they are better equipped to take advantage of
opportunities open to them, and to make their farms as productive as possible, with
increasing profits from farm operations.
The farmer, however, is also a member of a family and local community. In effect decisions
are made by the farm family, since different farming operations are carried out by different
members. But the ways in which farm tasks are shared vary from one culture to another.
There is a division of labour within the family between all of its members. While most of
the decisions with respect to farming are made by the individual farmer, decisions are made
in the light of membership within the family. The farmer desires what is best for all
members of the farm household and they have a direct influence on the decisions taken.
Nevertheless, the desire of the farmer to secure a better living for the family is a compelling
factor in many situations to improve the productivity of the farm business.
Successful management of the farm requires the farmer to have the following qualities:
ƒthe ability to organize and achieve specific goals and targets set by the farm
household;
ƒa good understanding of technical issues involved in the production and marketing
of farm products;
ƒthe ability to communicate with people to obtain good information;
ƒthe capacity to make informed and relevant decisions.
Individual farmers may already possess some or all of these qualities. However, in order to
achieve their desired objectives, the farmer must develop marketing and production plans,
make estimates on future events and forecasts, and adapt their decisions in the light of
technical, market and policy changes that are regularly occurring in the broad environment
within which farming takes place. Farmers require the skills and know how to adapt
effectively to external changes and ensure greater competitiveness.
Farm Management takes time and work and is just as critical for success as planting,
growing, harvesting and marketing a crop or a livestock product. Good farmers need to
learn from their day to day experience and recognise their mistakes, become accountable for
their actions, and are willing to change their thinking based on new information.
Why is Better Farm Management Important?
As previously mentioned farmers operate within a dynamic and constantly changing
environment caused by:
x Changing prices: Prices of inputs and outputs are constantly changing in line with
supply and demand and market forces. Changes in the prices of products affect the
overall farm’s profitability.
x Changing resource availability: The quantity available of any input has a direct impact
on farm profitability. Problems of availability of supplies could result in the reduced use
of fertilizers, purchased feed etc. and farmers would constantly need to reassess past
decisions in relation to the resources available.
x Changing technical relationships: The relationship between inputs and outputs
changes as technological advances are made. For example, a new variety of cassava may
become available that produces a yield similar to current varieties but with better disease
resistance, lower fungicide requirements and, hence, lower production costs. This would
have an effect of enhancing farm profitability.
x Changing institutional/ social relations: Factors concerning access to markets/
financial institutions, government support and private sector linkages also affect the
performance of the farm.
Although farmers are in the position to control the use of their own resources, they cannot
control the factors and conditions surrounding them. They have to constantly assess the
potential benefits of technologies and reassess the relationship between inputs and outputs.
When new technologies are introduced and increase production and more produce reaches
the market, market prices may fall, further influencing the relationship between inputs and
outputs. Farmers have to respond to these changes effectively. Improving farmer’s
management skills is the best way to prepare them to adapt and cope with the external
changes that impact on agricultural performance.
What are the Farmer's Objectives?
In order to improve farm management, it is important to understand the expectations of
farmers and their families. Farmers tend to have a number of objectives that guide their
choices between alternative actions. Some of these are:
x ensuring stable food supplies for the family.
x increasing production;
x maximising profits;
x increasing sales;
x minimising costs;
x avoiding debt;
x achieving a “satisfactory” standard of living;
x reducing the risks involved in farming;
x transferring the farm to the next generation ;and
Farmers often have multiple objectives and some may even
conflict. Nevertheless, for market oriented production an
important common objective is profit. In the long-term,
farm profit must be sufficient to cover family expenses
and production costs related to the farm.
Profit is the difference
between the value and the
cost of the production. It
represents the farmer's
gain.
How Do Farmers Decide?
Farmers continually make decisions and it is the role of extension workers to support
them in doing so. The steps taken in the decision-making process are summarized as:
Identify the
problem and collect
data/information
Follow-up and
monitor the
decision
THE DECISION-MAKING
PROCESS
Implement the
decision
Identify and
appraise
alternative
solutions
Make the decision adopt the best
alternative
First Step - Identify the problem and collect data/information: The first stage of the
process is to recognize the existence and nature of the problem. This stage calls for the
collection of data on current farm performance as the basis for making improvements to
the farming system. For example, data could be collected to analyse farm performance in
comparison to other similar farms in the vicinity. The problems identified might be due to
the use of obsolete or inappropriate production techniques, constraints on marketing and
limited alternative market channels.
Second Step - Identify and analyse alternative solutions: Possible solutions to the
identified problems may include increasing the use of purchased inputs and materials, and
introducing improved bio-fertiliser and pest management methods amongst others. The
consequences of the alternative actions would be evaluated to assess their likely impact on
farm performance.
Third Step - Make the decision and adopt the best alternative: Which of the alternatives
is most likely to improve farm performance? Since it is rare that all the information required
in making a decision would be available, selection often requires judgement by the farmer
before a decision is made. The final decision, therefore, will frequently reflect the farmer’s
attitude towards risk and more specifically, the perceived risks of each of the alternatives.
Fourth Step - Implement the decision: Farmers have a role in implementing decisions and
enforcing the action needed to ensure that the decisions are followed. On a small farm, very
often different members of the farm family undertake the planning and implementation
tasks.
Fifth Step - Follow-up: Once the first four steps have been completed, it is useful to review
the results of the decisions taken. Having identified the changes made, it is important to
continue monitoring progress to ensure that the new plans are being followed and that
revised targets are being achieved.
There are three different time horizons within which decisions are taken in agriculture.
These are:
a) Short-term. These decisions are concerned with the daily organization of farm
operations such as sowing, weeding, fertilising, harvesting and storage. They also
involve culling of stock, veterinary interventions and artificial insemination of
livestock.
b) Medium -term. These are concerned with the annual organisation of the farm e.g.
preparing the cropping plan, deciding on the amount of labour to use and whether to
introduce new crop varieties and animal husbandry practices.
c) Long-term. These decisions relate to the long-term nature of the farm e.g. whether or
not to expand farm size through purchasing or leasing land; and whether or not to
construct buildings and/ or purchase of machinery and equipment.
Short-term decisions are operational in nature, medium and long-term decisions are
concerned with capital investments.
Understanding Farm Enterprises
There are several restrictions and opportunities in managing farm enterprises. Knowledge
of enterprise gross income, costs of production, gross margin and profitability is essential
for both extension workers and farmers.
Gross Income
Gross Income is the value of the output of an enterprise. The gross income is obtained by
multiplying the physical output (including home consumption) by the farm gate price of
the product. The farm gate represents the point of first sale. It would be incorrect to
calculate gross income for the enterprise by using the price at which the farmer sold the
produce in the marketplace or elsewhere off the farm. The costs of transportation and
other marketing expenses need to be deducted from the market price in order to arrive at
the gross income at the farm gate.
Since it is possible to produce more than a single short term crop from the same land area
within a year, a distinction needs to be made between gross income for a particular season
and gross income for a particular year. The gross income of a particular crop for the year
may be the sum of the gross income for two or more crops grown during the year.
Where stocks are carried over from one production period to another, as with livestock
production, gross income can be defined more precisely as the difference between the
closing valuation of stocks plus sales (including marketable produce and by products
consumed on the farm) and the opening valuation of stocks plus purchases.
A gross income calculation for a livestock enterprise could be set up as follow:
Closing valuation (at the end of the year)
Opening valuation (at beginning of the year)
Increase/Decrease in value
Total Sales
By-products
Products used for home consumption
Sub-total
Purchases of animals (during the year)
Total net turnover during the year
Gross Income
$US .................... (+)
$US .................... (-)
$US ...................
$US ....................
$US .................... (+)
$US .................... (+)
$US ....................
$US .................... (-)
$US .................. (+)
$US ..................
The gross income calculated for perennial crops would use the same calculation method.
Changes in value of tree crops and the value of produce stored on the farm would be part
of the gross income calculation.
The factors that influence the gross income of an enterprise can be summarised as:
ƒthe value of produce sold both directly or via intermediaries;
ƒthe value of by-products and produce re-used on the farm - produce which is used
again as input on the same farm. For example, maize is produced as grain and used
as feed for the livestock enterprise;
ƒthe value of produce consumed by the farmer and his/her family - for example rice,
beans, cassava, etc. consumed by the farmer's family, and valued at the farm gate
price;
ƒthe gain/loss in value of tree crops and livestock - increase or decrease in value of
tree crops and livestock. It is the difference in value at the beginning of the year
(opening valuation) and the value at the end of the year (closing valuation).
ƒthe gain/loss in value of stored farm produce - in the case of products from a
previous agricultural season and stored ready to be sold (cassava, dasheen, etc.).
This is the difference in value from the time that the produce is stored to the time
that it is sold.
An example of a gross income calculation is given below.
a) Gross income of 1 ha of Sweet Potato.
Produce:
Sweet Potato:
8,000 kg/ha at $ 0.5 per kg
Family consumption
200 kg at $ 0.5 per kg
Gross Income
Costs of Production
= $ 4,000
= $ 100
= $ 4,100
It is important to understand the structure of costs of production. While the farmer does
have control over some of the costs of production, they tend to have little or no control
over the prices received for most of their products. This is often the case as product prices
are determined by both country and world-wide factors. Therefore, in the event that
farmers wish to increase their income, they should attempt to reduce the cost per unit of
output.
Production costs are usually classified into two categories: variable and fixed costs. The
classification of a particular cost as variable or fixed depends partly on the nature and
timing of the management decisions being considered. Some costs are fixed in relation to
certain decisions but others remain variable.
Variable Costs
Variable costs are short-term costs (usually made within one year or within a single
production cycle) and include items that:
- occur only if something is produced (and do not occur if nothing is produced);
- tend to vary according to the size of the enterprise (with the area of the crop or the
number of livestock); and
- can easily be allocated to individual enterprises.
For example, considerable labour is required in vegetable production. If a farmer has to
hire labour, then as production increases, so too will the need for hired labour. Similarly,
Fuel costs for a tractor increase as the use of the tractor increases; or the greater area a
farmer plants to bananas, the higher the fertilizer costs. Thus, variable costs in farming
are usually costs of seed, fertilizers, sprays, livestock feeds, veterinary services, fuel and
lubricants, interest, etc.
The variable costs of a crop enterprise could include, for example:
- Seed: This is usually bought but may be a mixture of purchased and home-grown seed.
Home-grown seed may have been kept in storage since the end of the previous season
and as such needs to be valued. Although it is home-grown, it will have a value (the
value at which it might have been sold).
- Fertilizer: This is normally purchased but could include animal or farmyard manure.
The value of the latter may be the nutrient replacement value. The nutrients found in
manure replace some or all of those found in artificial fertilizer.
- Sprays: This includes chemical or biological agents used to control weeds, pests or
diseases.
- Hired Labour: This covers the labour brought in from outside the farm. Hired labour is
used for tasks required to be done quickly at times when insufficient numbers of the
farm’s own workforce are available (e.g. special weeding operations, assistance with
pineapple harvesting or banana sorting before marketing).
- Fuel and Lubricants: Includes the costs of fuel and lubricants used in farm equipment
and machinery.
- Miscellaneous Crop Costs: This includes all other costs attributable to crops that have
not been included under the other headings. For example, bananas may be sold in
boxes. This item would be placed under this heading.
The variable costs of a livestock enterprise would include:
- Feed: Includes feed purchased or transferred from another enterprise on the farm (e.g.
maize produced on the farm and used to prepare a ration for animal feed).
- Veterinary Fees and Medicines: This heading covers all expenditures for animal
health, mainly veterinary practitioners’ fees and medicines. Prophylactic doses of
mineral or vitamins for the improved animal health of intensively reared stock (e.g.
pigs or poultry) would also be included.
- Livestock Transport: If the amount of produce to be transported is considerable, a
transportation company may need to be contracted. For small amounts of produce sold,
farmers often prefer to take their own animals to market.
- Fuel and Lubricants: These include the costs of fuel and lubricants for farm
equipment.
- Miscellaneous Livestock Costs: These include such items as ear tags for animal
identification and bedding. Purchased forage in small amounts could also be included
but large quantities purchased should be added to the feed cost item.
Fixed Costs
Fixed Costs are generally long-term costs (lasting for more than one year) and are
defined as costs that remain the same regardless of the size of the enterprise and do not
alter with small changes in size. The allocation of
fixed costs to a specific farm enterprise can be As a general rule, a reduction of fixed
difficult, in some cases. Some fixed costs can be costs where production is not
directly allocated to a specific enterprise (e.g. affected will lead to increased profit.
maize harvester, cages for chickens, etc.). Other A higher fixed cost places a strain on
fixed costs (e.g. farm machinery) are more the farm and pressure to increase
difficult to allocate. Tractors, for example, tend to productivity.
be used in all farm operations and for all
activities. If a farmer grows an extra acre of maize, the costs of the tractor will hardly be
increased. If the farmer stops growing the crop altogether, some of the tractor costs will
still be incurred. Of course, the operating costs of using the tractor, and in particular the
cost of fuel, are variable but the capital cost of the tractor is fixed.
19
Other fixed costs such as depreciation on buildings and machinery, maintenance and
repairs, regular labour, water, fencing, insurance and rent, may need to be computed for
the whole farm unless they can be directly allocated to a specific enterprise.
19
Machinery depreciation: The annual cost of capital items is called depreciation cost. Depreciation charge is included to reflect the
fall in value of farm machinery in a year. A rate of depreciation is applied depending on the class of machinery involved. For example,
powered machinery will usually carry a depreciation rate of 20-25% per annum whereas trailed equipment (cultivators, drills, etc.) is
usually depreciated at 10-20%.
The annual cost of depreciation of a capital item can be calculated as follows:
Purchase price - Salvage value
---------------------------------------- =
Annual depreciation cost
Labour can be either supplied by the farm family or hired. Hired labour is treated as a
variable cost as noted above. Family labour is sometimes treated as a variable cost and on
other occasions as a fixed cost. This depends very much on the family unit size and
composition which varies between countries and cultures. Where the farm operations are
shared between the adult members of the family on a regular basis throughout the year,
family labour is treated as a fixed cost. However, some members of the family,
particularly children, might also help out for specific operations at particular times of the
year. In this event their labour contribution could be treated as a variable cost.
For small farms, family labour normally does not constitute a cost. However, the cost of
family labour should be valued as if it were all hired. To value this cost, the concept of
opportunity cost - the cost of any choice is given by the value of the best alternative use
foregone - can be applied.
Gross Margin
Gross margin is a simple, useful and practical tool to assess farm performance. The gross
margin for an enterprise is defined as the gross income minus its variable costs.
Gross margin = Gross income - variable costs
A farmer who uses his resources to grow crops worth $60 at a variable cost of $10 is
generating a gross margin of $50 ($60-$50). The gross margin is a measure of what that
enterprise is adding to farm profits. Variable costs rise and fall as the enterprise expands
and contracts. The fixed costs of the farm will not be affected if a farmer decides to grow
a new crop. Only the variable costs will be increased together with the total value of
production of the farm. If the extra variable cost is less than the value of extra production,
the farmer will increase profits by growing that crop. Farm profits will be increased by the
value of the gross margin for the crop.
Enterprise Profitability
A profitability calculation conducted for the whole farm may indicate a problem, but the
source of the problem is often difficult to find if there are many enterprises. Some
enterprises may be highly profitable, while others are unprofitable or less profitable. This
requires analyses of profitability for the different farm enterprises.
The calculation of enterprise profitability consists of deducting all of the costs incurred
for the enterprise i.e. fixed and variable costs, from the enterprise gross income. When the
enterprise gross margin was calculated above, only the variable costs were taken into
account. Now in calculating the enterprise profit the total cost of production – fixed as
well as variable- is considered.
Enterprise profit calculations assume that the fixed costs can be allocated to the enterprise.
This may, however, in some cases be difficult to assess. The allocable fixed costs may
include family labour, rental charges, taxes, depreciation and interest on machinery and
Useful life in years
Where:
Purchase price = is the value of the capital investment at the time of the purchase.
Salvage value =
is the value of the implement at the time it has come to the end of its useful life.
equipment, taxes and other costs. Rent and land taxes are apportioned according to the
area of the farm devoted to the enterprise and the duration of the crop. Where the land is
owned, a rental value can be imputed at the market rate for similar land by using the
concept of opportunity cost.
Family labour should also be allocated to the enterprise and can be valued as if it were all
hired. The time required for all operations would need to be accounted for and the result
multiplied by the going wage for hired labour.
Enterprise
profitability
is
Interest is defined as the payment for the use of borrowed conducted by allocating all
capital. Since the capital requirements of the farm may be income and costs among the
supplied partly by the farmer and partly by outside individual enterprises being
sources, it is usually difficult to determine how much carried out.
interest should be included in the cost. For the purpose of
costing the enterprise, interest should be imputed at the market rate for all costs incurred
for the enterprise as though all money required to produce the crop were borrowed.
Gross
Income
Enterprise
Gross Margin
Enterprise
Profit or Loss
Variable
Costs
Fixed
Costs
The factors affecting gross income and profitability of three typical enterprises are
indicated in the examples that follow.
Factors Affecting Gross Income and Profitability of a Banana Enterprise
climate
soil nutrient status
mineral fertilizer
organic fertilizer
pest/diseases incidence
Yield
variety
irrigation
planting date
plant population/density
% spoilage
GROSS INCOME
time in which it is sold
sales - direct, wholesale
Price
variety
type of packaging used
less
Fertilizers
Planting material
Chemicals (herbicides, fungicides, insecticides)
Variable Costs
Casual Labour
Bags
Miscellaneous
less
Permanent labour
Fixed Costs
Machinery (owned or rented)
Other rent
Financing costs
Miscellaneous
equals
ENTERPRISE PROFIT or NET INCOME
Factors Affecting Gross Income and Profitability of an Egg Enterprise
Housing conditions
Strain of bird
Feed
Output of Eggs
Number of eggs laid per bird
Size of eggs
Resistance to disease
Time of year when hens hatched
Gross Income
Price of Eggs
and seasonality of production
Size and grade of eggs
Method of sale
Brown or white shells
Percentage of cracks and
second quality eggs
Price of Culls
Strain of bird (weight of carcass)
Age of birds (first or second year)
Livestock
replacements
Cost of replacement
Mortality
less
Variable Costs
Feed
Vet. and medicine
Hired labour
Miscellaneous
less
Fixed Costs
Permanent Labour
Machinery
Rent and rates
Buildings and equipment costs
Financing Costs
Miscellaneous
equals
ENTERPRISE PROFIT or NET INCOME
Whole Farm Income
Whole farm income is the year-by-year profitability of the farm as a whole. It is the
reward for labour, capital and management contributed by the farm family during the
year. There are several ways of calculating this, either by using gross margins or
enterprise profitability calculations for all farm enterprises. The total gross margin for the
farm is calculated by combining the gross margin of each of the farm enterprises and the
fixed costs are deducted to arrive at whole farm income. This gives a measure of the farm
profit. It should be noted that the term “margin” used in this sense simply means the
difference between costs and returns. In fact the gross margin is sometimes called gross
profit.
Gross Margin
=
Gross Income
-
Variable Costs
Whole farm
income
=
Gross Margin
-
Fixed Costs
The final income figure reflects the profit of the farm By measuring farm income,
and the reward for the capital and management the economic strength of the
contributed by the farm family during the year. The farm can also be measured.
management income for the farm is equal to the total of
the profits from all enterprises. The whole farm income is necessary to cover the family
living expenses and payment of taxes. The amount left over after these accounting for
living expenses and taxes can be reinvested into the farm activities.
Economics results - (Parana - 97/98 - 98/99)
Index
No-Tillage
Total Production Costs (R$/ha)
Yield (kg/ha)
Conventional
256.00
274.00
5,929.00
5,723.00
Market Price (R$/kg)
0.10
0.10
Total Output (R$/ha)
604.76
583.75
348.76
92.00
309.75
122.00
3.79
2.54
Net Income (R$/ha)
Labour (hs/per/ha)
Return to Labour (R$/ha)
Source: adapted from Ribeiro et al. (1998)
%
7.0%
-3.5%
-3.5%
-11.2%
32.6%
-33.0%
FARM PLANNING – GROSS MARGIN
The Use of Gross Margin System in Farm Planning
Gross margin is a simple, useful and practical tool to assess the performance of a farm
business by comparing the return or profit from its different farm enterprises.
The gross margin for an enterprise is the output (income) from the enterprise minus its
variable costs.
Gross margin = Gross output - variable costs.
The gross margins for the business are then aggregated together and the fixed costs
deducted to arrive at the net profit for the business. The aim of gross margin accounts is
to allocate the variable costs to their respective enterprises.
Gross margin accounting is the most commonly used system on farms for both
performance analysis and budgeting, and it has several advantages, such as:
x it does not require arbitrary decisions to be made over allocating the fixed costs;
x it is not as time consuming as full-cost accounting; and
x it focuses on those costs of an individual enterprise, which can be varied in the shortterm. (e.g. over one production cycle).
Gross margin accounts
Output from Enterprise
“A” (e.g. coffee)
less
Variable costs
for “A”
equals
Gross margin “A”
plus
Output from Enterprise
“B” (e.g. cattle)
less
Variable costs
for “B”
equals
Gross margin “B”
equals
Total farm gross
margin
less
Farm’s fixed costs
equals
Farm’s net profit
The following is an adapted example of a small-holder farmer in the region of Iraí de
Minas (MG) – Brazil
Farm enterprise
Rice
Coffee
Bean
Maize
Total
Gross Margin
per ha ($)
Area in
Hectares
Total Gross
Margin ($)
131
131
110
26
2.5
0.8
0.5
1.2
5.0
327.50
105.00
55.00
31.20
518.70
Any positive gross margin represents a contribution toward paying the fixed costs.
Therefore, maximising gross margin is equivalent to maximising profit (or minimising
losses) because the fixed costs are constant.
Calculating gross margins requires the farmer's best estimates of yields or output for each
enterprise and expected prices. The calculation of total variable costs requires identifying
each variable input needed, the amount required, and its purchase price. The gross margin
concept is useful for detecting faults in management. To take a simple example of the
above mentioned farmer with 5.0 ha cropped as follows:
2.5 ha rice
0.8 ha coffee
0.5 ha bean
1.2 ha maize
5.0 ha
less:
5.0 ha fixed costs
Profit
gross margin $ 131/ha
gross margin $ 131/ha
gross margin $ 110/ha
gross margin $ 26/ha
$
$
$
$
$
327.50
105.00
55.00
31.20
518.70
$
$
350.00
168.70
Suppose that the farmer, by applying $20 of fertiliser, can increase the gross margin of
the bean crop by $60. This would increase the total gross margin by $60 and, as the fixed
costs would remain the same, the profit would also rise by $60, which means the farm
profit would be increased by 36%.
Suppose that the farmer grew less beans (0.2 ha) and instead of that more rice (0.2 ha).
The effect would be a loss of $22 (beans) and a gain of $29 (rice) gross margin. That is to
say, a net gain of $7.
Another example of the use of gross margins for detecting faults in management can be:
Potato Crop Enterprise
Potato crop
$ per hectare
Output
300
Less Variable costs
200
Gross Margin
100
A gross margin derived from such figures is rather limited for planning, budgeting or
even reviewing enterprises. There is no breakdown of output or variable costs and no idea
is given of the relative contribution made by different inputs. Neither is there any
information of how outputs have been achieved. As such, this information would not help
farmers in the adoption of a new technology. Therefore, it is essential to have as detailed
a breakdown of variable costs and output as possible.
Potato crop
Output
less
Variable costs:
- seed
- fertiliser
- pesticides
- contract labour
- other
Total variable costs
Gross Margin
$/hectare
300
60 (30.0%)
25 (12.5%)
35 (17.5%)
40 (20.0%)
40 (20.0%)
200
100
Now we have a much clearer picture of how costs have been made up and we can take
the first step assessing technical as well as financial performance of the enterprise. For
example, we know that 30% of the variable costs of production is seeds and contract
labour account for 20%. This will provide useful data for comparison with other similar
enterprises on neighbouring farms or in the region.
However to be most useful we should have details of the physical usage relating to each
cost. For example:
Potato crop
Variable costs
- seed 3.0 t/ha x 20 $/t
- fertiliser:
200 kg N
250 kg P2O5
250 kg K2O
- pesticides:
herbicides (2.5 l/ha)
fungicides (3x3 l/ha)
desiccant (4 l/ha)
- hired labour (100 hours)
- other:
bags
levy
Total variable costs
$/unit
$/hectare
60
25
7
12
6
35
12
17
6
40
40
25
15
200
We now have a full picture of the variable costs of this potato enterprise. It is possible to
assess the technical and financial strengths and weaknesses that are contributing to the
overall gross margin. For example:
x is the level of fertiliser application correct?
x is the price of seed per tonne too low, to high?
x why are 3 fungicides applied when other farmers locally are applying one?
To conduct such an assessment, access to standard data from similar farms/enterprises is
necessary and a certain degree of technical familiarity with the enterprise is very useful.
Output
Just as we need to know how variable costs are made up, we equally need to understand
how output is made up. For the potato crop example:
Output
sales 30 t/ha - 300 $
We immediately have an assessment of yield of that enterprise. However, we could be
misled by thinking that the average price per ton was 10 $ (300 $/30). In fact sales were
made up of several components:
Output
15 t/ha for processing plant (14 $/t)
10 t/ha for stock-feed (3 $/t)
5 t/ha for seed (12 $/t)
$
210
30
60
300
We thus have a clear picture of the market for sales and the prices achieved in each
market place. We also may ask the following questions:
1. Why is 33 % of yield ending up as stock-feed?
2. Is $12/ton a realistic price for potato seed?
Example of Gross Margin Calculations
The following example analyses how conservation agriculture techniques affect the gross
margin.
Soybean, Maize, Beans and Onions under CA and under Conventional Agriculture - Comparison (in R$/ha)
Description
Onions
Convent
Total Output
Inputs (fert.,seeds, chemicals, etc.)
3,360
624
Soybean
CA
Convent
Maize
CA
Convent
Beans
CA
Convent
CA
4,240
611
634
293
806
359
600
200
720
365
1,109
197
1,520
257
Machinery use
186
152
153
138
164
127
232
213
Labour use
570
505
9
8
161
131
188
116
1,380
1,980
1,268
2,972
455
179
505
301
525
75
623
97
617
492
586
934
Total Variable Costs
Gross Margin
FARM PLANNING – PARTIAL BUDGETING
Partial Budgeting
As mentioned earlier, management is basically concerned with the ways a farmer can
obtain and organise scarce resources so as to achieve a set of goals. Partial budget is a
useful instrument that can be used to assess the effect of marginal changes on overall
profitability as well as in choosing between technology and enterprise.
With this method, only part of the information is needed to make a complete analysis.
Partial budgeting is:
x Relatively easy
x Measures the changes in costs and expenditures, income and cost-effectiveness of the
investments and labour
x An adequate tool in situations where a limited number of factors are compared.
The objective of partial budget is to make an overview of the costs and income of
different land preparation systems (conventional vs. conservation agriculture). When
different land preparation/management systems are compared, the following factors need
to be kept in mind:
x A system that has less costs is not necessarily better than the other one if soil erosion
is not reduced, as in the long run the crop yields will be reduced on degraded soil,
x Variable costs will be different from one farm to the other,
x Depending on the tools and equipment used, the fixed costs will be different from one
farm to the other.
The budget is based on costs and benefits:
In partial budgeting costs are mainly made up of variable costs: those costs, which are
derived directly from the cultivation of the crop. The other part is formed by fixed
costs.
x Benefits are calculated through an estimation of the crop yield and the price of the
product.
x
Benefits
Benefits are expressed per hectare, and are calculated through crop yield (kg/ha)
multiplied by the exact market price of the product (per kg). Farm income sometimes
depends on subsidies offered by the government for certain activities. These should also
be taken into account in the budgeting exercise.
Fixed costs
Usually when farmers own equipment and machinery, fixed costs are related to these
tools. They are based on:
x Purchase price
x Tax on purchase
x Type of interest paid to bank or money lender, and
x Insurance costs, if any.
Variable costs
Variable costs are derived directly from the cultivation of the crop and include
operational costs and the cost of inputs. Operational costs are related to the operations
that are executed in the field, like land preparation, seeding, spraying, etc. and the
associated costs, like fuel, lubricants, repair and maintenance of the equipment, costs for
hiring machinery and labour costs. Operational costs should be calculated for all
operations realised in the field:
x Land preparation
x Fertiliser application
x Seeding
x Pest and disease control, including weeding
x Harvest
Input costs include all expenditures made for growing a crop, like seed, fertiliser,
pesticides, etc.
In order to evaluate the changes that different activities bring, a partial budget will be
made. With partial budgeting only those costs and benefits that are affected by the change
will be used in the calculation. The costs and benefits that are not affected by a change in
activity will be ignored: they will be the same for the different systems.
Partial Budgeting Procedure
Steps in decision-making process discussed earlier included identifying and defining the
problem, gathering information, and identifying and analysing alternatives. Partial
budgeting fits this process through the analysis of only two alternatives at a time, the
current situation and a single, proposed alternative. Identifying the alternative to be
analysed, before gathering any information reduces the amount of information needed.
The changes in costs and revenues needed for a partial budget can be identified by
considering the following four questions. They should be answered on the basis of what
would happen if the proposed alternative were implemented.
1) What new or additional costs will be incurred?
2) What current costs will be reduced or eliminated?
3) What new or additional revenue will be received?
4) What current revenue will be lost or reduced?
The Partial Budget Format
The answers to the above questions can be found in one of the four categories shown on
the partial budget format in Table 4.1.2.
Additional Costs
these are costs that do not exist at the current time with the current
plan. A proposed change may cause additional costs because of a new or expanded
enterprise that requires the purchase of additional inputs. Other causes would be
increasing the current level of input use or substituting more of one input for another.
Additional costs may be either variable or fixed, as there will be additional fixed costs
whenever the proposed alternative requires additional capital investment.
Reduced Revenue this is revenue currently being received but what will be lost should
the alternative be adopted. Revenue may be reduced if an enterprise is eliminated or
reduced in size, if the change causes a reduction in yields or production levels or if the
selling price will decrease. Estimating reduced revenue requires careful attention to
information about yields, livestock birth and growth rates, and output selling prices.
Additional Revenue this is the revenue to be received only if the alternative is adopted.
It is not being received under the current plan. Additional revenue can be received if a
new enterprise is added, if there is an increase in the size of a current enterprise, or if the
change will cause yield, production levels, or selling prices to increase. As with reduced
revenue, accurate estimates of yields and prices are important.
Reduced Costs reduced costs are those now being incurred that would no longer exist
under the alternative being considered. Cost reduction can be due to eliminating an
enterprise, reducing the size of an enterprise, reducing input use, substituting more of one
input for another, or being able to purchase inputs at a lower price. Reduced cost may be
either fixed or variable. A reduction in fixed costs will occur if the proposed alternative
will reduce or eliminate the current investment in machinery, equipment, breeding
livestock, land, or buildings.
The categories on the left-hand side of the partial budget are the two that reduce profit –
additional costs and reduced revenue. On the right-hand side of the budget are the two
that increase profit – additional revenue and reduced costs. Entries on the two sides of the
form are summed and then compared to find the net change in profit. Whenever
opportunity costs are included on a partial budget, the result is the estimated change in
“economic profit”.
Table 4.1.2 Partial Budgeting Form
Problem:
Additional Costs:
$
Additional Revenue:
Reduced Revenue:
Reduced Costs:
A. Total Additional Costs
and Reduced Revenues
B. Total Additional Revenue
and Reduced Costs
$
Net Change in Profit (B m inus A )
The example in the next page refers to the addition of 5 beef cows to an existing herd.
However, not enough forage is available, and 12 hectares currently in grain production
must be converted to forage production. The total additional revenue and reduced costs
are $ 1,137 or $ 1,305 lower than the total additional costs and reduced revenue. This
negative difference indicates the proposed change would decrease profit.
Table 4.1.2a - Example of Partial Budgeting
Problem: Add 5 beef cows and convert 12 hectares to forage production
Additional Costs:
$
Additional Revenue:
Fixed costs
Interst on cows/bulls
250 1 cull cow
Bull depreciation
20
Taxes
10 2 steer calves
Variable costs
(130 Kg @ 0,60 $)
Labour
60
Vet and health
50 2 heifer calves
Feed and hay
200 110 kg @ 0.70 $)
Hauling
30
Miscellaneous
20
Pasture fertiliser
150
Interest on variable costs
32
Reduced Revenue:
Reduced Costs:
Grain production
18.000 kg @ 0.09 M
1,620 Fertiliser
Seed
Chemicals
Labour
Machinery
Interest on variable costs
A. Total Additional Costs
and Reduced Revenues
2,442
B. Total Additional Revenue
and Reduced Costs
$
150
78
77
275
140
120
150
100
47
1,137
2,442
Net Change in Profit (B minus A)
-1,305
The outline of the partial budget suggests that there are five ways to increase the
profitability of the farm. Net farm profit increases as the result of the following changes:
1.
2.
3.
4.
5.
Changes that increase income and decrease costs;
Changes that increase income by more than the increased costs;
Changes that increase one source of income by more than the decrease in other
sources, with no changes in costs;
Changes that decrease costs by more than the decrease in income;
Changes that decrease one item of costs by more than the decrease in other items,
with no change in income.
Although these five ways to increase profitability are quite obvious, the farmer's job is
not easy to discover the changes that are possible and evaluate them within the partial
budget framework.
FARM PLANNING - CASH FLOW
Farm household decision making processes are determined to a large extent by its cash
position. This Module will examine the use of the cash flow in farm planning and as a tool
for evaluating the financial performance of the farm as a whole. The cash flow guides
decision makers to assess whether the farm is able to generate a cash surplus or incur a
cash deficit and to find the time of the year where additional financial resources may be
required.
Definition of Cash Flow
The concept of cash flow is simply the flow of money into the farm from sales and the
flow of money out of the farm in the form of purchases. The difference between the
inflows and the outflows is known as net cash flow.
Net Cash Flow = Cash Inflows - Cash Outflows
For a farm to continue to operate in the medium to long-term, it must generate a positive
cash flow. More cash must flow into than flow out of the farm.
Cash Flow Analysis
A cash flow is a tool that has application for both ongoing
analysis and forward planning of farms. Cash transactions
frequently occur. An important task of the farmer as
manager is to control this flow of cash in and out of the
farm. This session reviews the concepts of liquidity and
cash flow and discusses ideas for improving cash flow
performance.
Cash flows can be prepared
for any budgeting period.
However, it is normal practice
to use monthly or quarterly
cash
flow
breakdowns.
Sometimes annual cash flows
by itself does not show a
shortage of cash in the farm
business.
What is Liquidity?
Liquidity is the ability of the farmer to generate enough cash to meet financial obligations
as they come due without disrupting the normal operation of the farm. This is illustrated
in Figure 5.2.1.
Cash flows into the farm from various sources such as the sale of crops and livestock, the
sale of capital assets, mobilisation of loans and non-farm income sources. Farmers use
this money to cover their farm and family expenses. These include such items as
production costs, capital expenditures, loan repayments and family living expenditures. A
reserve of cash or liquidity needs to be kept to prevent cash shortages from disrupting the
normal farm operations. Several factors can affect the cash flow's liquidity as given
below:
ƒThe farm production cycle for most enterprise lasts at least a year. This means
that farmers often have to make payments for inputs and materials used for up to
a year before any produce is sold.
ƒFarmers often find that it may be better not to sell produce directly following
harvest, but alternatively to store the crop for some time in the search for higher
prices. This, however, has an effect on the cash reserve by delaying cash inflows
from product sales.
ƒVery often traders involved in purchasing farm produce do not pay for it
immediately.
For many farmers the availability of cash over the short term may even be more
important than generating additional profits. For example, some farmers may sell
some of their productive assets, such as livestock, in order to pay for seeds and
fertilizers. For these reasons farmers need access to working capital and short tem credit.
Flexible lending facilities are often desired that advance cash as is needed during the
production cycle and can be repaid when produce is sold.
O t he r farm
S a le of
i nc om e s
c a p it a l a s s e t s
C r o p a n d l i v e s t oc k s a l e s
N o n- f a r m i nc o m e s
B o r r o w e d m on e y
L i qu id i ty
R eserve
P r od u ct io n
C a p i ta l
Loan
ex pen ses
e x p e n d i t ur e s
p a y m e n ts
F a m i ly
l iv i ng
ex pen ses
Figure 5.2.1. Farm Liquidity (Cash flow)
Cash Inflows
Sales of crop and livestock products are the primary sources of cash for the farm and are
critical to maintain the farm's liquidity reserve. Some enterprises such as dairy cows
generate a relatively even flow of cash over the production year. Other enterprises such as
fruit and livestock (meat production) result in sporadic cash inflows over the production
period.
Other farm income sources sometimes constitute a substantial cash inflow to the farm. A
typical item includes income generated from work performed for other farmers. Non-farm
income sources include income from off-farm employment, cash inflows from savings,
interest earned on investments and financial gifts.
Sales of capital assets are sporadic inflows of cash from the sale of land, buildings,
machinery, livestock and other capital items..
Borrowed money is also a source of cash, as shown in Figure 1. It enters the cash reserve
from the side rather than the top as it is often considered a source of cash used to maintain
liquidity when cash outflows exceed inflows. Borrowed money takes the form of shortterm loans to cover operating costs and longer term loans for the purchase of assets such
as machinery, livestock and buildings.
Cash Outflows
Production costs constitute a relatively large draw on the liquidity reserve. These costs
include seed, fertilizer, pesticides, feed, hired labour, repairs and others. If a farmer fails
to maintain a liquidity reserve to meet these costs, farm production could immediately
drop and the farmer could end up paying a high level of interest on borrowed money.
Capital expenditures include cash outlays for replacing or adding machinery and
equipment, breeding livestock, and purchasing land and buildings. These expenditures are
important for increasing and maintaining farm growth. The cash outflows are sporadic but
often involve large amounts of money. Consequently, the farmer needs to ensure that the
liquidity reserve is adequate to meet these expenditures.
Loan payments on borrowed money can be made during times when cash inflow from
non-borrowed sources exceed cash outflow.
Family living expenditures are often overlooked in assessing the liquidity reserve. Certain
basic family living expenses must be covered because money allocated to other uses in the
farm sometimes find its way into the family budget.
Practical Application of Cash Flow
Farmers need to be aware of the cash flow situation of the farm to ensure that cash is
available to cover expenses when needed. In practice, cash flow can be used:
a) To monitor liquidity
An effective way of maintaining a cash reserve is through cash flow planning. The
cash flow records the timing and size of the cash inflows and outflows that occur over
a given period, normally one year. The year is broken down into shorter periods of
months or quarters.
A projected cash flow could be completed at the beginning of the year and estimates
made of the expected cash inflows and outflows over the period. This is done to
estimate the liquidity reserve or cash balance. A cash flow of actual cash transactions
could be record as they take place over the year. The actual cash flow could be
compared with the projected cash flow as a way of monitoring the plan, devising
solutions to problems, and take advantage of opportunities that occur.
b) For farm planning and management
The actual cash flow is compared with the projected cash flow to improve the
performance of the farm. The actual cash flow from one year can be used to project the
cash flow for the next year. In this way farmers will know that they have cash reserves
available and will not be surprised by cash shortfalls.
Projecting a cash flow is sometimes difficult. Crop and livestock budgets are useful in
this, providing necessary information for projecting future cash flows. The farmer
should also anticipate the changes in farm operations that are expected to take place the
coming year, such as the introduction of crop rotations, new livestock enterprises, or
sales and purchases of capital assets.
c) To provide solutions to cash shortfalls
The cash flow has an important function of identifying cash shortfalls and ways of
addressing the problem. This might be done by borrowing additional funds, mobilising
savings or selling assets.
The table below illustrates situations where cash problems occur and provides solutions or
suggestions for improvement.
CASH FLOW - PROBLEMS AND POSSIBLE SOLUTIONS
Problems
Possible solution
Cash flow problems may be a symptom of the problem of low profitability.
The first step would be to analyse profit and profitability of each single
Low Profitability
farm enterprise. Increasing profit and profitability is often the best way to
remedy cash flow problems.
One way to prevent cash flow problems is to identify problems before they
Unexpected cash problems
occur. Cash flow would give the farmer time to alter his plans and remedy the
problems by timing cash inflows and cash outflows.
Low profitability together with
low cash inflow
This means a careful look at the combination of enterprises on the farm.
Perhaps another crop rotation or livestock enterprise would increase cash
inflow and allow the farmer to increase profitability at the same time.
An effective way to improve cash flow is through cost control. Is the farmer
High Production Costs
using the best seeds and seeding rates? Is fertilisation at the right level?
Can the use of commercial fertiliser be reduced through the use of manure?
Can integrated pest management be used?
The best approach to this problem is to improving marketing plans. For non-
Need
to
increase
selling perishable products, the farmer has some flexibility in timing sales.
flexibility
Improving farm profitability should be the main goal in formulating a
marketing plan.
Leasing or renting instead of owning: the down payments and loan payments
Need to reduce cash outflow
associated with the purchase of land, buildings and machinery sometimes put
a heavy burden on cash flow.
Taking an off-farm job. One or both spouses could seek part-time or full-
Increase cash availability
time employment off the farm. Any additional expenses related to off-farm
employment such as transportation, clothing and others need to be
considered carefully.
Estimate the financial package that the farmer requires when a cash
Assess the financial package
shortfall is identified. The cash flow enables the farmer to estimate the size
required
of loan required, the repayment caapcity of the farmer and the repayment
schedule
Refinancing: Cash flow problems are sometimes caused by a poor balance of
Increase cash availability
short- and long-term debts on the farm. Some farmers use short-term loans
to finance current and fixed assets. Operating loans should be used only to
purchase variable inputs.
RISK AND UNCERTAINTY
Managing Risk and Uncertainty
Farmers make decisions in a risky and ever-changing environment. The consequences of
their decisions are generally not known when the decisions are made, and outcomes may
be better or worse than expected. Variability of prices and yields are major sources of risk
in agriculture. Changes in technology, legal and social factors, and the human factor itself
all contribute to the risky environment that farmers have to operate in.
Risk management is trying to prevent something happen that you don’t want too, or to
makes its effect as small as possible.
Farmers have to take risks to grow a crop. They are not sure about the:
ƒThe weather;
ƒThe price they may get if they choose to sell;
ƒWhat people may what to buy.
Effective risk management involves:
ƒanticipating that an unfavourable event may occur and acting to reduce the
probability of its occurrence; and
ƒtaking actions to reduce the adverse consequences should an unfavourable event
occur.
For example, a risk management strategy relating to mechanisation might involve a
complete overhaul of an old tractor before peak season work load, to reduce the chances
of a major breakdown in operations over the period. During planting and harvesting,
farmers keep may decide to keep some spare parts readily available. While they may not
be able to prevent a breakdown from occurring, they can help to reduce the unfavourable
consequences should the breakdown occur.
Farmers need to make choices. To do this they need to know about input and selling
prices, yields, markets and other technical data. However, very often farmers find that
their best decisions often turn out to be wrong, because things change from the time the
decision was made and the crop or animal was finally harvested or sold.
Farmers must make decisions about what crops to plant and what seeding rates, fertiliser
levels, etc., to use early in the cropping season. The final yield and prices will not be
known for several months, or even several years in the case of tree crops. Risks in
farming activities can come from unexpected places, resulting in low prices, drought, or
disease. Risk management is mostly concerned with reducing the chances of less
favourable outcomes occurring, or at least softening their effects.
Sources of Risk and Uncertainty
Risks can be classified in several ways. One useful way is to classify them under technical
and financial risks.
Technical risks are those risks associated with farming and are independent of the
farmer's financial situation. These include variable yields, fluctuating prices, and many
other factors that make the consequences of a decision unknown.
Risk and uncertainty are inherent in setting the objectives of the farm business and in the
farmer’s decision-making process made by farmers. The most common sources of technical
risks for the farm operator are:
a)
Market or price risk. This is associated with the purchase of inputs as well as the sale
of commodities. Fluctuations in input and output prices cause income gains or losses.
The fluctuations occur both within a marketing year and between years. Net worth
may also be affected if prices of inputs such as land and machinery change.
Availability of inputs is also a risk. In addition, in the long run, the variability of
prices, interest rates, and relative prices are risk factors that influence decisions taken.
b) Production risk. This refers to the random variability inherent in the production
process. Weather, diseases, and pest infestations lead to production risk in crop and
livestock activities. Fire, wind, theft, and other adversities are also sources of
production risk.
c)
Technology-related risk. This refers to the effect of technological improvements in
existing farm management decisions. For example, there is the risk that durable may
become obsolete as technological changes occur. The rapid changes in farm
machinery and cultivation techniques, as a result of conservation agriculture, are
noticeable examples.
d) Legal and social risks include government prices and income programmes, tax, trade,
credit, and environmental policies, all of which have impact on the operating
environment. These risks may increase for larger farms. New risks may also occur
from, for example, forward contracting and minimum price contracts that introduce
risks associated with contractor’s integrity.
e)
Human sources of risk are associated with the labour and management functions in
farming. Health problems of key individuals can severely disrupt farm performance.
Changing objectives of individuals and family members can have major effects on a
farm's long-run changes and viability.
Financial risks are the risks faced by farmers who have to rely on borrowed capital for
their farm operations and has a low equity base. Availability of loan funds and the costs of
credit are some examples.
Expectations and Variability
What the farmer thinks they will get in the future for their crop or livestock is important in
the decisions that are made. What happened in the past is very particularly important to
the farmer and helps him or her decide what they think they will get next time.
Farmers tend to remember the bad things and the good things. If a tractor recently broke
down, they tend to think it is bound to happen again, soon. However, if something has not
happened before, like a severe drought, floods or hurricanes, the farmer may not be
prepared to consider such an event ever happening to them.
What happened last month is considered more important than what happened last year.
When things change, like the start of an El Nino, the amount of rain will not tell the
farmer what to expect now. Basing what will happen tomorrow on what happened
yesterday means you believe that what happened yesterday will continue to happen.
When making a decision that will happen over many years, it is not a good idea to just
base your decision on what happened yesterday. This can get you into trouble.
Information and Decision-Making
Formulating expectations is an important phase of the decision-making process and
involves judgement. Most farmers rely heavily on personal experience and supplement
this with other information. Futures prices and outlook information on markets, as well as
past information on price trends can be helpful in formulating price expectations.
Good information is the most useful tool a farmer can have to assist them in risk
management. There are several sources of information available to farmers:
a) Farm Records: The best source of historical production and marketing information
is farm records. Crop yields, livestock production, and cost information generated
from farm records tell the farmer what can be achieved. Production records should
tell the farmer how successful he or she was at managing risk in the past. This will
also give a guide to the farmer for what they should do in the future to be successful.
The combination of historical results and the risk preferences of the farmer should
point out what, if any, changes in risk management
should be made in the future.
How can price and yield
b) Other Farm Information: This includes information
from the Agricultural Statistics Services, National
Extension Services, and other government agencies as
well as consulting advisory services, newsletters,
magazines, agricultural suppliers, and neighbours
could all prove to be valuable sources of information
for the farmer.
c)
variability (risk) experienced
by farmers be compared with
average data?
Comparing
historical
farm
performance to that of
similar farms in the same area
should provide an additional
insight into aspects of the
risk
management function
that need improvement.
Production and Market Information: Historical
yield and price information is often available from
National Statistics Services. This information can
prove useful when compared to the data generated by farm records. It should be
remembered that national data is an average of many farms and may not tell the
farmer exactly what they might get. Comparing historical farm yields to that of
similar farms in the same area should provide additional information on how the
farmer can improve their performance.
What is happening in the market now and what may happen in the future can be found out
from many sources. National Extension Service, farm magazines, etc. all should provide
analysis of the current situation and market outlook for most agricultural products.
How the market is doing is not enough to tell the farmer about the risk, it will just give a
trend that the farmer must decide is good or bad new for him or her.
Understanding the importance of these issues and good information about them could help
the farmer avoid "bad'' decisions in both the short and long run.
Risk Management Strategies
A farmer should decide to make a plan to cope with risk
so that they can get some protection against the decisions
they make today, not knowing what may happen
tomorrow.
Risk management strategies have many
responses, which may reduce the chance of a “bad” event
occurring and/or reduce the effect of the “bad” event if it
occurs.
Most responses to risk have a
cost associated with them,
even if it is not explicit.
Generally, farmers would like
to avoid major losses, but
would also like to be in a
position to benefit from
favourable events.
The farmer can make taking risky decisions easier by
thinking about different strategies and guess the possible outcome of each. The process
can be broken down into several steps:
1. Identify the possible sources of risk
2. Identify the possible outcomes or events that could occur
(e.g. weather, prices, etc.)
3. Decide on the alternative strategies available
4. Quantify the consequences or results of each possible outcome for each strategy
5. Evaluate the trade-offs between risk and returns.
Making risky decisions in high risk environment require careful consideration of the
various strategies available and the possible outcome of each.
Risk responses are commonly grouped into production, marketing and financial
(money) responses. As described in the table below, most farmers use a combination of
production, marketing, and financial responses in their risk management strategy.
Risk Management
Area of the
Reducing Chances of Occurrence Providing Protection Against
farm business
Production
Adverse Consequences
Choosing low-risk activities
Selecting and diversifying
Diversifying enterprises
production practices
Dispersing production spatially Maintaining flexibility
Varying production capacity
Marketing
Financial
Obtaining market information Participating in government
Spreading sales
programmes
Contract Farming
Minimum price contract
Working off-farm
Insuring against losses
Maintaining liquidity reserves
Pacing investments
Acquiring assets
Limiting credit
Production Responses
Production responses have traditionally been very important in risk management. There are
a number of production responses to the risks farmers face.
a) Choosing Low Risk Activities
The selection of what crop or livestock is produced by the farmer, can affect the risk
that the farmer takes. Farmers are also likely to be aware of differences in the yield
that they can get for a crop related to soils, management, and other factors on their own
farm. Because of these factors, growing of one crop may be considered a high-risk
activity by one farmer and a low risk activity by another farmer.
Crops, such as tomatoes and vegetables for processing, commonly have greater year to
year yield fluctuations than the more common crops such as sweet potato. Although
these crops may offer the possibility of high gross returns, they may also involve
higher production costs and difficulties in finding marketing outlets. Because of these
factors, these crops would not be considered low risk activities for most farmers.
Some farmers may undertake only part of a production activity as a means of reducing
risk. For example, a farmer may breed pigs but may not fatten them.
b) Growing many things -diversification
Growing many things is a risk management technique traditionally used by farmers. If
one crop did not do well, the farm had other crops on which to rely. The money the
farmer makes may not be as high as if they specialised in growing just one crop, but
the differences in year to year yields is reduced.
Farmers rotate crops to protect their soils and stop diseases building up. This reduces
costs and increases yields. For most farmers, combining crops - crop rotation or
diversification - is not a risk management activity - it is simply good management.
However, it is important to keep in mind that in the short-run, crop rotation may
constrain or reduce risk management activities. For example, an arable farmer, who is
locked into a specific rotational pattern of production in order to reduce incidence of
pests and diseases or to replenish soil nutrients, cannot immediately take advantage of
market opportunities as they arise.
Furthermore, some factors can make crop diversification difficult. For example, some
crops use similar machinery and equipment, and some vegetable crops, which can be
grown may require special equipment. Thus, the benefits of diversification may be
offset by increased costs. Other enterprise may make very little money. Although
variability could be reduced by including these enterprises in the farm business, most
farmers are unwilling to accept the reduced income, which can also result from the
diversification practices.
c)
Growing crops on different land parcels or plots
Growing crops in many different locations on the farm reduces the impact of localised
disease and micro climatic factors. Farmers in order to increase the scale of their crop
production must cultivate over a wide area. This costs more money -operating costs.
However, spreading out production is one way of reducing risk as well as getting
increased efficiency in machinery and labour use.
d) Selecting and Changing Production Practices
Farmers often choose different ways of doing things as a way of spreading risk. They
may plant several varieties of a single crop or have two species of livestock. They
may also spray a crop before there is a sign of disease. The additional cost of doing
this has to be compared against what could happen if they did not.
e)
Maintaining Flexibility
Farmers commonly try to maintain flexibility in their operations as a production
response to risk. Increasing specialisation of livestock facilities and equipment limits
flexibility. However, farmers are more likely to maintain flexibility in their marketing
and financial decisions than in the type and size of production activities. Often the
costs associated with flexibility in production are higher than most farmers are willing
to risk.
Marketing Responses
The rapid change of food prices in the market place has increased farmers' awareness of
price risks and has made good marketing skills important. Farmers have attempted to
improve their knowledge of marketing and develop new marketing skills. New marketing
responses to risk - variability, like minimum price contracts, are sometimes developed.
a) Obtaining Market Information
Very often farmers do not know the national price for a product. Obtaining market
information from friends, relatives and the radio is not difficult, but obtaining “good”
information is.
Finding out about market prices is not a way of dealing with risk or variability.
Getting market information is a starting place and the information must be combined
with other actions before there is an effect on price and income variability.
b) Spreading Sales
The technique of spreading sales -making several sales
of a product during a year- is commonly used by
farmers. Dairy and other livestock producers are
forced to spread the sales over the entire year because
of the nature of their production. With frequent sales
throughout the year, the average price received by a
producer is nearly equal to the season or annual
average price.
Spreading sales throughout
the year essentially averages
out the price within year,
but it does little to reduce
year-to-year variability.
Farmers with marketing flexibility can also spread cash sales and obtain a price similar
to the seasonal average price. This method of selling enables a farmer to avoid selling
all of the production at the lowest price in the market.
c)
Forward Contracting
The practice of forward contracting, where available, can be used for both inputs and
outputs. Some farmer contracts need quantities of inputs at specified prices to avoid
the risk of price increases and unavailability of inputs; similarly, some farmers contract
the price of some of their production. Forward contracting may result in the farmer
getting a lower price than they would have if they had sold on the ‘day’. However, the
ability to guarantee the price the farmer receives, allows them to plan and if they are
happy with the gross margin received and they feel they can safely supply the
quantities contracted, then forward contracting is a good risk avoidance mechanism.
d) Minimum Price Contracts
A marketing response, which has recently become available in some agricultural
commodities, is minimum price contract. This type of contract provides farmers with
the opportunity to secure price insurance. However, this contract will not always be
able to guarantee a profit. This marketing technique provides producers with greater
flexibility and more risk management alternatives.
Dealing with Risk and Uncertainty
In implementing their activities, farmers might need technical advice in order to
concentrate their skills and resources where they have distinctive competencies. In so
doing, they may become exposed to a higher level of risk and uncertainty. Farm planning
techniques must recognize this problem. For farming circumstances, the two most
practical evaluation techniques adopted are the break-even and sensitivity analysis.
Break-Even Analysis
This technique is particularly useful when the costs of undertaking a particular investment
or action are known but the outcome is uncertain. Such uncertainty may affect either the
yield or the price. Break-even analysis usually takes the form of calculating increase in
the level of an output variable necessary to just balance the additional costs incurred.
For example, a farmer regularly grows 2 hectares of sugarcane and wishes to assess the
yield increase needed to justify the installation of an irrigation system.
Capital cost of the equipment
Annual cost of irrigation (variable costs):
Interest charge on the capital employed @ 7.5%
Depreciation charged @ 20% over five years800
Annual running costs of irrigation @ $ 80 per acre
Total (Variable) Annual Cost
US$
4,000
300
160
1,260
Comments:
ƒ The variable (annual) cost per acre will be $630 ($1,260 divided by 2 ha).
ƒ Each extra ton produced is sold at a gross price of $60 per ton and incurs marketing
costs of $5 per ton. The additional revenue generated by each ton is therefore $55.
ƒ The extra yield per acre needed to balance the extra costs is found from the variable
cost of irrigation per hectare divided by the revenue for each extra ton: $ 1,260/2
hectares = $630 (variable cost per hectare) or $630 / $55 = 11.5 tons.
The current yield is 100 tons per hectare. Therefore, the farmer needs to increase the yield
from 100 tons to 111.5 tons/ha. With this increase of about 12% (11.5/100 tons), the
farmer can achieve the break-even yield necessary to justify the purchase of the irrigation
system for his sugarcane enterprise. Having calculated the break-even yield increase
required, the farmer could compare it with the experience of others in his/her area.
The situation is graphically represented below.
G r ap h ic re pr ese nta tion of B re a k-E v en
$
Re ve nue
7 ,5 0 0
Cur r ent yie ld
7 ,0 0 0
T ot al C os ts
100 t/ha
6 ,5 0 0
6 ,0 0 0
5 ,5 0 0
5 ,0 0 0
B re ak-e ven yie ld
4 ,5 0 0
111.5 t/h a
4 ,0 0 0
3 ,5 0 0
3 ,0 0 0
+ 12 %
2 ,5 0 0
2 ,0 0 0
1,50 0
Fix ed C osts
1,00 0
5 00
10
20
30
40
50
60
70
80
90
100
110
120
130
140
150
160
U nit of O utput (tons of suga r ca ne)
Sensitivity Analysis
Sensitivity analysis aims at identifying the critical variables and studying their effect on
projected profitability. This technique quantifies the outcome of a change in an important
variable such as yield, price of outputs, usage level, or price of inputs. Sensitivity analysis
is used to identify the most critical components of an enterprise budget i.e. those where
even small changes have a major impact on profitability.
The following example would help in understanding the concept of sensitivity analysis.
A farmer’s association has a sheep flock enterprise of 100 ewes that are currently
producing 35 lambs per year. The projected profit for the next year is US$1,050. The
members of the association are concerned because one neighbouring farm has suffered
from a disease called enzootic abortion, which reduces the number of lambs produced by
30%. The question that the members of the farmer’s association need to answer is "how
will profit change if our sheep flock contracts the same disease?"
The steps to answer the question are the following:
Calculation of effect on profit:
Reduction (30%) in the number of lambs produced
Total revenue lost if lamb price is $ 30 per head
Total costs saved if each lamb consumes $ 12 worth of feed
Change in profit
No 11
$ 330
$ 132
$ 198
Thus, in the case of a similar disease problem, the likely profit would be reduced from
$1,050 to $852 with a reduction of approximately 19% in the projected profit ($198). The
conclusion is that the profit is extremely sensitive to the problem (disease outbreak) and that
appropriate management time should be allocated resources to prevention.
ECONOMIC BENEFITS
The adoption of conservation agriculture has two main impacts on farming activities. On
one hand, the technical impact, with reduction or elimination of erosion, increase in soil
fertility, reduction of re-seeding rates and labour, controlled/reduced use of chemicals and
fertilizers, etc. As a direct consequence of technical impact, on the other hand, farmers
would also have direct economic impact (increased farm profit by reducing the use of
labour, fertiliser and chemicals and by increasing yield. The economic impact is therefore
directly influenced by the technical aspects.
This Training Manual is a tool aimed at supporting small farmers in the adoption and/or
adaptation of Conservation Agriculture techniques through the improvement of farm
management and marketing techniques. Farmers need to be better prepared to detect
opportunities for traditional products in rural economies by adopting a business approach
which includes formal agronomic, commercial and economic evaluations for potential
market options. Farmers must be able to examine the economic consequences of moving
the production techniques from conventional to conservation agriculture.
In other words, conservation agriculture can be seen as a devise for diversification of
agricultural production.
Three major economic benefits can be observed:
ƒTime saving and thus reduction in labour requirement
ƒReduction of costs
ƒHigher efficiency
The positive impact of conservation agriculture on the distribution of labour during the
production cycle and, even more important, the reduction in labour requirement is the main
reason for farmers in Latin America to adopt conservation agriculture, especially for farmers
who rely fully on family labour.
The substitution of conventional tillage by conservation agriculture allows a more even
distribution of labour over the year, because of the elimination of ploughing and harrowing
activities and the use of cover crops and herbicides. The example in figure 1 shows no
differences in labour requirements in January and February, which is harvest time of beans in
Paraná. Under conservation agriculture, cover crops are sown in April and managed in
September, which requires some hours of fieldwork. The next bean crop is sown in
October/November, resulting in labour peaks for the conventional system, as the land needs
to be prepared. Also more labour is needed in the conventional system for weeding activities
in December. The total labour saved in this situation was 50 hours per hectare.
Labour (hours ha-1)
50
Conventional tillage
Conservation agriculture
40
30
20
10
0
J
F
M
A
M
J
J
A
S
O
N
D
FIGURE 1
Labour distribution over the year for bean production under conservation
agriculture and conventional tillage in Paraná, Brazil (Ribeiro et al., 1993)
Not only the total time required for agricultural production is reduced, but also the number of
activities is reduced as is demonstrated in the example in table 2.
Table 2 Mechanized operations and the time required (hours/ha) for each of them under
different production systems (Rego, 1998).
Operation
Conservation agriculture
Conventional tillage
Knife roller
0.89
Direct seeding
0.76
Spraying
1.2
0.6
Harvest
0.93
0.93
Ploughing/disking
1.37
Levelling
1.38
Conventional planting
0.89
Earthing
1
Total
3.78
6.17
Especially in areas where (family) labour is becoming a constraint, because of migration,
HIV Aids or death, conservation agriculture is a good option for farmers. The reduction in
on-farm labour requirement allows farmers to:
x
extend the cultivated area,
x
hire themselves out in off-farm employment where available,
x
diversify their activities, including processing of agricultural products, or
x
reduce the cultivated area, because of increased production and allow the marginal area
to regenerate.
Table 3 gives a simple overview of the labour requirements, using animal traction or tractor
in land preparation activities. Especially in the case of animal traction the reduction in labour
when applying conservation agriculture is high: 86%. Time required to prepare the land
using a tractor is reduced with 58% under conservation agriculture.
Table 3 Time requirement for land preparation activities under conventional tillage and
conservation agriculture (Skora Neto, 1993).
Conventional tillage
Conservation agriculture
-1
Operations
Time required (hours ha ) Operations
Time required (hours ha-1)
Tractor
Tractor
Ploughing
1.5
Knife roller
0.9
Harrowing
1.4
Spraying
0.3
(2x)
Total
2.9
Total
1.2
Animal
Traction
Ploughing
Harrowing
(2x)
Furrowing
Total
Animal
Traction
25
5
Knife roller
Spraying
3
1.5
3
33
Total
4.5
In production systems that use manual labour or animal traction physical exercise of the
farmer (i.e. walking in the field) is also reduced considerably, as is shown in table 4.
Table 4 Covered distances (km) by man for the cultivation of one hectare of maize, using
animal traction under conservation agriculture and conventional tillage (Melo, 2000).
Operation
Conservation agriculture
Conventional tillage
Ploughing
40
Harrowing
15
Furrowing
10
Planting
5
5
Fertilization
10
10
Knife roller
7.5
Weeding
30
Nitrogen application
10
10
Bending over of the
10
10
cobs
Harvest
15
15
Total distance (km)
57.5
145
Besides a reduction in time required for field activities, the costs for operation and
maintenance are also reduced (figure 2). Fuel and lubricants are reduced and also wear and
tear of tractors, machineries and other equipment is less, resulting in lower maintenance and
repair costs, and an increase in life span of the equipment. As ploughing activities are
eliminated, farmers do not need heavy machinery or tractors, resulting in lower investment
or write-off costs.
La bo ur
H e r b ic id e s
S e e d s / F e r tiliz e r s
G re e n m a n u re / C o v e r c ro p s
O th e r s : m a c h in e r y , e q u ip m e n t,
fu n g i c id e s , th r e s h in g
C o n v e n tio n a l ti lla g e
C o n se r v a tio n a g r icu ltu r e
Figure 2 Relative percentages of production costs of maize (Samaha, et
al., 1998).
Generally, the costs for inputs are a bit higher in conservation agriculture compared to
conventional tillage, due to cover crop seeds and agrochemicals.
One of the most exciting recent developments has been the response of rice farmers to
conservation agriculture in Southeast Asia. According to Ardjasa (1994) small holder
farmers in Indonesia are realizing 25 percent saving in labour, 65 percent savings in land
preparation costs, 28 percent savings in irrigation water per cropping cycle and 2-3 weeks
time saving for land preparation. In conventional preparation of paddies 30 percent of the
water is used in the ploughing and puddling process. A substantial amount of this water is
lost into the canals during this process resulting in soil and water loss and water pollution.
The small farmers in Indonesia rent the equipment to plough and as availability is limited
they often have to wait, sometimes missing a cropping cycle. Together with the 2-3 weeks
real savings in time to prepare the land for planting conservation agriculture will help move
production from the current average of 1.4 crops per year towards a realizable two or even
three crops a year. Similar results are being observed in the Philippines, Thailand and India
(Hebblethwaite, 1997).
In general, conservation agriculture can produce equivalent or higher yields compared to
conventional tillage systems (Figure 3).
6
Conventional tillage
-1
Crop yield (t ha )
Conservation agriculture
4
2
0
Wheat
Soya
Maize
FIGURE 3
Wheat, soy bean and maize yields under conventional tillage and
conservation agriculture (averages over a period over 8 years)
(Ruedell, 1995)
Immobilization of nitrogen might cause a reduction in maize yield during the first years of
conservation agriculture, but this can be overcome with the application of nitrogen fertilizer
(Figure 4).
-1
Maize yield (t ha )
6
Conventional tillage (CT)
CT 90 kg N
Direct seeding (DS)
DS 90 kg N
4
2
0
Oats
Lupin
Vetch
FIGURE 4
Maize yield after different cover crops, under conservation agriculture
(green) and conventional tillage (brown) with and without nitrogen
fertilizer (Calegari, ..)
Based on research data, maize can produce a yield with oats, lupine and vetch as a cover
crop (without fertilization), which is comparable or higher to those obtained with
-1
conventional tillage and a fertilizer treatment of 90 kg ha .
The yield increase in these cases was highly correlated with the phosphorus content of the
leaves and the phosphorus availability in the soil. This occurred because of higher moisture
content in the soil under the mulch layer, which led to higher phosphorus uptake by plant
roots. Improvements in crop growth and vigour are due to direct and indirect effects. Direct
effects are due to improvements in nutrient and water content, as indirect effects are due to
favourable rooting environment and possible weed suppression and reduction in pests and
diseases.
1600
Net income
Labour
Machinery
1200
-1
Value (R$ ha )
Inputs
800
400
0
Soya
Maize tractor
Maize animal
traction
Beans
FIGURE 5
Economic result of different production systems in Santa Catarina
(conventional tillage = left and conservation agriculture = right) for
four different production systems (Heiden, 1999).
Crop yields under conservation agriculture are less variable through the stabilizing effects of
favourable conditions of soil properties and microclimate.
Overall, with equal or slightly higher yields and reduced costs, the farm income increases
under conservation agriculture.
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