Whole-Farm Planning Notes

Whole-Farm Planning

What is a Whole-Farm Plan?

• A whole-farm plan outlines the type and volume of production for the entire farm and the necessary resources to achieve it.

• Resulting detailed projections form a whole-farm budget that organizes expected costs and returns.

The Planning Procedure

1. Determine Objectives and Specify Goals: Establish what the farming operation aims to achieve.

2. Inventory of Available Resources: Assess land, labor, machinery, and any other assets.

3. Identify Possible Enterprises and Technical Coefficients: Select potential production options and evaluate their resource needs.

4. Estimate Gross Margin of Each Enterprise: Calculate returns after variable costs are deducted.

5. Choose a Combination of Enterprises: Select the mix that maximizes profitability.

6. Prepare a Whole-Farm Budget: Create a financial plan reflecting projected income and costs.

Objectives and Goals

• Profit maximization is common, but managers may also focus on long-term productivity, environmental stewardship, worker health, and financial independence.

• Performance goals should be set based on desired outcomes such as crop yield and net income targets.

Resources

• Land: Total acreage, land type, fertility, climate, etc.

• Buildings: Number and condition of farm structures.

• Labor: Availability and skill level of workers.

• Machinery: Size and capacity of equipment.

• Capital: Financial resources for operations.

• Management: Experience of operators and past farm performance.

Technical Coefficients

• Indicate the amount of resource required to produce one unit of output for each enterprise.

• Crucial for determining optimal enterprise sizes and combinations.

Estimating Gross Margin

• Enterprise budgets serve as tools for planning by providing estimates of the gross margin (returns above variable costs).

Choosing the Enterprise Combination

• The ideal mix of enterprises yields the highest profitability given limited resources.

• Linear Programming: A mathematical technique utilized to determine optimal enterprise combinations.

Preparing Whole-Farm Budget

• The whole-farm budget helps to:

  • Estimate expected income, expenses, and profit.

  • Analyze cash flows and liquidity.

  • Compare alternatives and evaluate changes.

  • Communicate plans to stakeholders.

Example of Whole-Farm Planning

• An example illustrates selecting a mix of crops and livestock to maximize gross margin.

Linear Programming Basics

• Linear Programming (LP): A systematic mathematical method to find the most profitable enterprise combination based on constraints.

  • Objective: maximize GM(1)xUNITS(1) + GM(2)xUNITS(2) + …

  • Constraints: X1xUNITS(1) + X2xUNITS(2) + … ≤ RESOURCE

  In linear programming (LP) for whole-farm planning, key terms and letters include:

  1. GM(i): Represents the gross margin from the i-th farm enterprise, calculated as the difference between revenues and variable costs. It's essential for assessing profitability.

  2. UNITS(i): Refers to the quantity produced for the i-th enterprise, such as bushels of crops or livestock head.

  3. X(i): Denotes the resource input coefficient for each enterprise, indicating the specific resources needed (e.g., land, labor) to produce one unit.

  4. RESOURCE: Total available quantity of a specific resource, like land or capital, vital for ensuring that production stays within limits.

Building an LP Tableau

• Organize data into a tableau for analysis.

• Columns: Enterprises considered.

• Rightmost column: Resource limits.

• Rows: Represent objective function and constraints.

Shadow Prices and Reduced Costs

• Shadow Prices: Indicate how much the objective would increase with one more unit of a limited resource, representing the marginal value product.

• Reduced Costs: Indicate how much the objective would decrease if a non-selected enterprise is produced.

Other Issues in Farm Planning

• Sensitivity Analysis: Evaluates how changes in assumptions affect projections.

• Liquidity Analysis: Assesses the farm's ability to meet cash flow needs.

• Long-run vs. Short-run Budgeting: Factors variations in prices and yields over time.

Long-Run Budgeting Principles

• Average or long-run prices and yields should be utilized.

• Ignore short-term inventories and focus on sufficient capital investments to maintain assets.

Summary

• Whole-farm planning involves analyzing profitability across all operations.

• Linear programming aids in identifying optimal enterprise combinations for improved financial performance.