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Sectorial Economy I.

Bai, AttilaGáthy, Andrea

Nábrádi, AndrásNagy, AdriánNagy, Lajos

Szőllősi, LászlóSzűcs, István

Szerkesztette Nábrádi, András

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Sectorial Economy I.írta Bai, Attila, Gáthy, Andrea, Nábrádi, András, Nagy, Adrián, Nagy, Lajos, Szőllősi, László, Szűcs, István, és Nábrádi, András

TÁMOP-4.1.2.A/1-11/1-2011-0009

University of Debrecen, Service Sciences Methodology Centre

Debrecen, 2013.


TartalomTárgymutató ......................................................................................................................................... 11. 1. Resources in Agriculture, Speciality of Agricultural Resources (András Nábrádi) ..................... 2

1. HUMAN RESOURCES ......................................................................................................... 22. PHYSICAL RESOURCES ..................................................................................................... 43. SOURCES OF CAPITAL ...................................................................................................... 84. References .............................................................................................................................. 9

2. 2. Measuring the output in agricultural sectors (Yield; Production Value; Income; Profit) (Adrián Nagy) ............................................................................................................................................................ 11

1. Referencies: .......................................................................................................................... 173. 3.Costs of production and cost-concepts for agriculture (A. Gáthy , I. Szűcs) ............................. 18

1. Referencies: .......................................................................................................................... 234. 4. Efficiency and it’s measurement in Agriculture (András Nábrádi) ........................................... 24

1. References: ........................................................................................................................... 335. 5. Decision-making and risk management in agricultural production (Lajos Nagy) ..................... 35

1. Uncertainty or risk? .............................................................................................................. 352. The Payoff Matrix ................................................................................................................ 363. Sources of Risk and Uncertainty .......................................................................................... 37

3.1. Production and Technical Risk ................................................................................ 373.2. Price and Market Risk ............................................................................................. 373.3. Financial Risk .......................................................................................................... 373.4. Legal Risk ................................................................................................................ 383.5. Personal Risk ........................................................................................................... 38

4. Risk-Bearing Ability and Attitude ........................................................................................ 385. Expectations and Variability ................................................................................................. 39

5.1. Most likely value ..................................................................................................... 395.2. Averages ................................................................................................................... 40

6. Variability of the expected value .......................................................................................... 416.1. Decision tree ............................................................................................................ 42

7. Summary .............................................................................................................................. 428. References ............................................................................................................................ 43

6. 6. Economic Principles: Choosing Production Levels (Andrea Gáthy , István Szűcs) ................. 447. 7. Economic Principles: Choosing Input and Output Combinations (Andrea Gáthy István Szűcs) 508. 8. Enterprise budgeting and planning of cash flow (Attila Bai) .................................................... 54

1. 1. Partial budgeting ............................................................................................................. 562. 2. Whole-farm (complete) budgeting .................................................................................. 57

2.1. 2.1. Example of a Complete Cash Flow Budget ...................................................... 583. References ............................................................................................................................ 62

9. 9. Investment Analysis (László Szőllősi) ....................................................................................... 631. 9.1. Time value of money ..................................................................................................... 63

1.1. 9.1.1. Future values .................................................................................................. 631.2. 9.1.2. Present value .................................................................................................. 64

2. 9.2. Investment analysis ....................................................................................................... 652.1. 9.2.1. The Net Present Value (NPV) method ........................................................... 662.2. 9.2.2. The Internal Rate of Return (IRR) rule .......................................................... 672.3. 9.2.3. NPV versus IRR ............................................................................................ 672.4. 9.2.4. The Profitability Index (PI) method .............................................................. 672.5. 9.2.5. The Discounted Payback Period (DPP) rule .................................................. 68



3. 9.3. Handling income taxes .................................................................................................. 684. 9.4. Handling inflation ......................................................................................................... 685. 9.5. Handling risk and uncertainty ....................................................................................... 696. 9.6. Steps and cash flows to consider analysing an investment ........................................... 697. 9.7. Financing by foreign capital .......................................................................................... 708. 9.8. Summary ....................................................................................................................... 719. References ............................................................................................................................ 7110. Questions ............................................................................................................................ 72

10. 10. Farm business organizations, integrations (András Nábrádi) ................................................ 731. LIFE CYCLE ....................................................................................................................... 732. SOLE PROPRIETORSHIP ................................................................................................. 743. JOINT VENTURES ............................................................................................................. 754. OPERATING AGREEMENTS ............................................................................................ 755. PARTNERSHIPS ................................................................................................................. 756. CORPORATIONS ................................................................................................................ 787. LIMITED LIABILITY COMPANIES ................................................................................. 808. COOPERATIVES ................................................................................................................ 809. CONTRACTING, VERTICAL INTEGRATION ................................................................ 8010. Questions ............................................................................................................................ 81

11. 11. Planning of agricultural production (István Szűcs) ................................................................ 821. 11.1. Whole farm planning ................................................................................................... 82

1.1. 11.1.1. Determining objectives and setting goals .................................................... 821.2. 11.1.2. Inventory and assessment ............................................................................ 831.3. 11.1.3. Identify possible enterprises and technical coefficients .............................. 841.4. 11.1.4. Estimate the gross margin per unit .............................................................. 841.5. 11.1.5. Choose the enterprise combination .............................................................. 841.6. 11.1.6. Preparing budget .......................................................................................... 851.7. 11.1.7. Monitoring progress ..................................................................................... 85

2. 11.2. Detailed enterprise planning ........................................................................................ 852.1. 11.2.1. Assessment to establish enterprise planning ................................................ 852.2. 11.2.2. Determination of conceptions, planning principles and objectives ............. 862.3. 11.2.3. Planning of annual operation in livestock sectors ....................................... 872.4. 11.2.4. Planning of annual operation in crop sector ................................................ 89

3. References: ........................................................................................................................... 9012. 12. Farm Business and Enterprise Analysis (Szőllősi, László) .................................................... 91

1. 12.1. Types, methods, framework and tools of analysis ....................................................... 912. 12.2. Diagnosing a farm business problem .......................................................................... 923. 12.3. Balance sheet analysis ................................................................................................. 94

3.1. 12.3.1. Liquidity ...................................................................................................... 953.2. 12.3.2. Solvency ...................................................................................................... 96

4. 12.4. Income statement, measures of profitability ............................................................... 975. 12.5. Cash flow analysis ....................................................................................................... 996. 12.6. Measures of size .......................................................................................................... 997. 12.7. Measures of efficiency ................................................................................................ 998. 12.8. Enterprise analysis .................................................................................................... 1019. 12.9. Summary ................................................................................................................... 10210. References ........................................................................................................................ 10211. Questions .......................................................................................................................... 102

13. 13. Competitiveness and sustainability in agriculture, the economic questions of the agro-environmental management (Andrea Bauer Gáthy) ........................................................................ 103

1. Global “Environmental” Problems .................................................................................... 1032. Main Environmental Impacts of Agriculture ..................................................................... 105



3. Sustainability versus Competitiveness ............................................................................... 1074. Eco-efficiency of agriculture ............................................................................................. 1085. Economic questions of the agro-environmental management – Externality ..................... 1086. Socially Optimal Pollution Levels ..................................................................................... 1097. Mechanisms to achieve pollution reduction ...................................................................... 1098. References .......................................................................................................................... 110

14. 14. Economic and methodological aspects of the crop production structure (Lajos Nagy) ...... 1111. Features of crop production ............................................................................................... 1112. Work planning phases ........................................................................................................ 1143. Construction of the model .................................................................................................. 115

3.1. Defining the decision variables ............................................................................. 1153.2. Defining the constraints ......................................................................................... 1153.3. Defining the objective function ............................................................................. 118

4. Implemeting the model ...................................................................................................... 1185. Summary ............................................................................................................................ 1196. References .......................................................................................................................... 120

15. 15. Economics of agricultural inputs (horizontal activities of farming) (Attila Bai) ................ 1221. 1. Plant protection .............................................................................................................. 1222. 2. Fertilization .................................................................................................................... 1243. 3. Irrigation ......................................................................................................................... 1274. 4. Mechanization ................................................................................................................ 1295. References .......................................................................................................................... 130


Az ábrák listája1.1. Figure 1. Managenet flow chart based on functios of mamagenet ............................................... 41.2. Table 1. General format of a Balance Sheet .................................................................................. 53.1. Categories of costs and profits .................................................................................................... 193.2. Production Cost in the short run ................................................................................................. 203.3. Production Cost in the short run ................................................................................................. 203.4. Production Cost in the short run ................................................................................................. 213.5. Production Cost in the short run (AC = Average Cost) .............................................................. 213.6. Production Cost in the short run ................................................................................................. 224.1. Figure 1. ...................................................................................................................................... 254.2. Figure 2. The success of business activity .................................................................................. 254.3. Table 2. Indicators for the analysis of the regional efficiency .................................................... 284.4. Figure 6. Average efficiency shown by function ........................................................................ 314.5. Figure 7. Additional efficiency shown by function .................................................................... 324.6. Table 3. Classification of efficiency by manner of input ............................................................ 325.1. Figure 1: : Degrees of soundness of a decision in relation to the information available ............ 355.2. Figure 2 The scheme for making optimal decisions ................................................................... 365.3. Figure 3: Profit matrix ................................................................................................................ 365.4. Figure 4: Three frequent types of utility functions ..................................................................... 395.5. Figure 5: Determination of the most likely value ....................................................................... 395.6. Figure 6: Expected value with actual probabilities ..................................................................... 405.7. Expected value with estimated probabilities .............................................................................. 405.8. Yields of different crops and their variability in Hungary .......................................................... 415.9. Figure 9: : The structure of a simple decision tree ...................................................................... 426.1. Graphical illustration of a production function ........................................................................... 456.2. How Much Input to Use .............................................................................................................. 466.3. How Much Input to Use .............................................................................................................. 466.4. >How Much Input to Use ........................................................................................................... 466.5. How Much Output to Produce .................................................................................................... 476.6. How Much Output to Produce .................................................................................................... 476.7. How Much Output to Produce .................................................................................................... 476.8. Applying the Marginal Principles ............................................................................................... 476.9. Equal Marginal Principal ............................................................................................................ 486.10. Equal Marginal Principal .......................................................................................................... 487.1. Selecting a Least-Cost Feed Ration ............................................................................................ 517.2. Production Possibility Curves for Competitive Enterprises ....................................................... 527.3. Supplementary and complementary enterprise relationships ..................................................... 528.1. Figure 1: Demand for current assets of sugar rape production (left) and of a whole farm with plant-production (right) ............................................................................................................................... 558.2. Table 2: The calculation of interest ............................................................................................. 598.3. Table 3: Cash Flow Budget (complete), Part I. ........................................................................... 598.4. Table 4: Cash Flow Budget (complete), Part II. ......................................................................... 608.5. Table 5: Cash Flow Analysis for an Irrigation Investment ......................................................... 619.1. Figure 9.1: Illustration of the concept of future value for a present value and for an annuity . . . 639.2. Figure 9.2: Future value and compounding ................................................................................ 649.3. Figure 9.3: Relation between compounding and discounting ..................................................... 649.4. Figure 9.4: Illustration of the concept of present value for a future value and for an annuity . . . 659.5. Figure 9.5: Present value and discounting .................................................................................. 65



9.6. Table 9.1: An investment analysis model as an example ............................................................ 7010.1. Figure 10-1. Illustration of the life cycle in the farm business ................................................. 7312.1. Figure 12.1: The different objectives of financial/economic analysis processes ...................... 9112.2. Figure 12.2: Diagnosing a farm business problem ................................................................... 9312.3. Figure 12.3: Performance measures by area and viewpoint ..................................................... 9312.4. Figure 12.4: Index system of economy efficiency .................................................................. 10012.5. Figure 12.5: Classification of efficiency by manner of input ................................................. 10113.1. Figure 1: Global trends ........................................................................................................... 10313.2. Figure 2: Historical trends of food production 1960-2000 ..................................................... 10513.3. Figure 3: Weak Sustainability v. Hard Sustainability ............................................................. 10714.1. Figure 1: Economic context of crop structure planning ......................................................... 11214.2. Figure 2: Crop production system model ............................................................................... 11214.3. Figure 3: Work planning phases ............................................................................................. 11414.4. Figure 4. LP model schema for crop production planning and analyzing .............................. 11815.1. Table 1: Use of chemicals in some countries and areas .......................................................... 12215.2. Figure 1. Losses along the food chain .................................................................................... 12215.3. Table 2: Total estimated environmental and social costs from pesticide in the USA ............. 12315.4. Figure 2: Share of GM crops in global plantings of key crops in 2009* ............................... 12415.5. Figure 3: Effect of machinery utilization on the debate of ownership/hiring ......................... 129


A táblázatok listája8.1. Table 1: Comparision between complete and partial budgeting ................................................. 5515.1. Table 3: Differences between manures and mineral fertilizers ............................................... 125


Tárgymutató


1. fejezet - 1. Resources in Agriculture, Speciality of Agricultural Resources (András Nábrádi)Assessing the Resources of the Business Farms and vary widely in the quantity and quality of human, physical, and financial resources available to them. Thorough assessment of these resources will help the manager choose realistic strategies for achieving the goals of the business. This process is often called internal scanning, or internal assessment.

Human resources

The skills of the operator(s) and other employees often determine the success or failure of certain enterprises. Some workers are talented with machinery, while others do better with livestock. Still others excel at marketing or accounting. Equally important is the degree to which each person in the operation likes or dislikes doing certain jobs. It is a good idea to conduct a thorough audit of personal skills and preferences before identifying competitive strategies for a farm business.

Physical resources

The land base is probably the most critical physical resource. Productivity, topography, drainage, and fertility are just a few of the qualities that determine the potential of land for agricultural use. The number of hectares available and their location are also important. In many states, detailed databases exist that describe the important characteristics of a particular tract of land. Other physical resources that should be evaluated include breeding livestock; buildings and fences; machinery and equipment; irrigation installations; and established perennial crops such as orchards, vineyards, and pasture.

Financial resources

Even when the physical and human resources are present to carry out certain enter-prises, capital may be a lirniting factor. Financial resources can be evaluated by completing a set of financial statements and by exploring the possibility of obtaining additional capital from lenders or outside investors.

Thorough appraisal of the farm's physical, human, and financial strengths and weaknesses will steer it toward realistic strategies. Particular attention should be given to identifying resources that will give the farm a competitive advantage over other firms. If certain key resources are found to be in short supply, strategies to fill these gaps can be formulated.

1. HUMAN RESOURCESFarm managers of the twenty-first century are depending more on a team of employees or partners to carry out specific duties in the operation. Working with other people will become a more important factor in the success of the operation. Motivation, communication, evaluation, and training of personnel will become essential skills.

Farm businesses will have to offer wages, benefits, and working conditions competitive with nonfarm employment opportunities. They will likely have to follow more regulations regarding worker safety in handling farm chemicals and equipment and see that employees are properly trained in the use of new technologies. Many of the most efficient farms and ranches in the twenty-first century will be those with a small number of operators or employees who have specialised responsibilities. They will have mastered the communication and teamwork skills needed in such operations.

Modem managers will need to take advantage of the expertise of paid consultants and advisors. For some very technical decisions, such as diagnosing animal and plant diseases, developing legal contracts, or executing commodity prying strategies, the manager may pay a consultant to make recommendations. In other cases, the farm manager will obtain information from outside sources but do the analysis and decision making. Examples include formulating livestock rations or crop fertility prograrns based on the results of labouratory tests. In either


1. Resources in Agriculture, Speciality of Agricultural

Resources (András Nábrádi)case, the successful manager must learn to communicate clearly and efficiently with the consultant.

This means understanding the terminology and principles involved and summarizing information before submitting it.

Functions of Management

Farm managers perform many functions. Much of their time is spent doing routine jobs and chores. However, the functions that distinguish a manager from a mere worker are those that involve a considerable amount of thought and judgment.

The functions of management can be summarized under the general categories consist of three basic activities: planning, implementation (organizing, motivating, staffing, and controlling) and adjustment.

Planning

The most fundamental and important of the functions is planning. It means choosing a course of action, policy, or procedure. Planning consists of all those managerial activities related to preparing for the future. Specific tasks include forecasting, establishing objectives, devising strategies, developing policies, and setting goals. Not much will happen without a plan. To formulate a plan, managers must first establish goals, or be sure they clearly understand the business owner's goals. Second, they must identify the quantity and quality of resources available to meet the goals. In agriculture, such resources include land, water, machinery, livestock, capital, and labour. Third, the resources must be allocated among several competing uses. The manager must identify all possible altematives, analyze them, and select those that will come closest to meeting the goals of the business. All these steps require the manager to make long-run and short-run decisions.

Implementation:

1. Organizing:

Organizing includes all those managerial activities that result in a structure of task and authority relationships. This includes acquiring the resources and materials necessary to put the plan into effect, plus overseeing the entire process. Specific areas include organizational design, job specialization, job descriptions, job specifications, span of control, unity of command, coordination, job design, and job analysis.

2. Motivating:

Motivating involves efforts directed toward shaping human behaviour. Specific topics include leadership, communication, work groups, behaviour modification, delegation of authority, job enrichment, job satisfaction, needs fulfilment, organizational change, employee morale, and managerial morale.

3. Staffing:

Included are wage and salary administration, employee benefits, interviewing, hiring, firing, training, management development, employee safety, affirmative action, equal employment opportunity, career development, personnel research, discipline policies, and public relations.

4. Controlling:

The control function includes monitoring results, recording information, and comparing results to a standard. Controlling refers to all those managerial activities directed toward ensuring that actual results are consistent with planned results. Key areas of concern include quality control, financial control, sales control, inventory control, expense control, analysis of variances, rewards, and sanctions. It ensures that the plan is being followed and producing the desired results, or provides an early warning so adjustments can be made if it is not. Outcomes and other related data become a source of new information to use for improving future plans. Controlling consists of four basic steps:

a. Establishing performance standards,

b. Measuring individual and organizational performance,



Resources (András Nábrádi)c. Comparing actual performance to planned performance standards,

d. Taking corrective actions, which belongs to the adjustment.

Adjustment

If the information gathered during the control process shows that outcomes are not meeting the manager's objectives, adjustments need to be made. This may involve fine-tuning the technology being used, or it may require changing enterprises. In some cases more detailed production and cost data will have to be collected to identify specific problems. Figure 1 illustrates the flow of action from planning through implementation and control to adjustment. It also shows that information obtained from the control function can be used for revising future plans. This circular process of constant improvement and refinement of decisions can continue through many cycles.

1.1. ábra - Figure 1. Managenet flow chart based on functios of mamagenet

Management audit checklist

The following checklist of questions can help determine specific strengths and weaknesses in the functional area of business. An answer of no to any question could indicate a potential weakness. Positive or yes answers to the checklist questions suggest potential areas of strength.

1. Does the firm use management concepts (planning, implenetation, control)?

2. Are farm objectives and goals measurable and well communicated?

3. Do managers at all hierarchical levels plan effectively?

4. Do managers delegate authority well?

5. Is the organization’s structure appropriate?

6. Are job descriptions and job specifications clear?

7. Is employee morale high?

8. Are employee turnover and absenteeism low?

9. Are organizational reward and control mechanisms effective?

2. PHYSICAL RESOURCESThe simplest way for understanding physical resources is to become familiar with balance sheet format. „A balance sheet is a snapshot of a business's financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities, and owners' or stockholders' equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money market, or government securities. At any given time, assets must equal liabilities plus owners' equity. An asset is anything the business owns that has monetary value. Liabilities are the claims of creditors against the



Resources (András Nábrádi)assets of the business.“ (I.1)

1.2. ábra - Table 1. General format of a Balance Sheet

A condensed and general format for a balance sheet is shown in Table 1. Assets are shown on the left side or top part of a balance sheet, and liabilities are placed to the right of or below assets.

Assets

An asset has value for one or both of two reasons. First, it can be sold to generate cash, or second, it can be used to produce other goods that can be sold for cash at some future time. Goods that have already been produced, such as grain and feed or livestock, can be sold quickly and easily without disrupting future production activities. They are called liquid (current) assets. Marketable securities (stocks, bonds, etc.) and the cash value of life insurance are also easy to convert to cash and are considered liquid assets as weIl. Assets such as machinery, breeding livestock, and land are owned primarily to produce agricultural commodities that can then be sold to produce cash income. Selling income- producing assets to generate cash would affect the firm's ability to produce future income, so they are less liquid, or illiquid. These assets (fixed) are also more difficult to sell quickly and easily at their full market value.

Current Assets

Accounting principles require current assets to be separated from other assets on a balance sheet. Current assets are the more liquid assets, which will either be used up or sold within the next year as part of normal business activities.

Cash on hand and checking and savings account balances are current assets and are the most liquid of all assets.

Other current assets include readily marketable stocks and bonds; accounts and notes receivable (which represent money owed to the business because of loans granted, products sold, or services rendered); and inventories of feed, grain, supplies, and feeder livestock. The latter are livestock held primarily for sale and not for breeding purposes.

Noncurrent (fixed) Assets

Any asset not classified as a current (fixed) asset is, by default, a noncurrent asset. On a farm or ranch, these assets would include primarily machinery and equipment, breeding livestock, buildings, and land.

Liabilities

A liability is an obligation or debt owed to someone else. It represents an outsider's claim against one or more of the business assets.

Current Liabilities

Current liabilities must be separated from all other liabilities for the balance sheet to follow basic accounting principles. Current liabilities are financial obligations that will become due and payable within one year from the date of the balance sheet and will therefore require that cash be available in within the next year. Short-term loans are those requiring complete payment of the principal in one year or less. These would typically be loans used to purchase crop production inputs, feeder livestock, and feed for the feeder livestock.



Resources (András Nábrádi)Loans obtained for the purchase of machinery, breeding livestock, and land is typically for a period longer than 1 year. Principal payments may extend for three to five years for machinery and for 20 years or more for land. However, a principal payment is typically due annually or serniannually, and these payments will require cash within the next year. Therefore, all principal payments due within the next year, whether they are for short-term loans or for noncurrent loans, are included as current liabilities.

The point-in-time concept requires identifying all liabilities that exist as of the date of the balance sheet. In other words, what obligations would have to be met if the business sold out and ceased to exist on this date? Some expenses tend to accrue daily but are only paid once or twice a year. Interest and property taxes are examples. To properly account for these, accrued expenses are included as current liabilities. lncluded in this category would be interest that has accumulated from the last interest payment on each loan to the date of the balance sheet. Accrued property taxes would be handled in a similar manner, and there may be other accrued expenses, such as wages and employee tax with holdings, that have been incurred but not yet paid. Income taxes on farm income are typical paid several months after the close of an accounting period. Therefore, a balance sheet for the end of an accounting period should also show accrued income taxes, or income taxes payable, as a current liability.

Noncurrent Liabilities

These include all obligations that do not have to be paid in full within the next year. As discussed, any principal due within the next year would be shown as a current liability, and the remaining balance on the debt would be listed as a noncurrent liability. Care must be taken to be sure the current portion of these liabilities has been deducted, and only the amount remaining to be paid after the next year's principal payment is recorded as a noncurrent liability.

Owner Equity

Owner equity represents the amount of money left for the owner of the business should the assets is sold and all liabilities paid as of the date of the balance sheet. It is also called net worth. Equity can be found by subtracting total liabilities from total assets and is therefore the "balancing" amount, which causes total assets to exactly equal total liabilities plus owner equity. Owner equity is the owner's current investment or equity in the business.

Owner equity can and does change for a number of reasons. One common and periodic change comes from using assets to produce crops and livestock, with the profit from these production activities then used to purchase additional assets or to reduce liabilities. This production process takes time, and one of the reasons for comparing a balance sheet for the beginning of the year with one for the end of the year is to study the effects of the year's production on owner equity and the composition of assets and liabilities. Owner equity will also change if there is a change in an asset's value, a gift or inheritance is received, cash or property is contributed or withdrawn from the business, or an asset is sold for more or less than its balance sheet value.

However, changes in the composition of assets and liabilities may not cause a change in owner equity. For example, if 10,000 EUR cash is used to purchase a new machine, owner equity does not change. There is now 10,000 EUR less current assets (cash) but an additional 10,000 EUR of noncurrent assets (the machine). Total assets remain the same, and therefore, so do owner equity. If 10,000 EUR is borrowed to purchase this machine, both assets and liabilities will increase by the same amount, leaving the difference or owner equity the same as before. The purchase will not affect owner equity. However, over time the loss of value in the item recorded by depreciation will affect owner equity. Using the 10,000 EUR to make a principal payment on a loan will also have no effect on equity. Assets have been reduced by 10,000 EUR, but so have liabilities. Equity will remain the same.

These examples illustrate an important point. Owner equity in a business changes only when the owner puts additional personal capital into the business, withdraws capital from the business, or when the business shows a profit or loss. Changes in asset values due to changes in market prices also affect equity if assets are valued at market value. However, many business transactions only change the mix or composition of assets and liabilities and do not affect owner equity.

Inventory Resources

Land



Resources (András Nábrádi)Land has a number of unique characteristics not found in other agricultural or non-agricultural resources. These characteristics greatly influence the economics of land use and management.

Characteristics of Land

Land is a permanent resource that does not depreciate or wear out, provided soil fertility is maintained and appropriate conservation measures are used. Proper management not only will maintain the inherent productivity of land but can even improve it. Land is productive in its native state, producing stands of timber and native grasses, but the management efforts of farmers have improved the agricultural productivity of many types of land. This has been accomplished through land clearing, drainage, good conservation practices, irrigation, the into production of new and improved plant species, and the use of limestone and fertilizer. Land use often changes as a result of these improvements.

Each tract of land has a legal description, which identifies its particular location, size, and shape.

Land is immobile and cannot be moved to be combined with other resources.

Machinery, seed, fertilizer, water, and other inputs must be transported to the land and combined with it to produce crops and livestock.

Not only is land a unique resource in general, but each farm or specific parcel of land is unique.

Any piece of land larger than several hectares often contains two or more distinct soil types, each with its own set of characteristics. Topography, drainage, organic material, and the existence of natural hazards such as flooding, wind and water erosion, and rock outcrops are other factors that combine to make land resources different from farm to farm.

The supply of land suitable for agricultural production is essentially fixed, although small amounts may be brought into production by clearing and draining or may be lost to nonfarm uses. This makes the price of land very sensitive to changes in the demand for its products. Unlike other agricultural inputs, additional land cannot be manufactured when the demand increases. Therefore, changes in the profitability of agricultural production are eventually factored into land prices and rents, and the land owner receives the economic benefits or losses.

The land resource is generally the most valuable resource and one of the most difficult to alter. Land is also a complex resource with many characteristics that influence the type and number of enterprises to be considered. The following are some of the important items to be included in the land inventory.

1. Total number of hectares available in cropland, pasture, orchards and vineyards, timber, and wasteland

2. Climatic factors, including temperature, annual rainfall, and length of the growing season

3. Soil types and factors such as slope, texture, and depth

4. Soil fertility levels and needs. A soil testing program may be needed as part of the inventory

5. The current water supply and irrigation system or the potential for developing it

6. Drainage canals and tile lines in existence, and any current or potential surface and subsurface drainage problems

7. Soil conservation practices and structures, including any current and future needs for improvement

8. The current soil conservation plan and any limitations it may place on land use or technology

9. Crop bases, established yields, long-term contracts, or other characteristics related to government programs or legal obligations

10. Existing and potential pest and weed problems that might affect enterprise selection and crop yields

11. Tenure arrangements and lease terms that may affect production decisions

This is also a good time to draw up a map of the farm showing field sizes, field layouts, fences, drainage ways and ditches, tile lines, and other physical features. A map can assist in planning changes or documenting past



Resources (András Nábrádi)practices. If available, the cropping history of each field, including crops grown, yields obtained, fertilizer and lime applied, and pesticides used, can be recorded on a copy of the field map or in a computer database. This information is useful for developing a crop program where a crop rotation is desirable or herbicide carry over may be a problem.

Buildings

The inventory of buildings should include a list of all structures, along with their condition, capacity, and potential uses. Livestock enterprises and crop storage may be severely lirnited in number and size by the facilities available. Feed- handling equipment, forage and grain storage, water supply, manure handling, and arrangement and capacity of livestock facilities should be noted in the inventory.

The potential for livestock production may also be affected by the location of the farmstead. Close proximity to streams, lakes, or nearby residents may restrict the type and volume of animals that can be raised or finished. In addition, there should be adequate land area available for environmentally sound manure disposal.

Machinery

Machinery can be a fixed resource in the short run, and the number, size, and capacity of the available machinery should be included in the inventory. Particular attention should be given to any specialized, single-purpose machines. The capacity limit of a specialized machine will often determine the maximum size of the enterprise in which it is used.

Capital

Capital for both short-run and long-run purposes can be another limiting resource. The lack of ready cash or limited access to operating credit can affect the size and mix of enterprises chosen. Reluctance to tie up funds in fixed assets or to leverage the business through long-term borrowing may also limit expansion of the farming operation or the purchase of labourlabour-saving technology.

Other Resources

The availability of local markets, transportation, consultants, marketing quotas, or specialized inputs is also important resources. These are surplus of the farm, quoted in immaterial fixed assets in the balance sheet.

3. SOURCES OF CAPITALCapital consists of cash and assets purchased with cash, so it is relatively easy to intermingle capital from different sources. An important part of farm financial management is the ability to obtain capital from several sources and combine it in the proper proportions in various uses.

Owner Equity the farmer's own capital is called owner equity or net worth. It is calculated as the difference between the total assets and the total liabilities of the business, as shown on the balance sheet. There are several ways the operator can secure or accumulate equity. Most farmers begin with a contribution of original capital acquired through savings, gifts, or inheritances. As the farm generates profits in excess of what is withdrawn to pay personal expenses and taxes, retained earnings can be reinvested in the business. Some operators may have out-side earnings, such as a nonfarm job or other investment income, which they can invest in their farming operation. Assets already owned may increase in value through inflation or changes in demand. This does not increase the amount or productivity of the physical assets, but additional cash can be obtained by either selling the assets or using them as collateral for a loan.

Outside Equity

Some investors may be wiling to contribute capital to a farm without being the operator or producer. Under some types of share lease agreements, the landowner contributes operating capital to buy seed and fertilizer, or even provides equipment and breeding livestock. Larger agricultural operations may include „silent“partners who contribute capital but do not participate in management. Incorporated farms may sell stock to outside investors. These arrangements increase the pool of capital available to the business but also obligate the business to share earnings with the investors.

Leasing



Resources (András Nábrádi)It is often cheaper to gain the use of capital assets by leasing or renting rather than owning them. Short-term leases make it easier for the operator to change the amount and type of assets used from year to year. However, this also creates more uncertainty about the availability of assets such as land and discourages making long-term improvements.

Contracting

Farmers or ranchers who have restricted access to capital or credit, or who wish to limit their financial risk, may contract their services to agricultural investors. Examples include custom feeding of cattle, finishing pigs on contract, contract broiler or egg production, and custom crop farming. Typically, the operator provides labour and management and some of the equipment or buildings, while the investor pays for the other inputs. The operator receives a fixed payment per unit of production. However, potential returns per unit for contract operations may be lower than for a well-arranaged owner-operated business.

Credit

After owner's equity, capital obtained through credit is the second largest source of farm capital. Borrowed money can provide a means to:

• quickly increase business size,

• improve the efficiency of other resources,

• spread out the purchase of capital assets over time,

• withstand temporary periods of negative cash flow.

Types of loans

Agricultural loans can be classified by their length of repayment, use of the funds, and type of security pledged. All of them include certain terms used in the credit industry. A prospective borrower needs to be familiar with these terms to communicate effectively with lenders.

Length of Repayment

Classifying loans by the length of the repayment period is widely used when preparing balance sheets, as was discussed. 5. Three time classifications are commonly used in agricultural lending:

1. Short-Term Loans; Short-term loans are generally used to purchase inputs needed to operate through the current production cycle. Purchases of fertilizer, seed, feeder livestock, and feed are examples. Wages and rents are also financed with short-term credit. Repayment is due when the crops are harvested and sold or when the feeder livestock are sold. Short-term loans are also called production or operating loans and are listed under current liabilities on the farm balance sheet.

2. Intermediate-Term Loans;

When a loan is repayable over more than one year but less than 10 years, it is classified as an intermediate loan. One or more payments are usually due each year. Intermediate loans are often used for the purchase of machinery, breeding and dairy livestock, and some buildings. These assets will be used in production for several years and cannot be expected to pay for themselves in one year or less.

3. Long-Term Loans;

A loan with a term of 10 years or longer is classified as a long-term loan. Assets with a long or indefinite life, such as land and buildings, are often purchased with funds from long-term loans. Loans for the purchase of land may be made for a term as long as 20 to 40 years, for example. Annual or semi-annual payments normally are required throughout the term of the loan.

4. ReferencesNábrádi A.-Pupos T.-Takácsné Gy. K.: (Ed) (2008) Üzemtan I.-II. (Farm Management) Szaktudás Kiadó Ház, Budapest. ISBN: 978-963-9736-91-7.



Resources (András Nábrádi)Ronald D. Kay William M. Edwards Patricia A. Duffy: Farm Managemet. McGraw-Hill , 2006.

Internet:

(I,1): http://www.inc.com/articles/2000/05/18941.html


2. fejezet - 2. Measuring the output in agricultural sectors (Yield; Production Value; Income; Profit) (Adrián Nagy)Yield

The main goal of agricultural enterprises is to create marketable goods and services. These outputs can be measured in various ways. To get a clear picture of the meaning of the different values and indexes, we need to go through a few basic definitions and calculations.

The first way to look at the output would be to measure each of its activities individually. This makes the output measurable in its own natural unit. Natural units are for example tons of grain, liter of wine. The natural unit of measure for the produced goods and services is also called the yield. The natural units can be used to show the development of the output in time, and can enable a trend research.

Branches producing the same product can be compared by yield. The ratio of the agricultural output to agricultural inputs (e.g. Kilogramm/Hectar) makes a comparison possible between enterprises. This method still presumes an identical output and makes no difference between various quality or price categories.

Yield per output capacity unit (e.g. Liter/Vine) expresses the production quality. This ratio can be used for comparison between different cultivation techniques, different fertilizer or spray.

In some sectors (like cereal or dairy production) is the use of Unified Performance Metrics (UPM) suitable. UPM sums up the products of different natural measurement unit into one index by substituting the metrics with the metrics of the used common input. A good example is the milk equivalent, which is defined by the United States Department of Agriculture as follows:

Milk equivalent is a measure of the quantity of fluid milk used in a processed dairy product. Measured on a milkfat basis, it takes about 21.8 pounds of farm milk to make a pound of butter, and about 9.2 pounds to make a pound of American cheese. Measured on a skim solids basis, it takes about 11.6 pounds of farm milk to make a pound of nonfat dry milk. Farm milk weighs about 8.6 pounds per gallon.

Products

The Products of a joint output can be categorized after their volume and their profitability. Main products have the highest revenues, co-products (which involve similar revenues to the main product), by-products (which result in smaller revenues), and waste products (which provide little or no revenue).

A main product is a joint output that generates a significant portion of the net realizable value (NRV) within a joint production process. The classification of a product resulting from a joint production process as either a main product or a by-product has relevance in the context of cost management because costs are only allocated to main products, not to by-products.*

A by-product is a secondary product derived from a manufacturing process or chemical reaction. It is not the primary product or service being produced. In the context of production, a by-product can be defined as the 'output from a joint production process that is minor in quantity and/or NRV when compared to the main products'.* The by-product is conventionally not inventoried. The income from production of these goods is mostly categorized as ‘other income’, and their influence on the total income is rather viewed as reduction of the costs of waste processing. (Examples: feathers – from poultry processing; blood meal – from slaughterhouse operations; straw – from grain harvesting)

A co-product is also secondary product derived from a manufacturing process, which involves similar revenues to the main product, the co-products are inventoried and handled the same way as main the main products. (Example: the co-products from a cow: meat, milk, butter etc.)


2. Measuring the output in agricultural sectors (Yield;

Production Value; Income; Profit) (Adrián Nagy)

Waste products provide little or no revenue. These products are not marketable or not suitable for reuse or recycle. However, waste products can become by-products and vice versa depending on the technology and transportation costs. Waste products are conventionally not inventoried.

*[ Wouters, Mark; Selto, Frank H.; Hilton, Ronald W.; Maher, Michael W. (2012): Cost Management: Strategies for Business Decisions, International Edition, McGraw-Hill, p. 535, 538.]

Production value

The yield itself is not suitable for comparing heterogenic production outputs. The problem can be solved through a unified measure unit: money. Production value is the monetary value of output of goods and services, (usually in one year period). The production value is calculated trough a simple formula:

Production value = yield * price

The yield is in a natural measurement unit of the given product. The price however is question of point of view.

Types of prices

The type of price used in determining the production value depends on many aspects including the goal of the calculation and the origin of the product.

Market price is the price at which the product is buyable/sellable at the given moment. The market price presumes that the product is actually endlessly on stock for that price or there is an inexhaustible demand for it and that there are no discounts/surcharges depending on the volume. This price is commonly used for planning, as the actual prices are not yet available.Purchase price is the price of the product at the time of the purchase. This is a retrospective view that helps determine the actual production cost. This price can be the most accurate. Nevertheless purchasing multi-use products or buying a not proportionally prized product can lead to an estimated purchase price. Cost price is equal to the proportional costs of the production of the good. A cost price is commonly used in cases where the product is made by the same enterprise that uses it. The cost price is clearing price between two sections of a production. The product itself is in most cases only produced for internal use, and is not marketable. The cost price should however be lower than any of the market prices of the substitute products. A guide price is determined and used only for clearing purposes. The seller and the buyer belong to the same owner, so the price is only a tool of profit-sharing. In this case the product has relatively higher costs and volume, but the product is usually still not marketable.

Categories of the production value

Gross Production Value (GPV) = yield * price

If we take a farmer who only sells milk and his daily output is 200 liter and he sells the milk for 60 Ft/l then his daily GPV is 12.000 Ft.

GPV measures the actual production output of an establishment. Operating activities include all production output, also production for own use and production for the enterprise's other establishments. Gross value excludes transfer gains from fixed assets, which are not seen as a production item but as windfall profit.

Income is the money value of the actually sold products.

income = sold output * selling price

The income differs from the productions because the sold output is smaller or equal to the produced volume and the price is set to the actual selling price.

Non-cumulative production value (NCPV) = GPV – reuse

NCPV excludes the revenue achieved by production for own use. So that the Production Value only shows the additional revenue of the activities.

Commodity Production Value (CPV) = NCPV - Change in inventories




CPV excludes the change in the inventory of finished products in order to show the net additional revenue of the activities in the actual period viewed.

Added Value (AV) = GPV – Purchase Value – reuse

Added Value is excluding all inputs at their Purchase Value from the income. The 0 value of AV is the closure point. That means if AV is negative, the further operations only produce losses. (The total variable costs are higher, than the total revenue.)

Net Production Value (NPV) = AV – Amortization

Net Production Value excludes furthermore the fix costs. This index shows the profitability of the enterprise. If NPV is positive, the enterprise has a profit. In cases where the NPV is negative and the AV positive, (Total Variable Costs < Total Revenue < Total Costs) the operations are only in short-term reasonable.

The next table shows an example of the calculation of the indexes.

denomination quantity (t) price Ft/t value (Mft)

wheat 1 OOO 4O OOO 4O OOO

straw 5OO 15OO 75O

Gross production value 4O75O

- Utilization (seed) -5O 4O OOO -2 OOO

NCPV 38 75O

CPV 36 75O

denomination distribution in %

Gross PV 1OO

- reuse 15- 25

- purchase value 45-6O

- amortization 5-8

Net PV 25-35

The common distribution of the values of the GPV.

Ways to rise the Production Value

As the formula of the Production Value multiplies the yield with the price, the logical ways to raise the Production Value is to rise either or both of the factors.

Raising the yield. The yield itself is a complex result from a lot of factors.

• Territory – raising the territory would mean a rising yield. However, the bigger territory needs more work, and although some of the resources can be used more proportially, there is an optimal plant size, where all the resources are most effectively used, optimalising their cost per output.




• Other resources – if the other resources are not optimal used, there could be a gain of yield, if more of the resources are put to work, or the current resources are reallocated to gain more efficiency.

• Technology – With an improved technology which makes the output/input rate higher can go the yield up.

On the other hand, raising the yield has its own risks. Depending on the market size, a larger yield could push the price down resulting in a lower production value. A second risk could be that there are no buyers for the extra yield, but this does not affect the GPV, because it only considers the produced volume, not the sold volume.

If the enterprise raises the price without a general rise of the market price, the effect depends on the market situation; but it is very likely that the higher price will lead to a lower demand. Nevertheless the calculated production value will grow.

If the market price is rising due to inflation or growing demand or lower supplies, the effects can be positive on the income and also on the production value.

A rise of the price is achievable by taking the products to other markets (changing the point of sale, the time of sale or producing better quality).

For example fruits can be sold for a higher price near a beach in the summer, the prices are higher before the season of a fruit starts.

Additional increase of the production value can be achieved by applying for EU, state or civil fundings, tender resources, insurance benefits, interest pay-out or the changes in the exchange rates. The latter is difficult or not at all influencable, but a significant surplus can be achieved by monitoring the contests and applying for fundings.

Definition of Expenditure

The resources expressed in their natural units, that were used for the production is called expenditure. For example, the food and water for the cows in our previous example of milk farmer, and also the electricity, the living labour, equipment, etc.

Expenditure per output unit is used to express the efficiency of the production regardin g on e resource. How many kilogram of hay is needed to produce one liter milk? How many hours labour are needed to produce one ton of wheat. The higher this ratio the higher the quality of the production.

Costs of the production

The monetary value of the expenditures used to create the production or service is called the production costs. This also includes the indirect expenses like insurance premium, taxes, membership fees or loan interests.

Production Costs = Input x Price

Cost categories

There are different aspects along which the costs can be categorize. Form:

Elemental – where the cost is not dividable anymore. These could be material costs, personnel costs, amortization or miscellaneous costs.

Combined – where at least two elemental costs are involved. These could be costs of a special equipment, by-product costs or general costs.

We can separate the costs by deciding if they are directly connected to one product:

Direct costs – where the costs are recognizably put to use to create one kind of a product. (For example raw material costs, equipment)

Common costs – where the cost are not easily dividable among the products. (For example costs of book-keeping, personnel costs of staff that works in more divisions.)




The costs are either tied to the volume of the production or not. The variable cost is moving together with the production volume. These typically the raw material, part of the labour or electricity costs. The fix cost is also to be paid when the output is zero (closure or production pause). For example loan interest, rent of buildings, amortization. These costs are only short-term fix costs. In middle- or long-term are all costs variable. To raise the production new building can be built, equipment can be bought or sold to change the amortization, etc.

Total cost is the sum of the fix and variable costs that emerge in connection to a production.

The costs can have different intensity in changing.Degressive – if the costs/output unit decreases if the volume grows.Proportional – if the costs/output unit does not change if the volume grows.Progressive – if the costs/output unit increases if the volume grows.

The cost can be explicit, where they are precisely expressed on clearing or bills, or implicit (e.g. amortization) where they are calculated.

Marginal cost is the cost of an additional unit of production at a given volume.

Average cost is the cost of one unit of production at a given volume. In case of a single product line the average cost is

Total cost / number of produced units

However, if there are more products, the average costs of the main product is to be calculated exclusive the value (or costs) of the by-products. In case of co-products the devision can be made through a artificial rate. Or with the help of Unified Performance Metrics discussed earlier.

Sunken costs are the costs that are already paid or to be paid independent to any business decision.

Decreasing the production costs

The average production cost can be decreased by increasing the volume in case of degressive inputs, or decreasing it with progressive inputs. The increase of the volume is economically reasonable until the marginal cost is lower than the average cost (if the selling price is not depending on the volume).

Using inputs with lower price is also a way to decrease costs. A lower price does not mean automatically a lower quality, but it is still something to consider.

Changing the production technology or methods can lead to lowering the need of average expenditure per output unit, and so to a lower average cost. The costs of a technology change must be compared to gains at reducing the average costs; it is only above a given volume of output that makes a change reasonable.

Income

After clearing the production value and costs, we can calculate the real goal of an enterprise, the income. The income is simply calculated be taking the difference of the above two.

Income = Production Value – Production Costs

Depending on how the enterprise did, this difference can be a positive income (profit, gains) or negative income (losses).

Categories of Income

Net income is the difference of the production value and production costs. This is mostly used by middle or large enterprises.

Net Income (NI) = PV-PC

Gross income includes the net income and additionally the personnel costs. This is used by smaller enterprises where the owner does not typically expresses the costs of his own work in ways of a salary.

Gross Income = PV - PC + Pers. CostsGross Income = NI + Pers. Costs




Gross Margin is the amount of money left for the fix costs (and profit) after paying the variable costs.

Gross Margin = PV – Variable costsGross Margin = NI + Fixed costs

Gross Profit is the sum left after paying all directs costs. This shows how lean the additional services must be.

Gross Profit = PV – Direct costsGross Profit =NI + Common costs

Opportunities for increasing the income

The main goal of a rational enterprise is to maximize its income (and to achieve profit). It has two basic ways to do that considering the above: by increasing the production value or decreasing the production expenditure. In practice however mostly the production expenditure will be increased resulting in a higher increase of the production value. The increase of the production volume is efficient way to increase the income while the marginal costs are lower than the marginal income. (Marginal income is the change of income if the output is increase with one unit, that is generally equal to the price of the output unit.)

Efficiency

The economic efficiency is the result of an activity compared to the efforts put into achieving it. The efficiency indexes are normally calculated on a yearly basis so that the comparison is reasonable.

Efficiency = results/efforts

The results and efforts above can be widely interpret, because results can be the output, the value of the production or even the yield in natural units of the output. As to the efforts, these can also be the expenditure, the capital used or production costs.

Depending on the values in the formula, the efficiency can be a natural (where the values are expressed only in natural units), an economic (where the values are expressed only in money) or mixed efficiency. For example liters of milk per kilogram of hay, Forints gained per forints invested, kg of cheese per Forints invested.)

Reciprocal efficiency is when the efforts are compared to the result. For example Forints spent per liter of milk. This helps a comparison between different products, because the price ratio of two products should reflect the efficiency ratio. A product with higher reciprocal economic efficiency is more profitable than one with lower.

Average efficiency is the overall efficiency of an enterprise considering all products, services and all expenditures. Marginal efficiency is the efficiency change achieved by increasing the output volume with one unit.

Profitability

The activity of the enterprise can be interpret as an investment. The interest rate of this investment can be calculated by dividing the income with the capital used in one year.

Profitability = income / capital used

The profitability is 5% if the gained profit is 5.000 Ft by using 1.000.000 Ft.

As the profitability in the early stages might be much lower (even negative) then later, calculating an average profitability of more years can be reasonable.

Average profitability = income/capital used

where n is the number of years and the income and the capital are also sums of the yearly values.

The profitability can be viewed in a bigger angle and the income is divided with the efforts detailed above.

General Profitability = income / efforts

Profitability is important for comparing different sectors, if the available capital is limited, And also to compare the profit to the loan rates, to make help to make the business decisions of starting or closing down an activity.




1. Referencies:Bódi E. (szerk.): Közgazdaságtan, Pénzügyi és Számviteli Főiskola, Budapest, 1999.

Brealey – Myers: Modern vállalati pénzügyek (Hetedik, új, átdolgozott kiadás) Budapest, 1999.

Gacsályi I. – Meyer D. – Misz J. – Simonits Zs.: Közgazdaságtan II. Makroökonómia, Nemzeti Tankönyvkiadó, Budapest, 2000

Koppányi M. – Petró K. – Vági M.: Kögazdaságtan I. Mikroökonómia, Nemzeti Tankönyvkiadó, Budapest, 2000

Meier D. – Solt K.: Makroökonómia. Aula Kiadó, Budapest, 1999.

Nagy A.: Pénzügyi alapfogalmak In: DARABOS E. GRASSELLI N. (szerk.) Vállalkozások finanszírozása. Debrecen, 2003

Nagy A.–Bai A.: Kalkulációs alapfogalmak In: ERTSEY I, NÁBRÁDI A(szerk.) Általános vállalkozási alapok. Debrecen, Campus Kiadó, 2003

Nagy A. – Nábrádi A.: Farmgazdálkodás, Szaktudás Kiadó Ház Budapest, 2011

Nábrádi A.–Nagy A. (szerk.): Vállalkozások működtetése az Európai Unióban. Budapest, Szaktudás Kiadó Ház, 2007.

Pfau E. – Posta L.: Mezőgazdasági vállalkozások és üzemek gazdaságtana, Ökonómiai füzetek 6. Termelési érték, termelési költség, jövedelem. Debrecen, 1996.

Nábrádi A.-Pupus T.-Takácsné Gy. K. (Szerk): Üzemtan I.-II. Szaktudás Kiadó Ház, Budapest, 2008

Ronald D. Kay William M. Edwards Patricia A. Duffy: Farm Management. McGraw-Hill , 2006.


3. fejezet - 3.Costs of production and cost-concepts for agriculture (A. Gáthy , I. Szűcs)In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.

A knowing and good understanding of production costs is one of the most important and useful for making a good management decision. The firm’s prime aim is to increase the profit, the difference between the total revenue and total cost. In this chapter Our central task is to analyse how we could find the cheapest way of producing a good.

It is essential to know the different type of cost, to make the best decision in connection them. Cost can be classified in different ways, depending on whether they are cash or noncash, involve or do not involve a monetary outlay, vary with the production level or not. A very interesting cost type is an opportunity cost and sunk cost in connection the managerial decision making.

The opportunity cost is the value of the next best alternative that is foregone when another alternative is chosen. Opportunity cost can be defined in one of the following two ways:

• the income that could have been earned by selling or renting the input to someone else, or

• the additional income that would have been received if the input had been used in its most profitable alternative use.

The real cost of an input, the opportunity cost in any specific use is the income it would have earned in its next best alternative use. If this is greater than the income expected from the planned use of the input, the manager should reconsider the decision. The alternative appears to be a more profitable use of the input.

Opportunity costs are used widely in economic analysis. For example, the opportunity costs of a farm operator's labour, management, and capital are used in several types of budgeting and when analyzing farm profitability. The opportunity cost of a farm operator's labour (and perhaps that of other unpaid family labour) would be what that labour would earn in its next best alternative use. That alternative use could be nonfarm employment, but depending on skills, training, and experience, it might also be employment in another enterprise or even the value that the opera tor puts on leisure time. (Kay et. al., 2008)

The other important cost type the sunk cost. Sunk costs are the costs that have already been incurred and cannot be recovered.

• A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened.

• Sunk costs are independent of any event that may occur in the future.

To sum up, the main differences between the opportunity cost and the sunk cost are in connection the managerial decision, we have a possibility to make a decision, to choose the best opportunity in the first cost type, and we could not change our decision which was made before from the point of sunk cost.

From the point of view of accounting we could share the costs into two groups. First is the explicit cost which is involving a monetary outlay, this cost we could find in financial statement and accounts. The other are the implicit costs, which are not involving in financial statement or accounts, but decision maker should pay attention when make a managerial decision.


3.Costs of production and cost-concepts for agriculture (A. Gáthy

, I. Szűcs)• Explicit Cost is a business expense that is easily identified and accounted for,

• these costs represent clear, obvious cash outflows from a business that reduce its bottom-line profitability

• for example: wage expense, rent or lease costs, and the cost of materials that go into the production of goods.

• Implicit Cost

• can also be thought of as intangible costs that are not easily accounted for;

• is represented by lost opportunity in the use of a company's own resources, excluding cash, for a firm it can be thought of as the opportunity cost related to undertaking a certain project or decision, such as the loss of interest income on funds, or depreciation of machinery used for a capital project.

• for example: the time and effort that an owner puts into the maintenance of the company.

Direct costs refer to materials, labour and expenses related to the production of a product. Other costs, such as depreciation or administrative expenses, are more difficult to assign to a specific product, and therefore are considered indirect costs.

• Direct Cost:

• a price that can be completely attributed to the production of specific goods or services;

• refer to materials, labour and expenses related to the production of a product.

• For example: the cost of meat in a hamburger can be attributed directly to the cost of manufacturing that product, as could the cost of packaging materials and preservatives

• Indirect Cost:

• depreciation or administrative expenses, are more difficult to assign to a specific product.

• For example: hamburger manufacturer's legal fees and staffing, is anything that is not a direct cost

3.1. ábra - Categories of costs and profits

Production cost in the short run

Firstly we have to define what the short run period is. The short run is not a fixed periods of calendar time, it is that period which the available quantity on one or more production inputs is fixed and cannot be changed. The term of the short run is useful to think as pertaining to the degree to which the firms inputs constraints in its decision-making flexibility. For example the amount of crop land the farmers could increase or decrease in short run period, without reference to renting or buying a new territory, because this business need a longer time. So the current crop production cycle would be a short run period, as the amount of available land is fixed. The long run could be defined as that period during which the quantity of all necessary productive can be changed.

Total Variable Cost and Total Fixed Cost



, I. Szűcs)Variable costs are expenses that change in proportion to the activity of a business. Variable cost is the sum of marginal costs over all units produced. It can also be considered normal costs. Fixed costs and variable costs make up the two components of total cost. Direct Costs, however, are costs that can easily be associated with a particular cost object. However, not all variable costs are direct costs. For example, variable manufacturing overhead costs are variable costs that are indirect costs, not direct costs. Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

The Total Variable Cost function could be derived from the Partial Production function. On the vertical axes we can see firstly the amount of labour (f.e. in hour), and secondly the cost of the labour (which is a typical variable cost). On the horizontal axes we could follow the production increase all of the two frames of reference.

3.2. ábra - Production Cost in the short run

The Variable Costs are under the managerial control, they can be increased or decreased at he manager’s judgement and will increase as the level of production is increases. The TVC is equal with zero, if the production is zero.

• Total Variable Cost (TVC):

• does not change with an increase or decrease in the amount of goods or services produced

• For example: lease payment.




, I. Szűcs)

The Total Fixed Costs do not change as the level of production changes in the short run, but can change in the long run as the quantity of the fixed input changes. This type of costs turn up from the beginning of the production, at the zero level of production.

• Total Fixed Cost (FC):

• does not change with an increase or decrease in the amount of goods or services produced

• For example: lease payment.

The Total Cost can be calculated by adding Total Variable Cost and Total Fixed Cost.


3.5. ábra - Production Cost in the short run (AC = Average Cost)



, I. Szűcs)

Average costs

It is important to use average cost, when we would like to make decision for costs. This type of costs can show us the cost per unit of production. It could help to find the optimum point from the view of variable cost or total cost.

The Average Fixed Cost is the Total Fixed Cost per unit of output produced. The Fixed Cost per unit is going to show us for each unit that we producing how much that is coming from those unchangeable overhead cost. To calculate just take the Total Fixed Cost and divided by the member of units being produced. On the graphs the AFC is the differences between the AVC and the ATC.

• Average Fixed Cost: AFC=TFC/q (Total Fixed Cost/output)

The Average Variable Cost is the Total Variable Cost per unit of output produced. The Average Variable Cost could show us how much of the cost of unit is coming from the payable benefits, for example from the wages. To calculate just take the Total Variable Cost and divided by the member of units being produced. The lowest point of the function could show us the optimum level of producing from the view of total variable cost.

• Average Variable Cost: AVC=TVC/q (Total Variable Cost/output)

The Average Total Cost is the Total Cost per unit of output produced. The ATC we could calculate in two different ways. One way is to take the Total Cost and divided by the member of units being produced. The other way is when we add the Average Fixed Cost to the Average Variable Cost. The lowest level of ATC could show us the optimum unit of production from the view all cost, this is the firm technical optimum point.

• Average Total Cost (ATC): is the sum of total fixed cost and total variable cost.

ATC = TC/q or ATC = TFC + TVC




, I. Szűcs)

Finally the most important cost is the Marginal Cost which is the additional cost of producing an additional unit of output. The MC can be calculated by taking the change in Total Cost over the changing quantity. There is another way how we could calculate the MC, MC is the changing Total Variable Cost over the changing quantity.

• Marginal Cost: measures the cost of producing one more unit of the good or services.

MC=dTC/dq= (TC2-TC1)/(Q2-Q1)

or

MC = dTVC/dq= (VC2-VC1)/(Q2-Q1)

1. Referencies:Ronald D. Kay – William M. Edwards – Patricia A. Duffy: Farm management, 6th edition, 2008, The McGraw-Hill Companies, ISBN: 978-0-07-302829-3


4. fejezet - 4. Efficiency and it’s measurement in Agriculture (András Nábrádi)Introduction, key conceptual fields

A better understanding of the notion of efficiency is critical to dissolve ambiguity about it. Many confuse efficiency with other supposedly synonymous notions such as profitability, successfulness, competitiveness or productivity. This ambiguity originates not only in subjective reasons, but the lack of hierarchical order among certain ideas. The fact that different areas of science use different names for equal notions can also pose considerable problems, but the same ideas may also be interpreted in a distinct sense.

There are several definition can be found in different sources which reflected on that sometimes we speak about the same formula in different way or vice versa, we speak about different items based on the same definition. Let we show some examples:

Efficiency: Producing desired results with a minimum of effort, expense or waste. (Webster’s New World Dictionary 1995.)

Efficiency: State or quality of being efficient (Hornby (ed.): Oxford ertelmezo keziszotar. /Oxford dictionary/ Kultura International, Budapest, 1989.)

Efficiency: Getting any given results with the smallest possible inputs, or getting the maximum possible output from given resources. (A Dictionary of Economics. Second Edition. Oxford University Press, 2002.)

Efficiency: Technical efficiency: a measure of the ability of manufacturer to produce the maximum output of acceptable quality with the minimum of inputs. Economic efficiency: a measure of the ability of an organization to produce and distribute its product at the lowest possible cost. (A Dictionary of Economics. Third Edition. Oxford University Press, 2002.)

Productivity: A measure of the output of an organisation or economy per unit of input (labour, raw materials, capital etc.) (A Dictionary of Economics. Second Edition. Oxford University Press, 2002.)

It is sure, that the field of efficiency is not clear. Why this miserable situation? If we look around in the business textbooks about the efficiency we can find several ratios belongs to that big category. Efficiency ratios have five groups like: liquidity, leverage, activity, profitability and growth. (F.R. David Strategic management case and concepts. (2012). Within the categories we recognize logical correlations however sometimes if the ratio is bigger than we consider that is better, sometimes there are total opposite of our meaning. That is why the primary driver of our chapter to systematize efficiency in general, and formulate a new categorical approach of the efficiency in corporate level.

The premise of our investigation is the notion of efficiency defined in the widest possible sense.

Our hypothesis suggests that corporations are successful if they are efficient, liquid and competitive. What does efficiency stand for? In economic terms, efficiency is the expression of the successfulness of management. It can be measured by collating input and output. More poignantly, efficiency is the random combination quotient of output and input! Efficiency indicators can be subsumed into three main groups on corporate level:

I. Based on derived data:

a. Physical or natural efficiency

b. Economic efficiency

II. Based on relations of output and input (I/O):

a. Productivity


4. Efficiency and it’s measurement in Agriculture (András Nábrádi)

b. Intensity

c. Supply

d. Output-proportionality

III. Based on input types:

a. Average efficiency

b. Additional efficiency

c. Marginal efficiency

Basically, there are two main categories of efficiency on the grounds of derived data. The first is the large group of physical or natural efficiency and the second is economic one. We use the term of physical efficiency if in input-output relations both input and output are measures expressed in physical or natural dimension.

In the SI system: mass (e.g. kg), distance (e.g. m), area (e.g. m2), capacity (e.g. Kw) etc. If any of the elements (input-output) are expressed in money value, economic or business efficiency is mentioned. Its measurement unit reflects the economic notion by including money value (e.g. €/kg, €/ m2, or their reciprocals.

The mostly used indicator groups can be calculated on the grounds of relations. The first group of indicators (I) is too general, the third (III) is in-plant one (field register, log of animal feed, etc.) Relation-based classification is used when the existence and measurability of several input-output relations are discussed on corporate level (Figure 1.).

4.1. ábra - Figure 1.

Indicators of productivity, which are the quotients of output/input results, indicators of intensity, which are the quotients of input/output. Supply indicators refers of input/input correlations and finally output-proportionality indicators, which are the quotients of output/output values.

The second criterion for achieving efficiency is corporate competitiveness, which, beyond efficiency, means adaptability to in-company and out-of-company factors (e.g. marketability, ecological factors etc.). The third factor is liquidity. Liquidity means the capacity of a company to fulfil its payment obligations within the set deadline.

A business (activity) is successful, if it is efficient, compatible and liquid. This is presented on Figure 2.

4.2. ábra - Figure 2. The success of business activity



Several authors in the past decades tried to interpret the notion of efficiency as it is in correlation with several areas, phenomena and representations of life. “Earlier, basically the system of central planning and distribution, ignoring the relations of reality, input-field-output, the negation of the potential of decreasing outputs, the insufficient knowledge of western technical literature and other sources etc. played a key role; whereas after the transformation of regime the potentials of money-making, market development, the disorders of liberalization and deregulation and the constant character of transforming, transitional conditions pushed profitability in the background.” [3].

Efficiency – as a notion – is generally the comparison of certain event category and certain input category. It leads to conclude that efficiency is a relative category, and the calculation of a single formula or its result is not enough to declare whether a corporation or a farm is efficient or not. Accordingly, the general formula of efficiency can be given as follows:

In most cases, efficiency is discussed exclusively as the measurable, quantifiable result of activities, however, the authors elucidate efficiency can be examined in terms of national economy, society, regions, corporations and incorporation units as well. Consequently, efficiency can not only be discussed in general, but in concrete partial terms as well.

Efficiency in national and regional level

The system of national accounts (SNA) provides numerical information on the processes of economy, certain economic sectors and branches. National accounts describe goods and services that are generated and transformed and also the generation, distribution and re-distribution of revenues. They depict the use of these revenues for consumption and accumulation. The national accounts illustrate the processes of financing, the roles of banks and other financial institutions and property.

The various accounts of the national system of accounts can be divided into four groups:

• production accounts,

• revenue accounts,

• capital accounts,

• property accounts.

1. Gross output

In the case of national accounts the reasonable starting point is gross national output (GO), which is the total value of all the products and services in a country in a given period of time. Therefore, total output on the commodity market, the total production of an economy. Output is not equal with the sold quantity, as it includes stocks as well. Output expresses the sphere of consumer goods, capital goods, goods and services for government procurement.

Gross output subsumes items which are not for final use, but serve as the source materials for other products.



2. Gross domestic product, GDP

GDP = GO – intermediate consumption = Added value

If intermediate consumption is deducted from the total output of all the corporations and sectors, i.e. the value of gross output, the value of disposable products for final use is received. Actual final consumption is the value of those products and services, which are consumed by households and the community independently of the source of financing. On the level of national economy, it equals with final consumption expenditures. The value of final use for a business is expressed by added value, which is the surplus of gross output above intermediate consumption. Macro-economic models identify commodity market output with the volume of added value.

GDP can be analyzed from three sides:

• production;

• use;

• revenue (Table 1.).

Both national values (GO, GDP) are not efficiency indicators alone. As we have seen in former introductory part of the chapter; efficiency is a relative category so can be calculated with a formula of quotient. In that case efficiency formula is GDP/capita, or GO/capita.

Efficiency on regional level

From production side, the GDP of a country equals with the sum of the gross added value (the difference of gross output and ongoing intermediate consumption) and the undistributed balance of taxes on products, deducing the undistributed service charges, the margins [9].

The above indicators are quite problematic to use at regional level. Problems are posed by the following reasons:

1. For theoretical reasons, indivisible activities below country level include: activities of public administration e.g. foreign affairs and national defence, handling of public debt and environmental protection.

2. Activities which cannot be localised below country level, which include activities requiring movement e.g. transport, telecommunications, post electricity supply.

3. Rendering the surplus value of organizations with several premises to one area.

4. Taking activities performed out-of-premises into consideration, e.g. construction services, repair- maintenance, delivery of patients, animal health, competitive sport, film production, news agencies.

5. The validity and preciseness of statistical reporting.

6. Relation of regional GDP and incomes. The difference of GDP and incomes is primarily caused by the fact that capital owners’ residence and the location of production are different and labour has to commute regularly.



7. Interpretation of data. [4]. The statistical body of the European Union, EUROSTAT

does not provide data on territorial units below NUTS II. level. However, KSH (Central Statistical Office) has calculated country level data in Hungary since 1995.

In August 2001 in the governmental report entitled “Report on the development of the infrastructure system of Hungarian regions, counties and small regions and on the demarcation of regions”, the regions were analysed by 7 indicators. Efficiency indicators are the following out of them:

• taxable income for one person

• the number of operating corporations for one thousand inhabitants

• GDP per capita.

Indicators suitable for the analysis of the efficiency of a region can be divided into 5 groups (under Parliamentary regulation 0/1997. (IV.18 and Parliamentary decree 24/2001. (IV.20.),

In the examination of the efficiency of regional development programs, further E/R indicators can be generated, but this nomenclature differs from the previous ones. Four indicator groups can be separated as the basic elements of efficiency indicators:

• resource or input indicators, which practically express the volume of financial resources,

• output indicators, which express the results/output of activities e.g. the length of bicycle paths built, the number of flats built, the number of subsidized corporations,

• result indicators, which express the immediate result of programs, e.g. reduction of costs, fall in the number of accidents,

• effect indicators, which can either be direct effects occurring after the program’s time due to the program itself, or general, long-term, indirect effects, which point beyond the program.

At the evaluation of regional development programs the indicators of output, result and effect are related to resource (input) indicators. (Table 2.)

4.3. ábra - Table 2. Indicators for the analysis of the regional efficiency

Analysis of partial efficiency and its indicators

The definition of the efficiency in worldwide is not the same as we have discussed in the introduction part of this chapter. However dictionaries and textbooks approaches very often are different in national level



governments are fixed the basic definitions. We can see an example in Hungary: The interpretation of efficiency, on the basis of the Government Regulation 217/1998 (XII.30.) amended by the governmental regulation of 280/2003 (XII.31.) is the following: products, services and other output produced in the course of a given activity and the correlations of resources used for their production. Another interpretation claims that an economic activity is efficient, if it is successful in respect of a set objective. Objectives (output) may include outputs, gross production value, net production value, added value, revenue and the growth of profit. The resources (input) of economic activities may subsume: the use of living labour, assets and land [11]. The analysis of partial input is demonstrated on Figure 3.

As the figure indicates, the simplest interpretation of efficiency is that certain resource (labour, assets, land) is compared to some category of the production value (net production value, gross production value, added value) and the efficiency of the given resource may be calculated in this way. The following section details these calculations, their procedures, indices and interpretations.

Productivity of labour (efficiency of labour) and labour intensity

The productivity of labour shows the volume of manufactured products, production value during a unit of working time.

The reciprocal of labour productivity is labour intensity, which shows the volume of labour for the production of a unit of product.

Labour intensity can be influenced by the following factors:

• Technical equipment of labour

• The organization of work

• Monetary interest

These indicators are the following: agricultural output for an annual unit of labour, operating (business) output for an annual unit of labour, net production value per capita, added value per capita etc.

The indicators of asset efficiency express the generation of new (added) value by locked-up tangible and intangible assets in the form of a quotient. The quotient of asset efficiency can be calculated if the net production value is divided by the adequate asset and then this value is multiplied by 100:

Such asset efficiency indicators can be the following: net production value for 100 HUF of activated tangible assets, net production value for 100 HUF of stock, net production value for 100 HUF of “total” assets etc.

The indicators of asset intensity are the reciprocals of asset efficiency. These can be calculated if activated tangible assets, stocks and “total assets” one by one are divided by net production value then they are multiplied by 100. The tendency of these indicators is favourable if they show a decreasing value, i.e., the lower the value of the indicator than 100 is, and the more favourable the value of the indicator is.



Such are the following: tangible assets for the production of 100 HUF net production value, funds necessary for the production of 100 HUF net production value and “total assets” required for the production of 100 HUF net production value.

Territorial efficiency is determined by the quotient of production output and agricultural area. This is primarily influenced by the quality of production, as it is reflected by the following formula:

Stock management

Stock management primarily focuses on the velocity of turnover and the revolution of stocks. These indicators are suitable for the comparison of the annual data of certain sectors or the same businesses. Generally speaking, the faster the velocity of turnover for a stock, the shorter the duration of one revolution and the more positive the stock management of a corporation. Data on the velocity of turnover, which are higher than the standard values of a given industrial sector, can indicate the insufficiencies of asset management and the resulting low efficiency.

The velocity of stock turnover in days shows the number of days required by stocks for obtaining sales revenues.

The higher the velocity of turnover in a given sector, the fewer assets are required for the production activities. The revolution of assets (in turns) shows how many times stocks are refunded in revenues.

Wage efficiency and wage intensity

The indicator of wage efficiency expresses the potential of the corporation to create the new (added) value of used (paid) wages, which can be calculated if net production value is divided by wage costs.

It is favourable if it takes high values. The value of the indicator is also suitable to compare the subdivisions of corporations and corporations themselves. The indicator of wage intensity is the reciprocal of the above mentioned value and shows the necessary volume of wage costs (living labour), which is indispensable for the production of a unit of net production value. The value of the indicator is favourable if it stays low.

Capital efficiency, capital-related corporate revenue

Capital efficiency (equity profitability) reflects the volume of production value, profit or loss after taxation that a capital unit outputs for a corporation, i.e. the efficiency which operates (equity) capital invested in a corporation.



Capital-related corporate revenue is also included here, which shows how much corporate revenue can be realized by using a unit of equity capital.

Efficiency in corporate level

Corporate level efficiency has been defined by many, from basically similar approaches. Here we present a bunch of these, making the scope of definitions more colourful.

Essentially, efficiency is an economic term. The actors of economy usually measure efficiency in terms of production output or money, since their aim is mostly to maximize the difference (also in financial terms) between revenues and expenditures. Efficiency can be approached from two different directions: in the case of given input, larger output is more efficient than smaller output. Inversely: variant “A”, producing a given output with less input is more efficient than variant “B” requiring more input than that.

Efficiency is always a relative concept. At least two events, possibilities, ratios or one specific basis for comparison are required to define it, and even these are not enough.

On the basis of relation of output and input this, we can form productivity indicators from output/input ratios, demand indicators from input/output ratios, output-proportion indicators from output/output ratios and supply indicators from input/input ratios. Such relations – even though not exactly in the above grouping – are shown in Figure 5.

Output and input can also be expressed in naturalia and money value. If there is a natural unit both in the numerator and denominator of the efficiency index, we speak about natural/technological efficiency. If either the numerator or the denominator is given in money value, we consider it economic efficiency.

Efficiency indicators can also be grouped on the basis of the given input volume. If the total output is contrasted with the total input, we speak about average efficiency. (Figure 6)

4.4. ábra - Figure 6. Average efficiency shown by function



If we examine the output change achieved through the input surplus as compared to the previous input level, we get the additional efficiency index. (Figure 7)

4.5. ábra - Figure 7. Additional efficiency shown by function

With respect to the output change caused by the last unit of input change, we can form the marginal efficiency indicator. All the above is shown by the comprehensive table in Table 3.

4.6. ábra - Table 3. Classification of efficiency by manner of input

Thus, efficiency is reflected by the quotient of output and input in any combination.

Different areas of science apply different nomenclatures. This, however, is natural, since their formation has followed the organic development of individuality. At the same time, however, the differences in the applied notions can be rather disturbing in the judgement of the same economic facts.

Output categories according to the nomenclatures of business management studies can be:

• yield, yield value: volume of the products or services produced or provided, and yield value is the index number expressing the same in terms of money value

• revenue: yield value sold



• other income: non-yield based incomes, e.g.. interest rate on deposits, insurance indemnity, subsidies

• production value: total yield value and other incomes

• net income: difference between production value and production cost

• gross income: total net income and personnel costs

• variable gross margin: production value minus variable costs

• standard gross margin: production value minus direct variable costs

• contribution margin: production value minus direct costs

Input categories are:

• land,

• labour,

• production assets,

• or expressed in money: production cost.

Accountancy (in Hungary) applies denominations which are different from the above. Output categories are operating output, business output, regular corporate output, profit or loss after taxation. According to accountancy input is either costs or expenditures. The category ‘input’ as applied by enterprise studies means the use of funds in accountancy. Accountancy does not calculate with production value, and the list of differences in denominations could still be long continued, making endless misunderstandings possible.

In order to eliminate the above problem, the following categorization is applied independently of scientific areas: within the two basic categories of efficiency (economic and natural) four groups of indicators are to be identified, which are:

Supply indicators: given by input-input quotients,

Requirement indicators: given by input-output quotients,

Productivity indicators: given by output-input quotients,

Output-related indicators: given by output- output quotients.

Within and beyond the category of productivity, the concept of profitability can also be discussed. Profitability is given by the quotient of income and any input or output category. An activity of which production value (yield in terms of accountancy) exceeds its production costs (expenditures, costs in terms of accountancy) can be regarded as income producing. Thus, income arises from a difference. Profitability, however, is a ratio, where income itself is in the numerator, and the denominator contains any input or output category. For example, revenue-related income (Return on Sales (ROS)), or cost-related income.

Summary

Finally, we provide an overview of the way the concept of efficiency is built up. Efficiency always expresses the relationship between an output and an input category. Different level efficiency indicators are used for estimating the efficiency of an activity (partial, complex, social, corporate, regional and macroeconomic). The smallest unit is the partial efficiency index, which only characterizes the efficiency of one specific sub-unit or resource of the corporation. Complex efficiency reflects the joint efficiency of these resources. Next, corporate efficiency expresses the efficiency of the given corporation or plant through supply, requirement, productivity and output-relatedness indicators. The efficiency of corporations in one specific region is shown by regional efficiency and its different indicators, such as the number of operating enterprises per 1000 inhabitants. The efficiency of all regions provides social efficiency, which expresses the efficiency of the national economy.

1. References:



BUZÁS GY. – NEMESSÁLYI ZS. – SZEKELY CS. (2000): Mezőgazda-

sági üzemtan I. Mezőgazdasági Szaktudás Kiadó, Budapest

CSEKŐ I. (2004): Rövid bevezetés az általános egyensúlyelméletbe.

CSETE L. (2006): A hatékonyság társadalmi, gazdasági jelentősége és változó megítélése. In: Az agrárinnovációtól a társadalmi aszimmetriáig. Center-print, Debrecen, 272–288. p. ISBN 963 9274 95 X

DUSEK T.: A regionális GDP számítás problémái. A Kisalföldi Gazdaságban 2000. március 24-én megjelent cikk kézirata

KOPÁNYI M. (1993): Mikroökonómia. Műszaki Könyvkiadó, Budapest

ANDRÁS NÁBRÁDI, KÁROLY PETŐ, VIKTÓRIA BALOGH, ERIKA SZABÓ, ANDREA BARTHA, KRISZTIÁN KOVÁCS:(2010): Efficiency indicators in different dimension. APSTRACT, Applied Studies in Agribusiness and Commerce

NÁBRÁDI A. – DEÁK L. – KOVÁCS K. – SZABÓ E. (2006): A hatékonyság mérésének módszertani alapjai (az eredményesség). In: A térségfejlesztés vezetési és szervezési összefüggései. Center-print, Debrecen, 45–66. p. ISBN 963 9274 96 8

NÁBRÁDI A. (2005): A gazdasági hatékonyság értelmezése napjaink mezőgazdaságában. In: A mezőgazdaság tőkeszükséglete és hatékonysága. Debrecen, 23–35. p. ISBN 963 472 896 0

NEMESSÁLYI ZS. – NEMESSÁLYI Á. (2003): A gazdálkodás hatékonyságának mutatórendszere. Gazdálkodás, XLVII. évf. 3. sz. 54–60. p.

RECHNITZER J. – LADOS M. (2004): A területi stratégiáktól a monitoringig. Dialóg Campus Kiadó, Budapest-Pécs, 322–351. p. ISBN 963 9542 180

SAMUELSON – NORDHAUS (1988): Közgazdaságtan. Közgazdasági és JogiKönyvkiadó,Budapest,965.p.,1021.p.ISBN963 221 9902

INTERNET 1: PALKOVICS M. (2006): Agrárgazdasági ismeretkörök. (http://www.georgikon.hu/tanszekek/agrargaz/Tananyagok/Agrgaz dI.félév/Agr.gazd..ppt)

INTERNET 2: GYÖKER I. (2000): 7. Vállalati eredmény és eredményesség vizsgálata. (www.mvt.bme.hu/imvttest/segedanyag/7/ Iranyitas_szervezeti.ppt)

INTERNET 3:

http://www.cs.elte.hu/~akos987/Kozszolg/kozpol04.doc

INTERNET 4: http://www.wikipedia.hu

INTERNET 5: SOLT K. (1996): A közgazdaságtan alkalmazása a politikában. (http://www.szif.hu/solt.html)

INTERNET 6: Key Business Ratios. www.creditguru.com/ratios (2007)

30/1997. (IV.18.) OGY határozat 24/2001. (IV.20.) OGY határozat


5. fejezet - 5. Decision-making and risk management in agricultural production (Lajos Nagy)1. Uncertainty or risk?A decision means making a choice between different alternatives. There are different amounts of date with different reliability at our disposal to develop decision alternatives. The degree of the soundness of the decision is determined by the knowledge of the status of environmental factors (weather, illness, supply and demand conditions, etc.) that the decision-make cannot usually have an influence on (Figure 1).

5.1. ábra - Figure 1: : Degrees of soundness of a decision in relation to the information available

Source: Own material based on Weinschenck (1991)

We speak of a sound decision when we are in of full information to make the decision. In this case we surely know which one of the possible statuses of the environmental space will be present and what the consequence of the decision will be. This usually occurs when the time factor is missing, i.e., a decision should be made concerning an immediate event.

A decision is quasi-sound when we are aware of the possible environmental statuses and the likelihood of their occurrence and the decision applies not to a single but a multitude of cases , e.g. all or most of the agricultural businesses in a country. In this case on the basis of the rules of the calculus of probabilities we can state the consequences of our decision with a high probability. As the number of cases increases probability will also become higher so a nearly sound decision might also be made.

From the point of view of practice decisions made with a total lack of information carry no weight as decisions made under such conditions cannot theoretically be founded. Decisions made under conditions of agricultural production are usually ones that are made under risk or uncertainty conditions. We speak of a risk decision when we know the likelihood of the occurrence of the events influencing the outcomes of the actions to choose from and we make a decision about a single event. An example is when a farmer decides as to what to produce in a given year. In this case we consider the different probabilities and the information inherent in them and calculate the consequences of the different possible outcomes so as to thoroughly characterise the different variants. This is what the decision criteria for risk decisions make use of.

We are faced with a case of uncertainty when we know the possible environmental statuses but have no information about the likelihood of their occurrences. So we have less information to make the decision as in the


5. Decision-making and risk management in agricultural

production (Lajos Nagy)case of a risk (DRIMBA – ERTSEY, 2008).

There are significant differences between the different sectors of agriculture as regards the market judgement of their produce, technologies, resource requirements, their distribution over time, length of and demand on land use, agronomic interactions, the levels of inputs and their profitability. The future development of internal and external factors shaping he outcomes of economic decisions are not known to the farmer (BÁCSKAI et al., 1976; HARDAKER et al., 1997; DRIMBA, 1998), which is based on the time-related contradiction that decisions related to the future of the business have to be made when the farmer has reliable information only for the past (BUZÁS, 2000). Risk is present in every industry of the economy and none of its actors can be exempt from its influence. Those involved in the economic life have to have tools by the use of which they can measure, pay attention to and manage the effects and consequences of a risk. A condition to this is that decision-makers should have enough necessary up-to-date, high quality information and following its evaluation there should be an opportunity to create and analyse decision alternatives. By doing so it is possible to support the decision that fits the assumption of risk by the decision-maker most. If the necessary information is available the risk can be measured by the use of statistical tools. Knowing the extent and nature of the risk we can reject a possible alternative or by applying different risk management tools we can implement it if we think it is the right step. The development of computing and the internet have given more prominence to the availability for the practical use of risk management methods over the past years.

2. The Payoff MatrixThe risk and uncertainty are always related to choosing some course of action, i.e. a decision. The problem of making a decision is well-illustrated by DRIMBA’s (1988) model (Figure 2).

5.2. ábra - Figure 2 The scheme for making optimal decisions

Source: DRIMBA, 1998

Options are located in a space for action (A). The possible alternatives, actions (ai), which are usually determined by well-definable conditions, are found in this set. The actions may be simple ones, e.g., the classic example of the newsagent (WINSTON, 1997) or combinations of actions such as the development of the crop structure in a crop producing business. The realisation of the chosen alternative may be influenced by the possible statuses (sj) of the environmental space (S), i.e., supply and demand, weather, etc. these are usually given and characterised on the basis of the period before the analysis. The combinations of the possible actions and environmental statuses yield the results space (E) and the possible outcomes (eij). The matrix obtained in this way is called the profit matrix, payoff matrix or decision matrix (Figure 3).

5.3. ábra - Figure 3: Profit matrix



production (Lajos Nagy)Source: Own development based on WINSTON, 1997

The expected value of an action in the profit matrix – EMV (Expected Monetary Value):

Where

EMVi: is the expected value of action i

eij: is the payoff ulinked to action i if environmental condition j comes true

pj: is the likelihood of j environmental condition coming true

The profit matrix forms the basis for the application of game theory models. Decisions are made by people and for this very reason, depending on their mentality they evaluate the results in the profit matrix in different ways and attribute utility to them. The mentality and the attitude to risks of the decision maker can be characterised, expressed and quantified by the use of the utility function. The values transformed with the utility function will yield the utility values (uij) of the decision space (D) The decision, i.e., the selection of the action deemed optimal by the decision maker will be done on the basis of values uij, which are ulinked to values eij. It has to be noted that the optimal value is not necessarily different and decisions are rather made on the basis of values eij.

3. Sources of Risk and UncertaintyThe sources of risk and uncertainty in agriculture are many. Agriculture usually consists of more enterprises among which there are differences in their products’ market perception, production technology, resource-demand, time-scattering, in their time and need for field, agronomical interactions, the level of expenditures and profitability. The future status of external and internal factors, that affect the result of economic decisions, is not known by the farmer (BÁCSKAI et al., 1976; HARDAKER et al., 1997; DRIMBA, 1998), and based on the contradiction that the decision concerning the business’ future must be made at the time when reliable information are available about the previous period (BUZÁS, 2000). Although the sources of risk in agriculture are diverse, they can be summarized into five broad management areas: production and technical, price and market, financial, legal, and personal.

3.1. Production and Technical RiskCrop and livestock performances depend on biological processes affected by weather, diseases, insects, weeds, metabolism, and genetics. These factors cannot be predicted with certainty. In plant production the risk of weather’s changeableness bears an increased significance. In extreme cases, catastrophe can evolve, however fluctuations from climatic conditions can induce positive and negative changes in the growth and development of crops and in their yields.

The cropping programs and the applied technology can reduce uncertainty caused by the previous factors, but the incorrect application or inadequate adaptation can be detrimental. The introduction of a new technology also involves risk, but if it is ignored, it can cause damage as well.

3.2. Price and Market RiskThe price variability is a significant additional uncertainty factor for agriculture. The price volatility of raw materials and finished products together exert their effect. Some price movements follow seasonal or cyclical trends, which can be predicted, but even these movements exhibit a great deal of volatility. Sometimes market access is a source of risk. A process or or packer may go out of business and leave no viable marketing channel. Or buyers may impose quality standards or quantity restrictions that a producer cannot easily meet. An important objective of the EU's Common Agricultural Policy stabilize income levels of farmers.

3.3. Financial RiskFinancial risk arises when ensuring the operation of the business loan will be recording. This risk occurs unpredictable future changes in interest rates or due to the uncertainty of whether the lender will be willing to



production (Lajos Nagy)continue to provide the necessary level of loans. Other source of risk to changes in the market value of the loans, or that the company's ability to repay the debt required to maintain cash flow.

3.4. Legal RiskChanges in the law are often significantly affect the operation of a business. For example, changes in environmental regulations caused the closure of many animal breeding farms. Farmers should be aware of food safety standards, rules (pesticide residues, antibiotic, laws regarding health and safety, etc). Violations can bring expensive fines and lawsuits.

3.5. Personal RiskThe owners and managers of specialized expertise, employees are the key repositories of the farm operation. The farm could lose key employees due to illness, retirement, changing jobs, or moving out. If noone else is informed about or skiIled in the employee's area of responsibility, significant production losses can occur before a replacement is hired. Family disputes or divorce settlements can divert property, financial assets, or cash from a farm business and bring about economic losses, as well as personal stress.

4. Risk-Bearing Ability and AttitudeWe have to distinguish two properties when we characterize the farmers in terms of risk.

How much loss can tolerate the company? This is the ability to bear risk. It depends ont the properties of company. Farms of large private capital, are able to survive in greater losses before the company becomes insolvent. Highly leveraged farms, with a high value of debt relative to assets, can quickly lose equity, because their volume of production is high relative to their capital.These enterprises are also more vulnerable to financial risks, such as interest rates rise as well.

How much risk are willing to take on the farmers? This is the willingness to bear risk, it depends on the individual properties, personal usefulness. Personal usefulness depends on the magnitude of wealth, temper, education and knowledge of the person. One’s attitude to risk can be inherited; it changes with one’s age systematically, namely, with age one’s anti-risk attitude hardens with changes in one’s marital status, i.e., getting married and the responsibility suumed for the family (ANDERSON et al., 1977, ANDERSON – DILLON, 1992). This is why the utility function has to be established for each individual separately. To this end the most widespread theory is the expected utility theory (the Bernoulli theory), which answers the question of how to organise risky decision variant and how to determine a utility function.

One of the most widespread methods to determine the personal utility function is ELCE (Equally Likely Certainty Equivalent) (NEUMANN – MORGENSTERN, 1947). First we have to establish the certainty equivalent (c), which contains the worst (a) and the best (b) outcomes of the problem with a 50% probability each. Then we determine the certainty equivalents belonging to outcomes (a,c) nd then (c,b). This way, now we have five points of the utility function for which we can draw or to which we can fit the utility function of the supposed type. If we find the number of points obtained few, we can go on in the above way. If any of the points does not fit the graph properly after the curve has been drawn, the procedure has to be repeated from the point in question.

We can also take control steps, such as apply the method to certainty equivalents belonging to outcomes (a,c) and (c,b) and we have to obtain c as the certainty equivalent.

The utility function that was drawn by using the utility points obtained in the above way can be used to read the utility values belonging to the money values in the farmer’s problem. It is often useful, however, to know the algebraical form of the utility function since the necessary utility values for a computer programme, e.g. for a spreadsheet, can be determined quickly and simply with it. To this, we should use for example, the least squares theory after the type of the function has been determined.

The risk premium of a Lottrey L:

RP(L) = EMV(L) - CE(L)

where



production (Lajos Nagy)RP(L): risk premium

EMC(L): the expected values of the outcomes of the lottery

CE(L): the certainty equivalent of the decision-maker as regards the lottery

As regards risk attitudes a decision maker:

• Is risk-avers if at any not degenerated L, a high relative utility value RP(L)>0 is observed at any payout, but with the increase of payouts the marginal utility decreases.

• Is risk-neutral if at any not degenaret L, the RP(L)=0, i.e., he uses the EMV decision rule.

• Is risk-seeking if at any not degenerated L, in the case of any payout the lowest utility value is RP(L)<0, but the marginal utility increases with the increase in the payouts.

Figure 4 shows the previous three, most frequently occurring types of utility functions. In the figure the value for the most disadvantageous payout is 0, and that of the most advantageous one is 1.

5.4. ábra - Figure 4: Three frequent types of utility functions

Source: Own graph prepared on the basis of RAGSDALE, 2007

5. Expectations and VariabilityThe decisions relating to the future. The plans' values are the expected future values. There is no assurance that this value will be the outcome each time, but decisions must be made based on the best information available. To analyze risky decisions, a manager needs to understand how to form expectations, how to use probabilities, and how to analyze the whole distribution of potential outcomes. Each individual has had different experiences, different personal utility’s value and may interpret the available information differently, so subjective probabilities will vary from person to person. Several methods can be used to form expectations about future events. Once a "best estimate" is chosen, it can be used for planning and decision making until more information allows a better estimate to be made.

5.1. Most likely valueThe most likely value is actually the mode or the value range at the highest frequency. Very simple decision criterion. An example is contained in Figure 5, where six possible ranges of wheat yields are shown along with the probabilities of the actual yield falling into each one. Using the "most likely" method to form an expectation, a yield of 4.1 to 5.0 tonnes/hectare would be selected. For budgeting purposes, we could use the midpoint of the range, or 3,5 tonnes.

5.5. ábra - Figure 5: Determination of the most likely value



production (Lajos Nagy)

Source: Own calculation

5.2. AveragesTwo types of averages can be used to form an expectation. A simple average, or mean, can be calculated from a series of past results. The main problem is the choice of the length of the data set used in the calculation. Meanwhile, the technology may evolved, new species could appear, etc.. It is advisable to choose the longer, but relatively homogeneous data set.

We can compute the expected value as a weighted average with actual probabilites (Figure 6) or estimated probabilities. (Figure 7). In some cases, the fundamental conditions have changed. New technology may have increased potential crop yields, and long-term changes in supply and demand may have affected market prices. In these cases, we can be apply the estimated probabilites that gives recent values more importance than the older ones.

5.6. ábra - Figure 6: Expected value with actual probabilities


5.7. ábra - Expected value with estimated probabilities





6. Variability of the expected valueSource: Own calculation

Variability of the expected value

A manager, who must choose between two or more alternatives, in addition to the expected value should also consider another factor. The variability of the expected value is also an important factor. For example, if two alternatives has the same expected value, the majority of managers will choose the option with the lowest standard deviation output options. This is due to the minor variability presents a lower risk. The variability can be measured in several ways.

One simple measure of variability is the difference between the lowest and highest possible outcomes, or the range.

i = xmax - xmin

Standard deviation shows how much variation or dispersion exists from the average (mean), or expected value. A low standard deviation indicates that the data points tend to be very close to the mean; high standard deviation indicates that the data points are spread out over a large range of values.

The standard deviation is difficult to interpret, however, when comparing two types occurences that have different means. Therefore, we must expect a relative indicator, the coefficient of variation.

The Figure 8 shows the most important arable crops yields in Hungary. If we just look at the standard deviation, the risky crop is sugar beet, barley is the least risky. The situation changes after standardization. Corn has the largest coefficient of variation.

5.8. ábra - Yields of different crops and their variability in Hungary




Source: Own calcuation prepared on the database of KSH

6.1. Decision treeThe decision tree is a method that is used in the evaluation of decision alternatives in a number of economic and management areas. The decision tree contains decision branchings and event branchings. The decision branchings are indicated with squares, while event branchings are indicated with circles. At decision branching points the decision-maker has to make some kind of decision, has to choose from alternative actions. These usually entail some costs as well, which is shown with Ka and Kb on . At the event junctions it is the external conditions that decide which one of the possible environmental conditions (in the figure: outcome1 and outcome2 will come true and with what probability (p1, p2). The branch of the decision tree from where there are no further branchings is called the terminal branch. The expected economic consequences (Oij) are located on the terminal branches, where “i” is the decision alternative and “j” refers to the ensuing conditions.

Knowing the decision alternatives and the probabilities of the resulting events as well as by using the economic results calculated for different conditions of the decision alternatives, the most favourable decision alternative is chosen on the basis of maximising the expected profit value (EMV) or the minimizing of the expected values of the costs. On the basis of we choose the decision alternative for which the following is true:

5.9. ábra - Figure 9: : The structure of a simple decision tree

Source: Own development

7. SummaryPlayers in economic or business spheres must possess such means by which they can measure, oversee and manage the effects and consequences of risk. One condition of this is that for the decision-makers the information needed for decision should be available up-to-date, in appropriate quality and quantity and after their evaluation, process it allows setting up and analyzing various decision alternatives, variants. By this, the support of the most appropriate decision-making that matches to the style of decision-maker can be possible. This is the task of decision support. In the presence of needed information we can measure risk by using statistical means. Knowing the feature and level of risk, we can reject a possible alternative or if we decide so, by applying proper risk management tools we can even realize it. Making risky decisions requires carefui consideration of the various strategies available and the possible outcomes of each.

The process of the decision making under risk can be broken down into several steps:



production (Lajos Nagy)1. Identifying the possible sources of risk.

2. Making a payoff matrix.

i. Identifying the possible outcomes (state of nature): for example: various weather conditions or prices, and their probabilities.

ii. List the alternative strategies available (actions).

iii.Quantify the consequences or results of each possible outcome for each strategy.

3. Estimate the risk and expected returns for each strategy, and evaluate the trade-offs among them.

Farmers and ranchers have a variety of management tools available to them for softening the consequences of taking risky actions. These are the production risk tools (stable enterprises, diversification, insurance, extra production capacity, share leases, custom farming and feeding, input procurement), market risk tools (spreading sales, contract sales, hedging, commodity options, flexibility), financial risk tools (fixed interest rates, self-liquidating loans, liquid reserves, credit reserve, owner equity), legal risk tools (business organization, estate planning, liability insurance) and personal risk tools (health insurance, life insurance, safety precautions, backup management).

8. ReferencesAnderson J.R. – Dillon J.L. (1992): Risk Analysis in Dryland Farming Systems. Farming Systems Management No.2., FAO, Rome

Anderson J.R. – Dillon J.L. – Hardaker J.B. (1977): Agricultural Decision Analysis. The Iowa State University Press, Ames, Iowa

Bácskai T. – Huszti E. – Meszéna GY. – Miko GY. – SZép J. (1976): A gazdasági kockázat mérésének eszközei. Közgazdasági és Jogi Könyvkiadó, Budapest

Buzás Gy. (2000): A gazdasági kockázat kezelése, biztosítás In: Mezőgazdasági üzemtan I. Szerk.: BUZÁS GY. – NEMESSÁLYI ZS. – SZEKELY CS., Mezőgazdasági Szaktudás Kiadó, Budapest, 434-457.p

Drimba P. (1998): A kockázat figyelembe vétele a mezőgazdasági döntési modellekben. PhD értkezés, Debrecen 121 p.

Drimba P. – Ertsey I. (2008): Elméleti és módszertani alapok. A kockázat forrásai, kockázatelemzési és becslési módszerek. in: Hatékonyság a mezőgazdaságban (Elmélet és gyakorlat) szerk.: Szűcs I. – Farkasné F. M., Agroinform Kiadó, Budapest 280-295. p.

Hardaker J.B. – Huirne R.B.M. – Anderson J.R. (1997): Coping with Risk in Agriculture. CAB International, Wallingford p. xi + 274.

Neumann J. – Morgenstern O. (1947): Theory of Games and Economic Behavior. Princeton University Press. Princeton.

Ragsdale C.T. (2007): Spreadsheet modeling & Decision Analysis: A practical introduction to management science. Thomson South-Western

Weinschenk G. (1991): Einzelbetriebliche Planungsmethoden II. Universitat Hohenheim. Hohenheim. 46.

Winston W. L. (1997): Operations Research Applications and Algorithms, Wadswoth Publishing Company, p. 863-870.


6. fejezet - 6. Economic Principles: Choosing Production Levels (Andrea Gáthy , István Szűcs)The central economic goal is how we could increase, or maximize our profit. We should analyze this question from the two of view. The first is the output side, the production side, and the second is the input side, the cost side. In this chapter we will concentrate on the output side, and we will analyze the production function, the partial production function and we are going to introduce the average product and the marginal product.

Firstly, we should recognize the term of marginalism. Economist and managers always interested in what changes will result in production altering one or more resources under their control. The term marginal refers to incremental changes, either increases or decreases, which occur at the edge or at the “margin”. It may help to mentally substitute “extra” or “additional” whenever the word marginally is used. But keep in mind that the “extra” can be negative.

The Production Function

The production function is a systematic way of showing the relation between maximum quantity of output a firm can produce given the quantities of inputs that it might employ A production function can be presented in the form of a graph, table or mathematical equation.

If we would like to draw this function we should follow all resources changing and their effects on the quantity of production. For example we are a farmer, we produce milk. What kind of resources we need? We have to feed our caws, we need a land to grove forage, we need machinery, a stable, a labour and so on. If we would like to draw the production function we have to use all data about resources use and about their affect to the production. It is easy to recognize that only the listed resources, factors results more than cubic equation, and more than cubic dimension function. That’s why we use only data about two resources’ group, the labour and the capital use.

L: Labour

K: Capital

Y: Output

The Partial Production Function

The Partial Production Function a total production function with a single input sows how the total output depends on the level of the input ceteris paribus. On the under mentioned function we could follow how will


6. Economic Principles: Choosing Production Levels (Andrea

Gáthy , István Szűcs)change the output, if we increase use of only one input, for example the labour, while the other input use is at the changeless level. Here the function has three regions. In the first stage (which is the region of increasing marginal returns) the production increase with accelerating tempo. In the second stage (which is the region of diminishing marginal returns) the production increase, but with the slower tempo. In the third stage we can see the diminishing of production.

Stages of Production

• Stage I: APP increasing, MPP>APP, TPP increasing

• Stage II: APP decreasing, MPP<APP, TPP increasing

• Stage III: TPP decreasing, MPP<0

6.1. ábra - Graphical illustration of a production function

Source: R. D. Kay – W. M. Edwards – P. A. Duffy: Farm management, 2008, p. 112

• Total physical product (TPP) is the amount of production expected from using each input level. Output or yield is often called total physical product.

• Average physical product (APPL) is the average amount of output produced per unit of input (Labour) used.

APP= Q/L

• Marginal physical product (MPPL) is the additional TPP produced by using an additional unit of input.

MPPL= dQ/dL = (Q2-Q1) / (L2-L1)

How Much Input to Use

• Do not produce in Stage III, because more output can be produced with less input.

• Do not normally produce in Stage I because the average productivity of the inputs continues to rise in this stage.

• Stage II is the “rational stage” of production.



Gáthy , István Szűcs)Law of Diminishing Marginal Returns

As additional units of a variable input are used in combination with one or more fixed inputs, marginal physical product will eventually begin to decline. Diminishing returns may start with the first unit of input used, or may start later after a period of increasing returns.

6.2. ábra - How Much Input to Use

6.3. ábra - How Much Input to Use

6.4. ábra - >How Much Input to Use

The Decision Rule

MVP = MIC

• If MVP > MIC, additional profit can be made by using more input.

• If MIC > MVP, less input should be used.

How Much Output to Produce

An alternative way to find the profit-maximizing point is to find directly the amount of output that maximizes



Gáthy , István Szűcs)profit.

6.5. ábra - How Much Output to Produce



Applying the Marginal Principles

Given prices for irrigation water and for corn, the principles from the last two sections can be used to determine the amount of water and the corresponding amount of corn that will maximize profit.

6.8. ábra - Applying the Marginal Principles



Gáthy , István Szűcs)

Equal Marginal Principal

In some situations an input may be limited so that the profit-maximizing point cannot be reached for all possible uses.

A limited input should be allocated among competing uses in such a way that the marginal value products of the last unit used on each alternative are equal.

6.9. ábra - Equal Marginal Principal

6.10. ábra - Equal Marginal Principal



Gáthy , István Szűcs)

Summary

• Economic principles using the concept of marginality provide useful guidelines for decision making.

• MVP and MIC are equated to find the profit-maximizing input level.

• MR and MC are equated to find the profit-maximizing output level.

• The equal marginal principle is used when a limited input must be allocated among competing uses.

Questions

• What is the role of the marginal analysis?

• What is the relationship between total physical product (TPP) and average (APP) and marginal physical product (MPP)?

• How can find the profit-maximizing amount of a variable input using the concepts of marginal revenue and marginal cost?


7. fejezet - 7. Economic Principles: Choosing Input and Output Combinations (Andrea Gáthy István Szűcs)Economic definition of inputs

Production of goods and services involves transforming resources – such as labour, natural resources (raw materials), capitals and the services provided by facilities and machines – into finished products. The productive resources, such as labour and capital equipment, that a firm uses to manufacture goods and services are called inputs or factors of production, and the amount of goods and services produced is the firm’s output. Nowadays we have to mention the fifth of inputs, it is an information, which can help to make a better managerial decision.

• The resources or factors of production used in the production of a firm's output.

• This term is most frequently associated with the analysis of short-run production, and is often modified by the terms fixed and variable, as in fixed input and variable input.

• In the short run, the quantity of a fixed input can not be changed, meaning it cannot be used to expand output. In contrast, a variable input can be changed, making it THE means of expanding output in the short run.

The manager or farmer has to make a decision on input use, on input combinations. Most products require two or more inputs, and the manager may choose the input combination or ratio to use.

The economic question is: Whether one input can be substituted for another to reduce the cost. In agriculture we have to pay attention on the scarcity of resources, mainly the land, the professional and trained labour, or the water. The substitution gives us a chance to tide over the scarcity. Substitution also takes place in the production of goods and services. Usually there is more than one way to produce a product or provide a service. Machinery, computers, and robotics can substitute for labour, and one livestock ration ingredient can be replaced by another. Prices, specifically relative prices, play a major role in determining whether and how much substitution should take place. In many production activities, including those on farms and ranches, the substitution is not an all-or-nothing decision. It is often a matter of making some relatively small changes in the ratio or mix of two or more inputs being used. Substitution is therefore another type of marginal analysis that considers the changes in costs and/or revenue when making the substitution decision. (Kay et. al., 2008, p. 124.)

The problem is one of determining whether more of one input can be substituted for less of another and thereby reduces total input cost. Substitution of one input for another occurs frequently in agricultural production. For example: Herbicides substitute for mechanical cultivation, and computers can replace labour.

This leads to the least-cost combination of inputs to produce a given amount of output. The least-cost input combination is not always the same. Changes in the price of one or more inputs may make it profitable to substitute one resource for another or at least change the proportion in which they are used.

The Input substitution ratio, or the rate at which one input will substitute for another, is can be calculated with the following equation:

Input substitution ratio

=

price of input being added

/


7. Economic Principles: Choosing Input and Output Combinations

(Andrea Gáthy István Szűcs)price of input being replaced

Input substitution could be a Constant rate (it is a perfect substitution), a Decreasing substitution and finally No substitution.

Three possible types of substitution

Source: R. D. Kay – W. M. Edwards – P. A. Duffy: Farm management, 2008, p. 125.

The Constant rate is a perfect substitution (a) This is an example of a constant rate of substitution between two inputs. This occurs most often when the two inputs contribute the same or nearly the same factor to the production process. Com and barley, for example, both contribute energy to a feed ration.

The Decreasing substitution rate is another, and perhaps more common, example of physical substitution is shown in Figure 8-1b. Here the isoquant PP' shows the different combinations of com and forage that might produce the same weight gain on a steer or the same milk production from a dairy cow. The amount of com that can replace a given quantity of forage changes, depending on whether more com or more forage is being used. The input substitution ratio is 4 / 1 = 4 when moving from point A to point B on isoquant PP', but it is 1 / 3- = 1/3 when moving from point C to point D. In this example, the input substitution ratio depends on the location on the isoquant and will decline with any movement down and to the right on the curve. This is an illustration of a decreasing rate of substitution. Many agricultural substitution problems have a decreasing input substitution ratio, which occurs when the two inputs are dissimilar or contribute different factors to the production process. As more of one input is substituted for another, it becomes increasingly difficult to make any further substitution and still maintain the same level of output. More and more of the added input is needed to substitute for a unit of the input being replaced, which causes the input substitution ratio to decrease. This is an indication that the inputs work together best when used at some combination containing a relatively large proportion of each. At low levels of one, there is a near surplus of the other, and it is usually not an efficient or productive combination. (Kay et. al., 2008, p. 125.)

The third type of substitution where is not possible a substitution. Figure 8-Ic illustrates one example with tractors and tractor drivers. It takes one of each to make a working combination as shown by point A. The right-angled isoquant indicates that more than one tractor with just one tractor drivers does not increase production, but would increase costs (because we have to pay a wage to driver). The same is true for more than one tractor drivers. Therefore, the only efficient, and the least-cost combination, is one tractor and one tractor driver.

To make a good managerial decision we could use the following equation, to find the least-cost combination is where the input substitution ratio just equals the input price ratio.

Decision Rule

input substitution ratio = input price ratio

If they cannot be exactly equal because of the choices available in the table, get as close as possible without letting the price ratio exceed the substitution.

7.1. ábra - Selecting a Least-Cost Feed Ration



(Andrea Gáthy István Szűcs)

grain at 4.4¢ and hay at 3.0¢

Source: R. D. Kay – W. M. Edwards – P. A. Duffy: Farm management, 2008, p. 126

With Different Types of Substitution

With a constant rate of substitution, the least-cost combination will be all of one input and none of the other (unless the price ratio is exactly equal to the constant rate of substitution). With a decreasing rate of substitution, the least-cost combination will usually include some of each input.

Enterprise Combinations

The basic decision to be made by a manager is what to produce, or what combination of products will maximize profit. If one or more inputs is limited, there is an upper limit on how much can be produced. The first step in determining the profit-maximizing combination of enterprises is to determine the physical relationship among the enterprises.

Types of Relationships

Type of relationship can be a competitive, supplementary or complementary. The competitive, when the output of one enterprise cannot be increased unless output of the other decreases. Competitive enterprises may have constant substitution or increasing substitution.

7.2. ábra - Production Possibility Curves for Competitive Enterprises


The second is a Supplementary, when more output from one enterprise can be added without a change in the level of the other enterprise. And finally the third is a complementary, when as output of one enterprise increases, output of the other increases also

7.3. ábra - Supplementary and complementary enterprise relationships



(Andrea Gáthy István Szűcs)


The most profitable combination of two competitive enterprises also can be determined by comparing the output substitution ratio and the output profit ratio.

The output substitution ratio is calculated from the equation:

Output Substitution Ratio

=

quantity of output lost

/

quantity of output gained

The output profit ratio is found from the equation:

Output Profit Ratio

=

profit output gained

/

profit output lost

The decision rule for finding the profit-maximizing combination of two competitive enterprises is the point where the

output substitution ratio = output profit ratio

If no available combination makes these exactly equal, get as close as possible without letting the price ratio drop below the substitution ratio.

Summary of the presentation

• This chapter emphasizes the use of substitution principles to decide how and what to produce.

• To decide how to produce, the manager finds the least-cost combination of inputs.

• To decide what to produce, the manager finds the profit-maximizing combination of enterprises.

References

• Ronald D. Kay – William M. Edwards – Patricia A. Duffy: Farm management, 6th edition, 2008, The McGraw-Hill Companies, ISBN: 978-0-07-302829-3

• Paul A. Samuelson – William D. Nordhaus: Economics, Mcgraw-Hill Publ.Comp., 2009


8. fejezet - 8. Enterprise budgeting and planning of cash flow (Attila Bai)Farm managers make choices every day. Some decisions have vital consequences for the farm business, while others are not as crucial. The choices made today may have an immediate impact on the business, or they may take much longer to have an effect (Roth-Hyde, 2002)

Even the most profitable farms and ranches occasionally find themselves short of cash. Anticipating these shortages and having a plan to deal with them is an important management activity (Kay et al, 2003).

"Budgeting is like a roadmap for your company," says Victor Butcher (a former president of the Tennessee Society of Certified Public Accountants) "It's like being in a car without a map or GPS system. You hope going in the right direction, but you don't know without it."

Budgeting is a method of analyzing plans for the use of agricultural resources. Farm plan serves as the basis of farm budgeting. It can be prepared without a budget but budgeting is not possible without farm plan. Farm budgeting is a process of estimating costs, returns and net profit of a farm or a particular enterprise. Budget can also help farmers minimize risk to your business.

An important part of budgeting is to determine the total demand for capital divided into two parts, fixed assets (for long-term decisions) and current assets (for less than a year-long decisions). Regarding the fix assets, the factors detailed below have the greatest importance:

• Land quality strongly influence capital need - as land tipically can be taken as the most valuable agricultural asset. Land quality at the same time has a great effect on current assets (the optimal level of fertilization, irrigation, plant protection) the number and type of produced plants as well as rental fee (in case of own land it is opportunity cost) such it has dominant role in the demand of current assets, too.

• Net value of machineries and buildings affects the depreciation and repairing costs and period as well as the safety of yield and operation. It can be extended by renewation, which results better operation (e.g. lower repairing cost) for several years but demands a considerable amount of investment.

• Plantations like alfalfa, orchard, forest, energy coppices cover land for years they determine the inputs and limited the decisions of the farmer (via the crop rotation) for a long time. They have a great investment cost int he first year (plantation cost), later - during operation period - it can be expected lower costs and significant incomes, in the last year another significant cost should be finance – so they have the same characteristics as the other fixed assets have.

Regarding demand for current assets, three aspects deserve attention:

• It occur that operation of our enterprise demands very serious financial resources but the commitment of current assets is low, because the continuous and considerable cash inflows can always cover the cash outflows. Diary farming is a good example for this. So distribution of cash flow has a vital importance in the required demand for current assets. The period of enterprise cash flow does not take from seeding till harvesting, but from the first cash flow (e.g. soil preparation) until receiving the price of our final product from the buyer. If we produce maize for animal feeding, this period finishes just after marketing of the animal product.

• It cannot be exceeded the importance of diversification regarding the safety of cash flow in a farm. If we have only one enterprise, the cash outflows has continuous, but differential cumulation, they demand pre-financing because we can expect cash inflows just after the production period. If we have several enterprises, these effects are equalized, the inflows of one enterprise can finance the outflows of the other one (Fig. 1).

• The way of financing the outflows is also worth considering. The order of costs of differential financial resources is the following from the cheapest to the most expensive: non-repayable state subsidy, interest-fee bank loan, bank-loan with favourable interest, own financial sources, issuance (in case of multinational firms), bank loan, leasing. Naturally, there are great deals of other reason which influence the assessment of these possibilities.


8. Enterprise budgeting and planning of cash flow (Attila Bai)

• Opportunity cost is not an accountancy category, but its negligation results probably bad decision, because the point is not only that we decide well (a profitable possibility), but that we make the best decision (the most profitable option).

8.1. ábra - Figure 1: Demand for current assets of sugar rape production (left) and of a whole farm with plant-production (right)

Source: Pfau-Kovács 1999 (actualized version, 2013)

There are two types (methods) of farm budgeting:

a. The partial budgeting refers to estimating costs, returns and net income of a particular enterprise. It refers to estimating the returns for a part of the business (one or few activities) for example

• To estimate additional costs and returns from growing the size of an enterprise

• To estimate additional costs and returns by changing the intensification of an enterprise (e.g. adopting foliar application of chemical fertilizers instead of soil application).

b. The complete budgeting refers to preparing budget for the farm as a whole. Complete budgeting considers all the crops, livestock, methods of production and aspects of marketing in consolidated form and estimates costs and returns for the farm as a whole. Therefore complete budgeting can be prepared for short run (annual budget) and for long run (investment analysis).

The difference between complete and partial budgeting is detailed in Table 1.

8.1. táblázat - Table 1: Comparision between complete and partial budgeting

Complete Budgeting Partial Budgeting

The whole farm is considered as one unit It is adopted when a minor aspect of farm organization is touched.

All the aspects like crops, livestock, machinery and other assets are considered

It is practiced with in the existing resources structure of an enterprise.



Both fixed and variable costs are calculated for working out costs and returns.

Especially variable costs are considered.

Net income is estimated by deleting fixed costs and costs of variable inputs from the value of the product

Net income is estimated by deleting only cost of variable inputs from the value of the product.

Source: Internet-1

Advantages of budgeting are the followings (Internet-2):

• It guides and encourages the most efficient and economical use of resources.

• It makes the farmer conscious of the waste in the farm business.

• It gives comparative study of receipts, expenses and net earnings on different enterprises in the same locality (perhaps in different localities) for the safer operation.

• It serves as valuable basis for improvements in farm management practices.

1. 1. Partial budgetingPartial budgeting is a planning and decision-making framework used to compare the costs and benefits of alternatives faced by a special farm activity. It focuses only on the changes in income and expenses that would result from implementing a specific alternative. Each type of crop or livestock is an enterprise and differential.

Effects of number of animals on budgeting:

• Some type of the yields (milk, egg, manure) continuously available and thanks to the continuous cash inflows the operation of these enterprises can be financed with less financial sources.

• Number of foddering days influences to the feeding cost (which is the most important one in animal production), the crop rotation (in case of own-produced foddering) and the cash flow (in case of purchased feedstuffs).

• Future number of animals strongly depends on the actual number and distribution of animal groups, it can be estimated by knowing the reclassification time and technical parameters (e.g. expectable rate of death) of the given animal groups.

• Animal farms need larger capital value (fix and currents assets), and longer-term commitment compared to the plan-production farms.

Effects of plant growing on budgeting:

• There are some cost elements where it is not obvious if they cause cash flow and if yes what extent. The family labour work has just opportunity cost, while hiring/employed labour (e.g. plant protection) and the connected taxes/contributions result cash outflow.

• Regarding machinery, depreciation is not cash factor, fuels, repairs are those, labour depends on (own, or employed). In case of hired machinery service the whole rental fee affects cash flow. Special machineries obviously influence the given enterprise, in case of the others we should divide the operational expenses between the connected enterprises by working hours.

• There are some other cash items: ensurance fee, land rental fee and (partly) the indirect costs

• The seasonal cash flow is considerable differential from animal breeding which can be reduced by scheduled buying/selling or diversification of plant production activity with several enterprises.

• Scaling of plant growing typically depends on the demand/supply of own animal husbandry (straw for bedding, foddering, manure)



However, the value of a partial budget analysis is highly dependent upon the quality of the information. A decision based on partial budget analysis is only as good as the information used in the analysis will allow. A budget to be used for next year’s planning will require the best estimate of next year’s price and yield. Budgets used for long-run planning require estimates of average prices and yields over the long run.

There are several ways to ensure that one are using realistic and accurate figures for price savings and expenses in the analyze (Internet-3):

• review previous years’ actual expenses

• use the Internet to research actual fees associated with services

• contact extension agents and other experts

• get prices from several suppliers

• talk with other producers who use the alternative are considering

The partial budget framework can be used to analyze a number of important farm decisions, including:

• adopting a new technology

• changing enterprises

• choosing to specialize

• hiring custom work

• leasing instead of buying machinery

• modifying production practices

• making capital improvements

There are a few steps to the successful use of partial budget analysis as a decision-making tool. Each step serves a specific, unique purpose and is vital to an accurate, meaningful analysis (Internet-3).

• It is important to have a clear understanding of exactly what alternative is being analyzed. It is impossible to estimate cash revenues and expenses without knowing what crops and livestock will be produced.

• List about the added and reduced returns/costs. It can be beneficial to use “best-case” and “worst-case” numbers to establish a range for the partial budget analysis.

• Summary of the change of net cash flow, considering non-economic factors. Such considerations may include the social aspects of having less labour on the farm, increased/decreased leisure time, the need for increased or specialized knowledge, and safety and/or ease of use of equipment. Note that these are generally focused on quality of life measures, which are frequently difficult to quantify.

• An economic enterprise budget includes information on opportunity costs of labour, capital, land and perhaps management. The profit (or loss) is what remains after covering all expenses, including opportunity costs. A projected economic profit of zero means labour, land, and capital is earning exactly their opportunity costs.

2. 2. Whole-farm (complete) budgetingA farm budget provides an estimate of the potential revenue, expenses, and profit for a single enterprise. The completed whole-farm budget is an organized presentation of the sources and amounts of income and expenses. Whole-farm budgets can be based on either short-run or long-run planning assumptions and can also be used to evaluate liquidity.

A cash flow budget is a financial analysis tool with applications in both forward planning and



the ongoing analysis of a farm or ranch business. It is a summary of all cash inflows and outflows for a given future period. This period is typically a future accounting period and is divided into quarters or months. As a forward planning tool, its primary purpose is to estimate the amount and timing of future borrowing needs and the ability of the business to repay these and other loans on time. The emphasis is on cash and all cash flows, regardless of type, source, or use. All cash flows must be identified and included on the budget. Cash flows into a farm business from many sources throughout the year, and cash is used to pay business expenses and to meet other needs for cash.

The main general uses of cash could be:

1. Farm operating expenses, the normal and usual cash expenses incurred in producing the farm revenue

2. Capital purchases, the full purchase price of any new capital assets such as land, machinery, and dairy or breeding livestock

3. Non-business and other expenses, which would include cash used for living expenses, income and social security taxes and any uses of cash not covered elsewhere

4. Principal payments on debt. Interest payments should also be included here, unless they were included as part of the operating expenses (Kay et al, 2003).

Two things make a cash flow budget substantially different from a whole-farm budget. First, a cash flow budget contains all cash flows, not just revenue and expenses, and it does not include any noncash items. For example, cash flows would include the total value of the sale/buy of capital items and proceeds from new loans, but not depreciation and the value of own-produced and own-used products (e.g. feedstuff, straw, manure).

The second major difference between a whole-farm budget and a cash flow budget is the

latter's concern with the timing of revenue and expenses. A cash flow budget also includes

"when" cash will be received and paid out as well as "for what" and "how much."

2.1. 2.1. Example of a Complete Cash Flow BudgetA completed cash flow budget introduced in Table 3-4 and the explanation below is based on the example about the cited book of Kay et al, 2003.

The first estimates needed are the beginning cash balance on January 1 and all sources and amounts of cash inflows for the year. These amounts are entered in the Total column and then allocated to the month or months when the cash will be received. This example shows estimated total annual cash inflow of $267,100, including the beginning cash balance of $2,500.

The next step is to estimate total cash operating expenses by type. In the example, the total annual cash operating expenses are projected to be $108,500, with the largest expenditures in November and March. The same procedure is followed for capital expenditures, family living expenses, income taxes, and social security payments. Another important requirement for cash is the scheduled principal and interest payments on debt outstanding at the beginning of each year. These amounts are shown on lines 44 through 47. Total cash outflow, found by summing lines 35 through 47, is $272,700 in the example. These steps should be completed before any of the calculations on lines 50 to 59 are attempted.

Beginning with the month of January, total cash inflow is $23,300, and total cash outflow is $4,650, leaving $18,650 of cash available at the end of January (line 49). There is no need to borrow any money in January, and there are no new loans that can be paid off. Therefore, lines 50 through 55 are all zero, and the $18,650 becomes the ending cash balance, as shown on line 56. The first column of lines 57 and 58 indicate there was no current debt and $340,000 of noncurrent debt at the beginning of the year. There are no changes in the debt balances during the month, so these figures are transferred to the January column, showing $340,000 of total debt outstanding at the end of January.

The next step is to transfer the January ending cash balance of $18,650 to the beginning cash balance for February. Calculations for February are similar to those for January, with one exception. There is a $6,000 principal payment on noncurrent debt, which reduces its balance to $334,000, as shown on line 58, and the total



debt outstanding to $334,000. February's ending cash balance of $15,250 is transferred to the beginning balance for March, where the first new borrowing occurs.

Cash outflow exceeds cash inflow by $76,300 in March, requiring the borrowing of $76,800 to cover this amount and leave a small projected ending balance of $500. New machinery will be purchased in March at a cost of $60,000, so a new noncurrent loan of $40,000 is included as part of the new borrowing. The remaining $36,800 needed is shown as a new current loan. After the appropriate adjustments in the loan balances on lines 57 and 58, March will end with an estimated $410,800 of debt outstanding. This example shows that additional new borrowing will also be needed in April, May, June, and July. Payments can be made in August when the feeder livestock are sold, and in October when some crop income is received. The principal repaid in August assumes that the oldest of the new current borrowing was repaid first. It included the $36,800 borrowed in March, the $16,400 borrowed in April, the $6,900 borrowed in May, and $7,300 of the June borrowing, for a total of $67,400. The interest rate was assumed to be 9 percent, and the interest due was calculated using the equation: interest = principal x rate x time (Table 2).

8.2. ábra - Table 2: The calculation of interest

Source: Kay et al, 2003

This example assumed that all monthly cash shortages would be met by new current borrowing. However, other potential solutions to monthly cash shortages should be investigated first. For example, could some products be sold earlier than projected to cover negative cash balances? Could some expenditure, particularly large capital expenditures, be delayed until later in the year? Would it be possible to change the due date of some expenditures such as loan payments, insurance premiums, and family expenditures to a later date? These adjustments would reduce or eliminate the amount of new current borrowing needed for some months and reduce interest expense.

It is important to emphasize that net cash flow is not equal to net profit. There are a lot of differences between a cash flow budget and an income statement. A cash flow budget does not include noncash items which do affect profit. These are especially costs (depreciation, opportunity cost) and – in case of partial (enterprise) budget – the value of non-marketed (own used) products. However the cash flow does include cash items such as loan payments, new loans, and withdrawals for personal use, which do not affect profit. A large positive net cash flow and a low or negative profit can occur whenever there are receipts from sales of capital assets such as land and breeding livestock, cash gifts or inheritances, large nonfarm revenue, new loans, large depreciation, or inventory decreases. Negative cash flow and a good profit could result from substantial inventory increases, cash purchases of capital assets, and larger than usual debt payments and personal withdrawals. In case of inner used products, price of account has a great effect on enterprise profit, but no effect either on the cash flow of enterprise or of farm, neither of the farm profit.

8.3. ábra - Table 3: Cash Flow Budget (complete), Part I.




8.4. ábra - Table 4: Cash Flow Budget (complete), Part II.




A cash flow budget can also be used as part of a system for monitoring and controlling the cash flows several times during the year. If the figures are updated monthly, or at least quarterly, it is easy to make a quick comparison of budgeted and actual cash flows. In this case outflows exceeding, or reduced inflows budgeted amounts are quickly identified and action can be taken to find and correct the causes. Estimates for the rest of the year can also be revised.

There is another, important use for a cash flow budget, which is not detailed yet. Any major new capital investment, such as the purchase of land, machinery, or buildings, can have a large effect on cash flows, particularly if additional capital is borrowed to finance the purchase and the operation. It should be analyze and answer before making the new investment is that the new investment probable will generate enough additional cash income to meet its additional cash requirements, or not – considering the risk and opportunity costs.

The example (in Table 5) is a long-lived capital investment, so it is important to look at the cash flow over a number of years (Kay et al, 2003).

8.5. ábra - Table 5: Cash Flow Analysis for an Irrigation Investment




This investment is obviously going to cause a cash flow problem during the first three years. Does this mean the investment is a bad one? Not necessarily. The irrigation system should last for more than the five years shown in Table 5 and will continue to generate a positive cash flow in later years. Over the total life of the irrigation system, there would be a positive net cash flow, probable a substantial one. The problem is how to get by the first three years. The best situation if we can finance it about the positive cash flow of our farm. Using reduced (subsidized) bank loan also could be a favorable way if we can use our money in higher profitability compared with the bank interest. Regarding the type of investment, its effect on profit is seriously depends on the weather and the harvested (irrigated) plant, if there are dry years and good market for the plant with high production value, it should be a very profitable possibility and vice versa.

3. References1. Kay-Edwards-Duffy (2003): Farm Management. McGraw Hill Higher Education, http://highered.mcgraw-

hill.com/sites/0072428686/

2. Oral lectures of Professor Ernő Pfau (2007-2009)

3. Internet-1:www.agriculture.gov.sk.ca/default.aspx?dn=3a8c4fbe-e1ed-48f3-ae85-9340b45d1a39

4. Internet-2: www.agriinfo.in/default.aspx?page=topic&superid=10&topicid=239

5. Internet-3: Roth-Hyde (2002): Partial Budgets. Newfoundland and Labrador. Department of Forest Resources and Agrifoods,

6. Internet-4: www.gov.nf.ca/agric/pubfact/agribus/partial.htm


9. fejezet - 9. Investment Analysis (László Szőllősi)This chapter introduces time value of money (Future Value, Present Value), investment analysis (Net Present Value, Internal Rate of Return, Profitability Index, Payback Period and Discounted Payback Period), financial feasibility, handling affects of taxes, inflation, risk and financing by foreign capital. Objectives this chapter is to explain the time value of money and its use, to illustrate the process of compounding and discounting, to discuss methods and formulas of investment analysis, to show how to apply these concepts and to introduce how taxes, inflation, risk and financing by foreign capital affect investment analysis.

1. 9.1. Time value of moneyA dollar today is preferred to a dollar in the future because the dollar could be invested to earn interest. If a dollar is spent on consumption, we’d prefer to get the enjoyment now. Risk is also a factor as unforeseen circumstances could prevent us from getting the dollar. Moreover inflation may diminish the value of the dollar over time. There are the main terms:

• Present value (PV): the number of dollars available or invested at the current time or the current value of some amount to be received in the future.

• Future value (FV): the amount to be received at some future time or the amount a present value will be worth at some future date when invested at a given interest rate.

• Payment; cash flow (PMT; C): number of dollars to be paid or received in a time period.

• Interest rate (r): also called the discount rate the interest rate used to find present and future values, often equal to opportunity cost of capital.

• Time periods (t): the number of time periods used to compute present and future values.

• Annuity: a term used to describe a series of periodic payments (Kay et al., 2008).

1.1. 9.1.1. Future valuesThe future value of money refers to the value of an investment at a specific date in the future. This concept assumes that the investment earns interest during each time period, which is then reinvested at the end of each period so it will also earn interest in later time periods. Figure 9.1 graphically illustrates this situation.

9.1. ábra - Figure 9.1: Illustration of the concept of future value for a present value and for an annuity

Source: Kay et al., 2008

Future value can be calculated by the following equation:


9. Investment Analysis (László Szőllősi)

where C is cash flow today (time zero), r is the appropriate interest rate and t is the number of periods over which the cash is invested. As an example Figure 9.2 illustrate the concept of compounding.

9.2. ábra - Figure 9.2: Future value and compounding

Source: Ross et al., 2005

1.2. 9.1.2. Present valueThe concept of present value refers to the value today of a sum of money to be received or paid in the future. Present values are found using a process called discounting. The future value is discounted back to the present to find its current or present value. Compounding and discounting are opposite, or inverse procedures, as shown in Figure 9.3.

9.3. ábra - Figure 9.3: Relation between compounding and discounting


Figure 9.4 illustrates the concept of a present value. The future value is known, and we need to find the present value of that amount. Present value can be calculated by the following equation:

where C is cash flow at the certain point in time, r is the appropriate interest rate and t is the number of periods over which the cash is invested. The formula can be used for cash flows that exist at any point in time; PVs can be added together to evaluate multiple cash flows.



9.4. ábra - Figure 9.4: Illustration of the concept of present value for a future value and for an annuity


As an example Figure 9.5 illustrate the concept of discounting.

9.5. ábra - Figure 9.5: Present value and discounting

Source: Brealey et al., 2006

2. 9.2. Investment analysisInvestment analysis, also called capital budgeting, involves determining profitability of an investment. There are the main terms:

• Initial cost: actual total expenditure for the investment;

• Net cash revenues: cash receipts minus cash expenses;

• Terminal value: usually the same as salvage value;

• Discount rate: opportunity cost of capital.

The capital investment analysis procedure is of primary importance in investment control. Once the investment has been made, it is largely a sunk cost and should not influence future decisions. The manager wants to obtain the maximum long-run cash flow from the capital investments and to add capital investments only when they will provide a net return in excess of the company’s cost of providing that investment (Anthony et al., 1992).

Different methods are used to analyse each type of investment because of differences in the timing of the expenses and associated returns (Kay et al., 2008). In general, the most frequently used technique for large corporations is Internal rate of return (IRR) or Net present value (NPV) (Graham and Harvey, 2001; Ross et al., 2005). According to Helfert (2001) the Net present value (NPV) measure has become the most commonly used indicator in corporate economic and valuation analysis, and is accepted as the preferred measure in the widest range of analytical processes.



An important point is that these techniques, in fact, are used in only about half the situations in which, conceptually, they are applicable. There are some reasons for not using present value techniques in analyzing all proposals (Anthony et al., 1992):

• There is no feasible alternative to adoption of the proposal. To comply with any legislation is an example.

• The rationale for the proposal is something other than increased profitability. Improve employee morale or company’s image, safety reasons are good examples.

Companies usually have rules and procedures for the submission of capital expenditure proposals. These rules specify the approval requirements for proposals of various magnitudes and also contain guidelines for preparing proposals and general criteria for approving proposals (Anthony et al., 1992).

When organizations evaluate the financial feasibility of investment decisions, the time value of money is an essential consideration. This is particularly true when a project involves cash flow patterns which extend over a number of years. This is called a discounted cash flow method. In order to discount all cash flows, an interest rate must be assumed for the intervening period. Frequently this interest rate is an assumed minimum desired rate of return on investments. Sometimes this is reflection of the known rate of return which can be earned on alternative investments (e.g., bonds or money market funds) (Budnick, 1988). According to Helfert (2001) this rate is commonly based on a company’s weighted average cost of capital, which embodies the return expectations of capital structure. From an economic standpoint, it should be the rate of return an inventor normally enjoys from investments of similar nature and risk. In effect, this standard represents an opportunity rate of return. In a corporate setting, the choice of a discount rate is complicated both by the variety of investment possibilities and by the types of financing.

2.1. 9.2.1. The Net Present Value (NPV) methodThe Net Present Value (NPV) of an investment is the present value of the expected cash flows, less the cost of the investment (Ross et al., 2005).

Accepting positive NPV projects benefits shareholders because of NPV uses cash flows, uses all the cash flows of the project and discounts the cash flows properly. To calculate NPV of a project we need to estimate initial costs, future cash flows (how much? and when?) and discount rate. The minimum acceptance criteria: Accept if NPV > 0; Ranking criteria: Choose the highest NPV.

Cash inflows are treated as positive cash flows and cash outflows, including the initial investment as negative cash flows. If the NPV of all cash flows is positive at the assumed minimum rate of return, the actual rate of return from the project exceed the minimum desired rate of return. Opposite of this, if the NPV for all cash flows is negative, the actual rate of return from the project less than the minimum desired rate of return (Budnick, 1988).

The NPV Rule has a lot of advantages that authors have already allocated. But it has various limitations, and it does not answer all our questions about the economic attractiveness of capital outlays, however. One of these is that the size of the NPV is affected by the size of the investment (Warren, 1982; Helfert, 2001).

The more central problem is that the concept of a NPV is awkward for a layman to understand. Most farmers have a good idea of what is meant by ‘return on capital’, but few will have a grasp of the implications of a net present value. It is just that NPV is not a convenient yardstick. Ideally, we need an investment appraisal technique which will incorporate the discounting principle and yet give a percentage rate of return on capital. Such a technique is the IRR method (Warren, 1982).

Although this analysis allows one to determine whether a project satisfies the minimum desired rate of return criterion, it does not provide a measure of the exact rate of return. Methods for computing the actual rate of return are simple extensions of NPV technique (Budnick, 1988).

In the following we present the most popular alternatives to NPV. “When it is all said and done, they are not the NPV rule; for those of us in finance, it makes them decidedly second-rate.” (Ross et al., 2005)



2.2. 9.2.2. The Internal Rate of Return (IRR) ruleThe internal rate of return (IRR) is also called the marginal efficiency of capital or yield on the investment. IRR is the discount rate that would make the NPV of an investment equal to zero. The IRR is usually calculated by computer or with a financial calculator (Kay et al., 2008).

Naturally, the result of a given project will vary with changes in the economic life and the pattern of cash flows. In fact, the IRR is found by letting it become a variable that is dependent on cash flows and economic life. In the case of NPV and PI, we have employed specified return standard to discount the investment’s cash flows. For the IRR, we switch the problem around to find the one discount rate that makes cash inflows and outflows exactly equal (Helfert, 2001). It is the discount factor that set NPV to zero.

Once the IRR has been calculated, it can be compared with the cost of capital (Warren, 1982). Accept the project if the IRR exceeds the required return. Unlike the NPV method, IRR can be used to rank investments which have different initial costs and lives (Kay et al., 2008). Select alternative with the highest IRR.

As a ranking device for investments, the IRR is not without problem (Lee et al, 1980; Warren, 1982; Helfert, 2001; Katits, 2002; Ross et al., 2005; Brealey et al., 2006):

• It does not distinguish between investing and borrowing.

• IRR may not exist or there may be multiple IRR, mainly not typical investments.

• Problems with mutually exclusive investments.

• The rate of return does not reflect the size of a project, it is the Scale problem.

• The timing problem. The NPV and IRR methods give conflicting ranking for projects.

• Assumption concerning the reinvestment rate.

2.3. 9.2.3. NPV versus IRRHardacer et al. (2004) underlie the widespread recommendation by economists that NPV is the most appropriate investment criterion. When comparing investments with different time horizons, the corresponding recommendation is to use equivalent annuity as the choice criterion. This is simply the NPV averaged over the life of investment. In practice, the recommendation in favour of NPV is often not followed. Instead, the internal rate of return (IRR) is widely used in preference to NPV, mainly on grounds of ease if interpretation especially for comparing investments of different scale. The two criteria will not always rank alternative investments in the same order. In general, NPV (ideally supported by the PI) is preferable on grounds of consistency, with IRR having values of convenience and ease of communication (Warren, 1982). Illés (2002) emphasizes disadvantages of NPV method and prefers IRR method.

In deciding whether to use the IRR or the NPV method, it should be recognized that in most cases both give the same accept or reject decision for a single project. The NPV method tends to be somewhat easier in terms of the computational procedures required. The IRR method has the advantage of expressing the result as a compound rate of return, which makes it easier to compare the project under consideration with financial instruments and other investment opportunities. In many cases where two or more projects must be ranked, it will be helpful to use both methods and draw a diagram of the results (Lee et al, 1980).

2.4. 9.2.4. The Profitability Index (PI) methodIn situations where a limited amount of capital is being allocated among several independent projects, it is sometimes helpful to ranking them on the basis of the Profitability Index (Lee et al, 1980; Brealey et al., 2006). After calculating the NPV of series of projects, we might be faced with a choice that involves several alternative investments of different size. It is based on the same inputs but differs in format, focusing on the relative size of the project (Helfert, 2001).

PI can be calculated by the following equation (Ross et al., 2005):



The minimum acceptance criteria: Accept if PI > 1; Ranking criteria: Select alternative with highest PI. It has problems with mutually exclusive investments (Ross et al., 2005).

2.5. 9.2.5. The Discounted Payback Period (DPP) ruleThe payback period is the number of years it would take an investment to return its original cost. If net cash revenues are constant each year, the payback period (PP) is: PP=C/E, where C is original cost and E is the expected annual net cash revenue. The payback period is easy to calculate and identifies the investments with the most immediate cash returns. But it ignores returns after the end of the payback period as well as the timing of cash flows (Kay et al., 2008).

The discounted payback period of a project show us how long does it take the project to „pay back” its initial investment taking the time value of money account? It is the number of years it takes before the cumulative forecasted cash flow equals the initial outlay. The payback rule says only accept projects that “payback” in the desired time frame. This method is flawed, primarily because it ignores timing of cash flow within the payback period, and the present value of payments after the payback period (Ross et al., 2005; Brealey et al., 2006).

It is a break-even condition in value creation. It is achieved at the specific point in time when the cumulative positive present value of cash benefits equals the cumulative negative present value of all the cash outlays (Helfert, 2001).

3. 9.3. Handling income taxesAccording to most authors, investments are better analysed using after-tax net cash flows; therefore all values should be on an after-tax basis in a practical application of methods. Whenever after-tax net cash flows are used, it is important that an after-tax discount rate also be used (Lee et al, 1980; Kay et al., 2008). Although some companies evaluate projects on a before-tax basis, most find that the best analysis is on after-tax basis (Budnick, 1988). There are two things that must be considered when calculating to after-tax cash flows are investment credit and depreciation. Interest of the credit increase cash outflows thus it reduce taxable income. Depreciation is not included in calculating net cash flows because it is a noncash expense. However, depreciation is a tax-deductible expense which reduces taxable income and therefore income taxes (Lee et al, 1980; Kay et al., 2008).

Helfert (2001) not only emphasise to take account depreciation as a tax shield effect in investment analysis, but consider accelerated depreciation possibilities and effects for return of investments also.

4. 9.4. Handling inflationThe most common error in investment appraisal is to calculate the rate of return in real terms, i.e. building no inflation into cash flow or profit estimates, testing against a cost of capital (discount rate) expressed in nominal terms. The result is the rejection of many projects which would in fact have been well worthwhile (Warren, 1982).

The real rate of return is an ‘inflation-free’ rate; it can be estimated by the following formula:

(1 + rnominal) = (1 + rreal) × (1 + rinflation)

When accounting for inflation in capital budgeting, we should maintain consistency between cash flows and discount rate (Warren, 1982; Helfert, 2001; Ross et al., 2005; Brealey et al., 2006; Kay et al., 2008). Thus if no inflation is built into the basic calculation, the result should be compared with the cost of capital in real terms. In other words if no inflation is calculated in cash flows, discount rate in real terms should be used, and conversely if inflation is calculated in cash flows, discount rate in nominal terms should be used.

In many ways this is the simplest solution to the inflation problem, as long as it can be assumed that the values of all inputs and outputs will rise in price at the same constant rate over the project life, and discounting by the nominal rate. In this way we can take into account that situation also when costs are likely to rise faster than prices of outputs. It is a common story in agriculture (Warren, 1982).



5. 9.5. Handling risk and uncertaintyIn most cases the initial outlay can be estimated with reasonable accuracy. Estimates of the other cash flows are nearly always subject to some degree of uncertainty. It must be expressed consistently in developing the investment analysis (Lee et al, 1980; Helfert, 2001).

Given the uncertainty that may exist about the future, it is often useful to make sensitivity analysis, which asking a number “What if” questions. It can be characterized also: ‘What changes in x will result from a given change in the level of y?’, where x is a measure of profit, cash flow, capital or NPV and y is one of the components of that measure, such as input price, input volume, output prise, output volume, interest rate and so on. This analysis involves changing one or more values in the net present value equation (called model) and recalculating not only the NPV, but other indicators also (Warren, 1982; Helfert, 2001; Kay et al., 2008).

The analysis will give an impression of the riskiness of the investment but, perhaps more important, will also show the elements to which the balance is most sensitive. On the other hand, it is a technique which allows the manager to examine the likely effects of his worst, best, and most likely assumptions (pessimistic, expected, and optimistic cases) on the outcome of a project (Warren, 1982).

The problem with sensitivity analysis is that the underlying variables are likely to be interrelated, and we can’t consider it properly. There are other techniques to handle uncertainty (Ross et al., 2005; Brealey et al., 2006):

• Scenario Analysis: Project analysis given a particular combination of assumptions. It allows managers to look at different but consistent combinations of variables.

• Simulation Analysis: Estimation of the probabilities of different possible outcomes. Monte Carlo Simulation is a tool for considering all possible combinations.

• Break Even Analysis: Analysis of the level of any variable at which the company breaks even. Point at which the NPV=0 is the breakeven point. It is calculated on a net present value basis, gives managers minimum targets.

• Decision Trees: Allow us to graphically represent the alternatives available to us in each period and the likely consequences of our actions.

6. 9.6. Steps and cash flows to consider analysing an investmentThe evaluation of capital investment projects should be approached in four main steps (Lee et al, 1980; Helfert, 2001):

1. Identifying potentially profitable investment alternatives.

2. Collecting relevant data on capital outlays (the amount expended – the net investment), costs and returns (the potential benefits – the net operating cash flows), time period (the time span off benefits – the economic life), residual values (any final recovery of capital – the terminal value).

3. Using an appropriate method to analyze the data.

4. Deciding whether to accept or reject the investment or selecting the top ranking among mutually exclusive projects.

The value of project depends on all the additional cash flows that follow from project acceptance. Here are some things to consider when we are deciding which cash flows should be included (Ross et al., 2005; Brealey et al., 2006): Estimate cash flows on an incremental basis; Do not confuse average with incremental payoffs; Include all incidental effects; Do not forget working capital requirements; Include opportunity costs; Forget sunk costs; Beware of allocated overhead costs; Treat inflation consistently.

In calculating the NPV of a project, only cash flows that are incremental to the project should be used. A sunk cost is a cost that has already occurred. Because sunk costs are in the past, they can’t changed by the decision to accept or reject the project. Therefore we should ignore such costs. If an asset is used in a new project instead of



selling or employing elsewhere in the business, potential revenues from alternative uses are lost. These lost revenues can meaningfully be viewed as costs. They are called opportunity costs. We should consider the side effects of the proposed project on other parts of the firm also. It is classified as either erosion or synergy. The time period selected for the analysis is commonly referred to as the economic life of the investment project, as distinguished from the physical life of equipment, or the technological life of a particular process or service. At the end of the economic life an assessment has to be made whether any residual values remain to be recognized. Such recoveries can be proceeds from the sale of facilities and equipments, as well as the release of any working capital associated with the investment (Helfert, 2001).

For most projects the major cash inflows are cash revenues from investment, any reduction in cash costs resulting directly from the investment, and the salvage value at the end of the useful life of the project. The major cash outflows are the initial cash outlay, increases in cash costs, and income taxes. The investment outlays normally consists of the gross capital requirements for new assets, reduced by any funds recovered from the trade or sale of any existing assets caused by the decision, the opportunity costs, and any additions to working capital required by the increased level of sales.

To determine the incremental after-tax cash flow firstly, we should calculate the cash flows from operation, which are revenues minus both operating costs and taxes. To compute taxes we should calculate with depreciation. Finally, the after-tax cash flow is the sum of investment outlays, the operation cash flow and the final cash flow.

When we analyse investments ask the question: Is the investment profitable? When financing is used, an equally important question may be: Is the investment financially feasible? In other words will the investment generate sufficient cash flows at the right time to meet the required cash outflows? Determination of financial feasibility should be the final step in any investment analysis (Kay et al., 2008).

7. 9.7. Financing by foreign capitalHow can we handle credit in connection with investment analysis? According to practice and bibliographies, there are two different approaches to handle financing by credit in the investment analysis. According to Illés (2002), the first one is called “weighted average interest rates of invested capital”. Using this technique initial outlays calculated in the model have to contain all capital investment, both equity and credit. Then the credit and its effects are not presented in the cash flows. Moreover, the discount rate is calculated as a weighted average interest rate of equity and credit. The second technique is called “automatic differentiation of interest rates” (Illés, 2002). In contrast to the first method, it calculates only equity as an initial outlays and the credit with its effects are presented in cash flows. At this point we can ask the question: Which method gives more exact results supporting investment decision. According to Szőllősi and Nábrádi (2006) the method of “automatic differentiation of interest rates” calculating credit and interest in cash flows permits of more correct investment analysis supporting investment decisions.

Table 9.1 demonstrates an investment analysis model as an example that contains credit and its effects. As it can be seen in the model interest should be calculated within revenues and expenses as in the profit and loss account. It reduces tax by reducing pre-tax profit. On the contrary, credit as principal repayments should be accounted after tax. In this way, it reduces after tax profit. If we calculate credit and interests in the same way as we displayed in this simple model, the investment analysis gives practicable and correct results.

9.6. ábra - Table 9.1: An investment analysis model as an example



Source: Szőllősi and Nábrádi, 2006

8. 9.8. SummaryThe future value of a sum of money is greater than its present value because of the interest that could be earned. Investments can be analyzed using: payback period, simple rate of return, net present value, internal rate of return, profitability index, discounted payback period.

9. References1. Anthony, R.N. – Dearden, J. – Govindarajan, V. (1992): Management Control Systems. Seventh Edition,

IRWIN, Boston, MA 02116, 290-292, 388-389. p.

2. Brealey, R.A. – Myers, S.C. – Allen, F. (2006): Corporate Finance. 8th ed. McGraw-Hill/Irwin. 84-143. p., 244-272. p.

3. Budnick, F.S. (1988): Applied Mathematics for Business, Economics, and the Social Sciences. Third Edition, McGraw-Hill International Edition, 894-897. p.

4. Graham, J.R – Harvey, C.R (2001): The Theory and Practice of Finance: Evidence from the Field. In: Journal of Financial Economics 61, 187-243. p.

5. Hardacer, J.B. – Hurnie, R.B.M. – Anderson, J.R. – Lien, G. (2004): Coping with Risk in Agriculture. Second Edition, CABI Publishing, 234-244. p.

6. Helfert, E.R. (2001): Financial Analysis: Tools and Techniques, A Guide for Managers. McGraw-Hill. 221-296. p.

7. Illés, M. (2002): Vezetői gazdaságtan. Bővített második kiadás, Kossuth Kiadó, 85-175. p.

8. Katits, E. (2002): Pénzügyi döntések a vállalat életciklusaiban, KJK-KERSZÖV Jogi és Üzleti Kiadó Kft., Budapest, 52-62. p.

9. Kay, R.D. – Edwards, W.M. – Duffy, P.A. (2008): Farm Management. 6th ed. McGraw-Hill. 293-313. p.

10. Lee, W.F. – Boehlje, M.D. – Nelson, A.G. – Murray, W.G. (1980): Agricultural Finance. Seventh Edition, the Iowa State University Press, Ames, 59-80. p.

11. Nábrádi, A. – Szőllősi, L. (2007): „Key aspects of investment analysis” In: Applied Studies in Agribusiness and Commerce (APSTRAC-T) Official Periodical of the International MBA Network in



Agribusiness and Commerce (AGRI-MBA) Vol. 1. Number 1. 53-56. p. Agroinform Publishing House.

12. Ross, S.A. – Westerfield, R.W. – Jaffe, J. (2005): Corporate Finance. International Edition. McGraw-Hill.

13. Szőllősi, L. – Nábrádi, A. (2006): „Financing by Foreign Capital in point of Investment Analysis” In.: Summer University on Information Technology in Agriculture and Rural Development, Debrecen, 19-22. August, 2006.

14. Warren, M.F. (1982): Financial Management for Farmers, the Basic Techniques of ‘Money Farming’. Third Edition, Stanly Thornes Ltd, 240-246., 259-260. p.

10. Questions1. What do you mean time value of money?

2. Introduce calculation of the Present Value and Future Value!

3. Introduce the methods of investment analysis!

4. NPV or IRR? Advantages and disadvantages?

5. How can we handle affects of tax during investment analysis?

6. How can we handle affects of credit during investment analysis?

7. How can we handle risk during investment analysis?

8. Build up an investment analysis model!


10. fejezet - 10. Farm business organizations, integrations (András Nábrádi)Any business, including a farm, can be organized in a number of different legal and business formats. Many managers change the type of organization during the life of their business to better meet changing goals and objectives.

The three most common forms of business organization for farms and are: (1) sole (or individual, or single) proprietorship, (2) partnership, and (3) corporation. Each one has different legal and organizational characteristics and is subject to different income tax regulations.

The proper choice of organization depends on factors such as the size of the business, the number of people involved in it, the career stage and age of the primary operators, and the owners' desires for passing on their assets to their heirs. A final choice of business organization should be made only after analyzing all the possible long-run effects on the business and on the individuals involved.

1. LIFE CYCLEEach farm business has a life cycle, with four stages: entry, growth, consolidation, and exit. These stages are depicted in Figure 10-1. The entry stage includes choosing farming as a career, selecting enterprises, acquiring and organizing the necessary resources, and establishing a financial base.

10.1. ábra - Figure 10-1. Illustration of the life cycle in the farm business

The growth stage involves expansion in the size of the business, typically through purchasing or leasing additional land or by increasing the scale of the livestock enterprises. Growth can also come about by intensifying production on a fixed land base. This stage often uses debt capital to finance the expansion and requires good financial planning and risk management. It may even include merging with another operator. Following the growth stage, the emphasis usually turns toward consolidation of the operation. Debt reduction becomes a priority, and increased efficiency is preferred to increased size. Early planning and merging of the next generation into the business, however, may allow it to continue in the growth or consolidation stage for some time without showing a decline in size.

As the farm operator nears retirement, attention turns toward reducing risk, liquidating the business, or transferring property to the next generation. In this exit stage, business size may decline. The income tax consequences of liquidation or transfer must be considered, along with the need for adequate retirement income. Another concern is to provide equitable treatment to all the children who may choose farming as a career, as well as to those who pursue other interests.

The life-cycle stage in which the farm is currently operating is an important consideration in selecting the form of business organization. Total capital invested, size of debt, income tax considerations, the goals of the owners


10. Farm business organizations, integrations (András Nábrádi)

and operators, and other factors are likely to be different in each stage. Farmers may find that a different form of business organization is appropriate for different stages in the life cycle. However, careful and early thought must be given to how the change from one type of organization to another will be handled.

2. SOLE PROPRIETORSHIPA sole proprietorship is easy to form and easy to operate, which accounts for much of its popularity.

Organization and Characteristics

In a sole proprietorship, the owner owns and manages the business, assumes all the risks, and receives all profits and losses. Its distinguishing characteristic is the single owner, who acquires and organizes the necessary resources, provides the management, and is solely responsible for the success or failure of the business, as well as for servicing all business debts. Often the sole proprietorship could be more accurately called a family proprietorship, because on many farms the husband, wife, and children are all involved in ownership, labour, and management.

A sole proprietorship is established by starting to operate the business. No special legal procedures, permits, or licenses are required. A sole proprietorship is not limited in size by either the amount of inputs that can be used or the amount of commodities produced. The business can be as large or small as the owner desires. There can be any number of employees. Additional management may be hired, and property may even be co- owned with others. A sole proprietorship does not necessarily need to own any assets; one can exist even when all land and machinery are leased.

Income Taxes

The owner of a business organized as a sole proprietorship pays income taxes on any business profit at the tax rates in effect for individual or joint returns. Business profits and capital gains are added to any other taxable income earned to determine the individual's total taxable income. Earned income is subject to self-employment and Medicare tax.

Advantages

The advantages of a sole proprietorship are its simplicity and the freedom the owner has in operating the business. No other operator or owner needs to be consulted when a management decision is made. The owner is free to organize and operate the business in any legal manner, and all business profits and losses belong to the sole proprietor.

A sole proprietorship is also flexible. The manager can quickly make decisions regarding investments, purchases, sales, enterprise combinations, and input levels, based solely on his or her best judgment. Assets can be quickly purchased or sold, money borrowed, or the business even liquidated if necessary, although the latter may require the concurrence of a landlord or lender.

Disadvantages

The management freedom inherent in a sole proprietorship also implies several responsibilities. Owners of sole proprietorships are personally liable for any legal difficulties and debts related to the business. Creditors have the legal right to attach not only the assets of the business but the personal assets of the owner to fulfill any unpaid financial obligations. This feature of a sole proprietorship can be an important disadvantage for a large, heavily financed business where the owner has substantial personal and nonfarm assets. Business failure can result in these assets being acquired by creditors to pay the debts of the sole proprietorship.

The size of a sole proprietorship is limited by the capital available to the single owner. If only a limited amount is available, the business may be too small to realize many economies of size, making it difficult to compete with larger and more efficient farms. At the other extreme, the management abilities and time of the single owner may be insufficient for a large business, making it difficult to become an expert in any one area. Thus, a large sole proprietorship may need to hire additional management expertise or consulting time. Another disadvantage of a sole proprietorship is a lack of business continuity. It is difficult to bring children into the business on any basis other than as employees or tenants. Death of the owner also means the business may have to be liquidated or reorganized under new ownership. This can be time consuming and costly, resulting in a smaller inheritance and less income for the heirs during the transition period.



3. JOINT VENTURESWhile a sole proprietorship offers the manager maximum flexibility and independence, other forms of business organization are possible. They allow two or more operators to combine their respective abilities and assets to achieve levels of efficiency or other goals that might be unattainable on their own.

Such businesses are called joint ventures. Of the several types of joint ventures, those most often used in agriculture include:

1. Operating agreements

2. Partnerships

3. Corporations

4. Limited liability companies

5. Cooperatives

Each type of joint venture has unique characteristics related to property ownership, distribution of income, taxation, continuity, liability, and formal organization. In many cases, only part of the total farm business is included in the joint venture. Sometimes the joint venture affects only one enterprise. In other cases, some assets, such as land, are excluded to protect them from the unlimited liability of the joint venture or to make ownership shares more equal.

Particular care should be taken to distribute the income earned by a joint venture in an equitable manner. Businesses with an operating agreement may divide gross income, as will be illustrated later. In more complex businesses, owners of assets that are used but not owned by the joint venture may be paid a fair market rental rate. People who lend money to the business receive interest payments. People who contribute labour should be paid a fair wage, even if they are also owners of the business. And, finally, profits earned by the business are distributed on the basis of ownership share, patron age rate, or some other mutually agreeable criterion.

The primary advantages of a joint venture over a sole proprietorship involve combining capital and management. Pooling the capital of the members of the joint venture allows a larger business to be formed, which can be more efficient than two or more smaller businesses. It can also increase the amount of credit available, allowing further increases in business size. The total supply of management and labour is also increased by pooling the capabilities of all the members. Management efforts can be divided, with each person specializing in one area of the business, such as crops, livestock, marketing, or accounting. It is also easier for one operator to be absent from the business when another operator is available to fill in.

4. OPERATING AGREEMENTSSometimes two or more sole proprietors carry on some farming activities jointly while maintaining individual ownership of their own resources. Such an activity is often called an operating agreement. They tend to be informal, limited arrangements.

In most operating agreements, all parties pay the costs related to ownership of their own assets, such as property taxes, insurance, maintenance, and interest on loans. Operating expenses such as the cost of seed, fertilizer, veterinarian fees, or utilities may be shared among the parties in a fixed proportion, often in the same proportion as the fixed costs. In other cases, one party or another may pay for all of certain operating costs, such as fuel or feed, as a matter of convenience. In either case, the general principle for an operating agreement is to share income in the same proportion as total resources are contributed, including both fixed assets and operating costs.

5. PARTNERSHIPSA partnership is an association of two or more persons who share the ownership of a business to be conducted for profit. Partnerships can be organized to last for a brief time or for a long duration.

There are two types of partnerships. The first is unlimited- and the second is so called limited partnership. In Hungarian terms we called “Közkereseti társaság”, and the limited is Betéti társaság). The limited partnership



must have at least one general partner, but can have any number of limited partners. Limited partners cannot participate in the management of the partnership business, and in exchange, their financial liability for partnership debts and obligations is limited to their actual investment in the partnership. The liability of general partners, however, can extend even to their personal assets.

Limited partnerships are most often used for businesses such as real estate development and cattle feeding, where investors want to limit their financially ability and do not wish to be involved in management.


There are many possible patterns and variations in partnership arrangements. However, the partnership form of business organization has three basic characteristics:

1. A sharing of business profits and losses

2. Shared control of property, with possible shared ownership of some property

3. Shared management of the business

The exact sharing arrangement for each of these characteristics is flexible and should be outlined in the partnership agreement.

A written partnership agreement is of particular importance if the profits will not be divided equally.

The written agreement should cover at 1east the following points:

1. Management

State who is responsible for which management decisions and how they will be made.

2. Property ownership and contribution

List the property that each partner will contribute to the partnership and describe how it will be owned.

3. Share of profit and losses

Carefully describe the method for calculating profits and losses and the share going to each partner, particularly if there is an unequal division.

4. Records

Records are important for the division of profits and for maintaining an inventory of assets and their ownership. Designate who will keep what records as part of the agreement.

5. Taxation

Include a detailed account of the tax basis of property owned and controlled by the partnership and copies of the partnership information tax returns.

6. Termination

State the date that the partnership will be terminated, if one is known or can be determined.

7. Dissolution

The termination of the partnership on either a voluntary or involuntary basis requires a division of partnership assets. The method for making this division should be described to prevent disagreements and an unfair division.

Partners may contribute land, capital, labour, management, and other assets to the partnership capital account. Compensation for labour contributed or assets rented to the partnership should be paid first, because these may not be in the same proportions as the ownership. The remaining profits generally are divided in proportion to the ownership of the partnership, usually based on the initial value of the assets contributed to the business. Some



partners prefer to share partnership profits equally, however, regardless of contributions.

Property may be owned by the partnership, or the partners may retain ownership of their individual property and rent it to the partnership. When the partnership owns property, any partner may sell or dispose of any asset without the consent and permission of the other partners. This aspect of a partnership suggests that retaining individual ownership of some assets and renting them to the partnership may be desirable.

A partnership can be terminated in a number of ways. The partnership agreement may specify a termination date. If not, a partnership will terminate upon the incapacitation or death of a partner, bankruptcy, or by mutual agreement between the partners. Termination upon the death of a partner can be prevented by placing provisions in the written agreement that allow the deceased partner's share to pass to the estate and hence to the legal heirs.

In addition to the three basic characteristics mentioned earlier, factors that indicate a particular business arrangement is legally a partnership include:

1. Joint ownership of assets in the partnership capital account

2. Operation under a firm name

3. A joint bank account

4. A single set of business records

5. Management participation by all parties

6. Sharing of profits and losses

Joint ownership of property does not by itself imply a partnership. However, a business arrangement with all or most of these characteristics may be a legal partnership, even though a partnership was not intended. These characteristics should be kept in mind for landlord-tenant arrangements, for example. A partnership can be created by a leasing arrangement based on shares, unless steps are taken to avoid most of the conditions mentioned.

Income Taxes

A partnership does pay any income taxes directly. Instead it files an information income tax return reporting the income and expenses for the partnership. Partnership income, therefore, is taxed mutually.

Advantages

A partnership is easier and cheaper to form than a corporation. It may require more records than a sole proprietorship, but not as many as a corporation. While each partner may lose some individual freedom in making management decisions, a carefully written agreement can maintain most of this freedom.

A partnership is a flexible form of business organization, in which many types of arrangements can be accommodated and included in a written agreement. It fits situations such as when parents desire to bring children and their spouses into the business. The children may contribute only labour to the partnership initially, but the partnership agreement can be modified over time to allow for their increasing contributions of management and capital.

Disadvantages

The liability of general partners can extend even to their personal assets. The unlimited liability of each general partner is an important disadvantage of a partnership. A partner cannot be held personally responsible for the personal debts of the other partners. However, each partner can be held personally and individually responsible for any lawsuits and financial obligations arising from the operation of the partnership. If the partnership does not have sufficient assets to cover its legal and financial obligations, creditors can bring suit against all partners individually to collect any money due them. In other words, a partner's personal assets can be claimed by a creditor to pay partnership debts.

This disadvantage takes on a special significance, considering that any partner, acting individually, can act for the partnership in legal and financial transactions. For this reason, if for no other, it is important to know and



trust your partners and to have the procedures for making management decisions included in the partnership agreement. Too many partners or an unstructured management system can easily create problems.

Like a sole proprietorship, a partnership has the disadvantage of poor business continuity. It can be unexpectedly terminated by the death of one partner or a disagreement among the partners. Dissolution of any business is generally time consuming and costly, particularly when it is caused by the death of a close friend and partner or by a disagreement that results in bad feelings among the partners. The required sharing of management decision making and the loss of some personal freedom in a partnership are always potential sources of conflict between the partners.

Laws governing the formation and taxation of partnerships are less detailed than for corporations. Unfortunately, this allows many farm partnerships to operate with minimal records and little documentation of how resources were contributed and how income has been divided. This can make a fair dissolution of the partnership difficult.

Partnership Operation

A partnership is usually formed for a relatively long period, so contributions to the partnership can be valued on the basis of current market values for the assets contributed by each party at the time the partnership was started. All operating expenses should be paid by the partnership, usually from a separate partnership account. If either or both partners contribute labour, they should be paid a representative and fair wage by the partnership.

In some partnerships, major assets such as land and buildings are not included in partnership property. Instead, the partnership pays rent to the owners of these assets (who may also be the partners) for their use. In such cases, the rented assets are not included when calculating the relative ownership shares of the partnership. Net income may either be paid out or left in the partnership account to increase business equity. As long as all withdrawals (not including wages or rent) are made in the same proportion as the ownership of the partnership, the ownership shares will not change. However, if one partner leaves more profits in the business, such as by retaining more breeding stock, or contributes additional assets, the ownership percentages will change. Sometimes this is done as a way to move toward more equal ownership of the partnership.

When a partnership is liquidated, the proceeds should be distributed in the same proportion as the ownership. For this reason, it is important to keep detailed and accurate records of the property used by a partnership, and of how wages, rent, and net income are distributed to the partners.

6. CORPORATIONSA corporation is a separate legal entity that must be formed and operated in accordance with the laws of the state. It is a legal "person," separate and apart from its owners, managers, and employees. This separation of the business entity from its owners distinguishes a corporation from the other forms of business organization. As a separate business entity, a corporation can own property, borrow money, enter into contracts, sue, and be sued.

The number of farm corporations, though still small, has been increasing. The majority are classified as family farm corporations with a relatively small number of related shareholders.


There are some basic steps that will generally apply to forming a farm corporation. These are:

1. The incorporators file a preliminary application with the appropriate state official. This step may include reserving a name for the corporation.

2. The incorporators draft a pre-incorporation agreement outlining the major rights and duties of the parties after the corporation is formed.

3. The articles of incorporation are prepared and filed with the state office.

4. The incorporators turn property and/or cash over to the corporation in exchange for shares of stock representing their ownership share of the corporation.

5. The shareholders meet to organize the business and elect directors.



6. The directors meet to elect officers, adopt bylaws, and begin business in the name of the corporation.

Three groups of individuals are involved in a farming corporation: shareholders, directors, and officers. The shareholders own the corporation. Stock certificates are issued to them in exchange for property or cash transferred to the corporation. As owners, the shareholders have the right to direct the affairs of the corporation, done through the elected directors and at annual meetings. Each shareholder has one vote for each share of voting stock owned. Therefore, any shareholder with 51 percent or more of the outstanding voting stock has majority control over the business affairs of the corporation. In some corporations, contributions of capital are exchanged for bonds instead of stock. Bonds carry a fixed return but no voting privileges.

The directors are elected by the shareholders at annual meeting, and they hold office for the following period (4-5 years). They are responsible to the shareholders for the management of the business. The number of directors is normally fixed by the articles of incorporation. Meetings of the directors are held to conduct the business affairs of the corporation and to set broad management policy to be carried out by the officers.

The officers of a corporation are elected by the board of directors and may be removed by them. They are responsible for the day-to-day operation of the business within the guidelines established by the board. The officers' authority flows from the board of directors, to whom they are ultimately responsible. A corporation president may sign certain contracts, borrow money, and perform other duties without board approval but will normally need board approval before committing the corporation to large financial transactions or performing certain other acts.

In many small family farm corporations, the shareholders, directors, and officers are all the same individuals. To an outsider, the business may appear to be operated like a sole proprietorship or partnership. Even the directors' meetings may be held informally around a kitchen table, but a set of minutes must be kept for each official meeting.

Advantages

Corporations provide limited liability for all the shareholder/owners. They are legally responsible only to the extent of the capital they have invested in the corporation. Personal assets of the shareholders cannot be attached by creditors to meet the financial obligations of the corporation. This advantage may be negated if a corporation officer is required to personally cosign a note for corporation borrowing. In this case, the officer can be held personally responsible for the debt if the corporation cannot meet its responsibilities.

A corporation, like a partnership, provides a means for several individuals to pool their resources and management. The resulting business, with a larger size and the possibility of specialized management, can provide greater efficiency than two or more smaller businesses. Credit may also be easier to obtain because of the business continuity advantage of a corporation. The business is not terminated by the death of a shareholder, because the shares simply pass to the heirs and the business continues. However, a plan for management continuity should exist by having more than one person involved in management and capable of taking over responsibility.

A corporation provides a convenient way to divide and transfer business ownership. Shares of stock can be easily purchased, sold, or given as gifts without transferring title to specific parcels of land or other assets. Transferring shares does not disrupt or reduce the size of the business and is a convenient way for a retiring farmer to gradually transfer part of an ongoing business to the next generation.

Disadvantages

Corporations are more costly to form and maintain than sole proprietorships and partnerships. Certain legal fees are necessary when organizing a corporation. (In Hungary 20 million HUF). An accountant may also be needed during the formation period and throughout the life of the corporation to handle financial records and tax-related matters.

Doing business as a corporation requires that shareholders and directors meetings are held, minutes are kept of directors meetings, and annual reports are filed with the state. However, if forming a corporation results in better business and financial records being kept, his might be viewed as an advantage rather than a disadvantage, because better information for making management decisions will be available.

Corporation, Operation



A corporation can be formed and operated in a manner similar to a partnership. The shares of the corporation are divided in the same proportion as the original contributions of equity capital. Partnerships and corporations can receive contributions of debt from the partners, as well as assets.

The number of shares to be issued is an arbitrary decision by the stockholders. The initial value of each share is found by dividing the beginning equity of the corporation by the number of shares to be issued. As with a partnership, the corporation can pay salaries for labour contributed by shareholders, as well as rent for the use of assets not owned by the corporation. Distributions of net income are in the form of dividends.

7. LIMITED LIABILITY COMPANIESA limited liability company (LLC) is a success type of business organization that closely resembles a partnership, but offers it’s members the advantage of limited liability. This means that creditors or other claimants can pursue the assets of the LLC to satisfy debts or other obligations, but cannot pursue personal or business assets owned individually by the members of the LLC. This is a significant advantage to potential investors.

Limited liability companies can include any number of members, all of whom can participate in management. Ownership is distributed according to the fair market value of assets contributed, as in a partnership.

8. COOPERATIVESFarmers have used cooperatives for many years as a means of obtaining inputs and services or for marketing products jointly. In some countries, cooperatives for the purpose of farm production have been formed by groups of small-scale landholders or farm workers to gain efficiencies in production. Many of the state and collective farms that existed in the former Soviet Union and neighbouring countries were reorganized into large production cooperatives.

Often they are made up of independent farmers who wish to carry out one particular operation jointly. Examples include sow cooperatives that produce feeder pigs for their members to finish or a cooperative that grows high-quality seed for its members. Cooperatives are a special type of corporation. They require articles, by-laws, and detailed records. Members who contribute capital enjoy limited liability on those contributions. Net income is passed on to members before it is subject to income tax. Cooperatives can also provide tax deductible benefits to owner/members.

Control of a cooperative differs from the other forms of business organizations, in that all members have one vote each when it comes to making decisions, regardless of how much of the cooperative they own. Most agricultural co-operatives limit membership to active farmers.

In recent years in the US a new form of farmer cooperative, known as a "closed" or "new generation" cooperative has become popular. Members must contribute a significant amount of equity capital to join and agree to sell a certain volume of production to the cooperative on a fixed schedule. Memberships can be bought and sold. These new cooperatives have been formed mostly for value- added processing, but also include livestock finishing and egg-laying operations.

Perhaps the key factor in making a farming cooperative successful is a true desire to cooperate. Each member must perceive that working together will help obtain benefits that outweigh the necessity of giving up some degree of managerial independence.

9. CONTRACTING, VERTICAL INTEGRATIONJust as some farmers and ranchers will produce specific products, others will specialize in a particular phase of producing more generic products. Examples include raising dairy replacement heifers, harvesting crops on a custom hire basis, or producing bedding plants for home gardeners. Such operators can develop a high degree of expertise in their particular area and apply it to a high volume of production.

Many of these managers produce an intermediate product or service so there may not be a widespread market at an established market price. To ensure that they can sell their product they may enter into a marketing contract with a process or, wholesale distributor, or other farmer. The contract may guarantee that a constant supply of



product of a minimum quality and type will be delivered. In some cases the buyer may supply some of the inputs and management, such as when pigs or broilers are finished in contract facilities on independent farms. Such arrangements are called vertical integration.

10. Questions1. What are the differences among the four stages in the life cycle of a farm business?

2. Why do you think the sole proprietorship is the most common form of farm business organization?

3. What general advantages does a joint venture have over a sole proprietorship?

4. How does an operating agreement differ from a partnership?

5. What should be included in a partnership agreement?

6. Explain the difference between a general partnership and a limited partnership.

7. Why might a partnership or corporation keep more and better records than a sole proprietorship?

8. What special characteristics do limited liability companies and cooperatives have? 9. What form of business organization would you choose if you were beginning a small farming operation on your own? What advantages would this form have for you? What disadvantages?

9. What form of business organization might be preferable if you had just graduated from college and were joining your parents or another established operator in an existing farm? What advantages and disadvantages would there be to you?


11. fejezet - 11. Planning of agricultural production (István Szűcs)1. 11.1. Whole farm planningOnce farmer has developed a strategic plan for a farm or ranch business, the next logical step is to develop an operative plan to carry it out. Every manager has a plan of some type about what to produce, how to produce, and how much to produce-even if it has not been fully developed on paper. However, a systematic procedure for developing a whole-farm plan may well result in one that will increase farm profits or come closer to attaining other goals.

As the name implies, a whole-farm plan is an outline or summary of the production to be carried out on the entire farm and the resources needed to do it. It may contain sufficient detail to include fertilizer, seed, and pesticide application rates and actual feed rations for livestock, or it may simply list the enterprises to be carried out and their desired levels of production. When the expected costs and returns for each part of the plan are organized into a detailed projection, the result is a whole-farm budget. Enterprise budgets can be used as building blocks for the development of a whole-farm plan and its associated budget. Partial budgets are useful for making minor adjustments or fine-tuning a previously developed whole-farm plan. However, a major change that affects several different enterprises may require a new whole-farm plan and bud get to adequately compare the profitability and feasibility of the proposed change against the current plan.

Most farmers do some kind of planning on their farms nearly every day. Whole farm planning is distinct from other farm planning approaches because it ties all the planning you do together for the whole farm and bases it on the long-term vision your family has for itself in the future. It is farmer-controlled, voluntary, and flexible. The plans are owned by the farmer, and the information contained in the plans is confidential.

The whole-farm plan can be designed for the current or upcoming year, or it may reflect a typical year over a longer period. In some instances, a transitional plan may be needed for the period it takes to fully implement a major change in the operation. The effects of alternative plans on the financial position and risk exposure of the business also need to be considered.

Benefits of whole farm planning include maintaining or improving profitability while enhancing sustainability. Whole farm planning can also lead to protection and enhancement of the quality of soil, water, and other natural resources on and near the farm. More importantly, the planning process helps the farm family define long- and short-term goals, which lead to an improved quality of life and a better relationship with the community.

Whole Farm Planning can be thought of as a six-step process, which can be used by the farm family to balance the quality of life they desire with the farm’s resources, the need for production and profitability, and long-term stewardship.

The development of a whole-farm plan can be divided into seven steps: (1) determine objectives and specify goals; (2) take an inventory of the physical, financial, and human resources available; (3) identify possible enterprises and their technical coefficients; (4) estimate gross margins for each enterprise; (5) choose a plan-the feasible enterprise combination that best meets the specified goals; (6) develop a whole-farm budget that projects the profit potential and resource needs of the plan; and (7) monitoring of the implementation. Often the farm plan is developed for one year, and resources such as land, full-time labour, breeding livestock, machinery, and buildings are considered to be fixed in quantity. The usual objective for a one-year plan is to maximize the total gross margin for the farm.

1.1. 11.1.1. Determining objectives and setting goalsThe first step in Whole Farm Planning typically begins with developing goals and a long-term vision for:

• The quality of life you want for you and your family within the community;

• The future of your farm;


11. Planning of agricultural production (István Szűcs)

• How your farm enterprise will provide the income and living environment you need.

These three goals correspond to three resource areas: (1) human and social resources; (2) environmental and natural resources and (3) economic and financial resources. In this step, for example you and your family need to jointly discuss and develop short- and long-term goals for all three resource areas outlined above.

Quality of life goals might include issues involving health and safety, education, opportunities to try out new skills and enterprises, finding ways to take more time for the family, and reducing the stress of work.

Examples of goals for your long-range vision of the farm might include wooded or prairie areas around streams that benefit wildlife and improve water quality; windbreaks for fields, livestock and buildings; and additional housing for a son or daughter entering the enterprise.

Goals for how your farm will produce the income and living environment you want would include a listing of the enterprises you would like to continue, discontinue, or add to your farm such as a cow/calf/feeder cattle operation, locally marketed vegetables, or cash crop corn/wheat/barley/alfalfa etc. rotation.

Most planning techniques assume that farmers/managers primarily seek profit maximization, but this objective is often subject to a number of personal and societal restrictions. Maintaining the long-term productivity of the land, protecting the environment, guarding the health of the operator and workers, maintaining financial independence, and allowing time for leisure activities are concerns that affect the total farm plan. Certain enterprises may be included in the plan because of the satisfaction the operator receives from them regardless of their economic results, while others may be excluded for personal reasons even though they could be profitable. After identifying the overall objectives, business and personal, a farmer/manager should be able to specify a set of performance goals. These can be defined in terms of crop yields, livestock production rates, costs of production, net income, or other measures.

1.2. 11.1.2. Inventory and assessmentThe second step in whole farm planning involves inventorying and assessing your resources, including natural resources, human resources, financial and capital assets, and crop and livestock systems. Information needed to complete the inventory and assessment may include soil maps, soil test results, cropping and animal management histories, and financial data. In this process, you may identify problems with the condition of some of your important assets and their management, like soil erosion in some fields, or livestock manure stored too close to water sources. You may also find weaknesses in your financial or capital assets due to excessive debt, large variable costs, or depreciation. Or you may determine that your human resources, labour or time are being used inefficiently. See the listing of Resources at the end of this publication to find tools to assist you with your inventory and assessment.

Land: the land resource is generally the most valuable resource and one of the most difficult to alter. Land is also a complex resource with many characteristics that influence the type and number of enterprises to be considered. This is also a good time to draw up a map of the farm showing field sizes, field layouts, fences, drainage ways and ditches, tile lines, and other physical features. A map can assist in planning changes or documenting past practices. If available, the cropping history of each field, including crops grown, yields obtained, fertilizer and lime applied, and pesticides used, can be recorded on a copy of the field map or in a computer database.

Buildings: the inventory of buildings should include a list of all structures, along with their condition, capacity, and potential uses. Livestock enterprises and crop storage may be severely limited in number and size by the facilities available. Feed-handling equipment, forage and grain storage, water supply, manure handling, and arrangement and capacity of livestock facilities should be noted in the inventory. The potential for livestock production may also be affected by the location of the farmstead. Close proximity to streams, lakes, or nearby residents may restrict the type and volume of animals that can be raised or finished. In addition, there should be adequate land area available for environmentally sound manure disposal.

Machinery: machinery can be a fixed resource in the short run, and the number, size, and capacity of the available machinery should be included in the inventory. Particular attention should be given to any specialized, single-purpose machines. The capacity limit of a specialized machine, such as a cotton picker, will often determine the maximum size of the enterprise in which it is used.

Capital: capital for both short-run and long-run purposes can be another limiting resource. The lack of ready



cash or limited access to operating credit can affect the size and mix of enterprises chosen. Reluctance to tie up funds in fixed assets or to leverage the business through long-term borrowing may also limit expansion of the farming operation or the purchase of labour-saving technology.

Labour: the labour resources should be analyzed for quantity and quality. Quantity can be measured in months of labour currently available from the operator, family members, and hired labour, including its seasonal distribution. The availability and cost of additional full-time or part-time labour should also be noted, as the final farm plan might profitably use additional labour. Labour quality is more difficult to measure, but any special skills, training, and experience that would affect the possible success of certain enterprises should be noted.

Management: the last part of a resource inventory is an assessment of the management skills available for the business. What are the age and experience of the manager? What are the past performance of the manager and his or her capacity for making management decisions? What special skills or critical weaknesses are present? If a manager has no training, experience, or interest in a certain enterprise, that enterprise is likely to be inefficient and unprofitable. The quality of the management resource should be reflected in the technical coefficients incorporated into the farm budgets. Past success and records are the best indicators of future performance.

Other Resources: the availability of local markets, transportation, consultants, marketing quotas, or specialized inputs are also important resources to consider when developing the whole-farm plan.

1.3. 11.1.3. Identify possible enterprises and technical coefficientsThe resource inventory will show which new crop and livestock enterprises are feasible. Those requiring an unavailable resource can be eliminated from consideration, unless purchasing or renting this resource is possible. Custom and tradition should not be allowed to restrict the list of potential enterprises, only the resource limitations. Many farms have incorporated alternative or non-traditional enterprises into their farm plans, and some have been quite profitable. The technical coefficients for an enterprise indicate how much of a resource is required to produce one unit of an enterprise. These technical coefficients, or resource requirements, are important in determining the maximum possible size of enterprises and the final enterprise combination. The technical coefficients are developed to correspond to the budgeting unit for each enterprise, which would typically be 1 hectare for crops and 1 head for livestock. For almost all enterprises, technical coefficients will be needed for land, labour, and capital. Using inaccurate enterprise budgets in the farm planning process will result in a less than optimal farm plan and a reduction in profit.

1.4. 11.1.4. Estimate the gross margin per unitAn enterprise budget is required for every enterprise that might be chosen for the farm plan, those already being produced and any new alternatives being considered. Enterprise budgets provide the estimates of gross margin needed in the farm-planning process, and they also give information that can be used to develop the technical coefficients previously discussed. The gross margin is the difference between gross income and variable costs. It represents how much each unit of an enterprise contributes toward fixed costs and profit, after the variable costs of production have been paid. If maximization of profit is the goal, using gross margin, instead of net profit, may seem strange. However, because the plan is for the short run, fixed costs are constant regardless of the farm plan selected. Any positive gross margin represents a contribution toward paying those fixed costs. Therefore, in the short run, maximizing gross margin is equivalent to maximizing profit (or minimizing losses), because the fixed costs will not change.

Accurate enterprise budgets are of great importance in whole-farm planning. A good estimate of the gross margin for an enterprise requires the manager's best estimates of gross revenue and variable costs. It is important that estimates of selling prices and yields be accurate and that the yield estimates reflect the production practices employed. The variable cost estimates also need to reflect production practices, and these estimates require identifying the amount of each variable input used as well as the purchase price per unit. Using inaccurate enterprise budgets in the farm planning process will result in a less than optimal farm plan and a reduction in profit.

1.5. 11.1.5. Choose the enterprise combination



The next step in the process is to identify and evaluate management alternatives and to develop and implement an action plan. The number and type of alternatives identified and evaluated is up to farmer/manager. However, the broader the range of alternatives you consider, the more likely you are to find options that meet your overall vision and address the human, financial and environmental resources goals you laid out in step 1.

Ideas for management alternatives may come from discussions with your family, from planning tools, from agency experts. For instance, you may want to evaluate the effect that a change from a continuous cropping system to a mixed livestock-cropping system would have on your income, quality of life, and natural resources such as soil and water and whether it would bring you closer to meeting your goals in all three areas. You may want to evaluate the impact of adopting soil conservation practices such as reduced tillage, or the income possibilities of direct marketing. You might consider the effect of different manure and chemical management alternatives on the safety of your drinking water and your family's health, as well as on profitability. As part of an action plan you could evaluate the changes required for a family member to take time for additional education. After you have evaluated your alternatives, use this information to develop your action plan, always returning to the vision and goals you identified in step 1 to see that your action plan fits. Once you are satisfied with your plan, put it into action.

Given the gross margins of the enterprises, the amount of each resource available on the farm, and the amount of each resource required per unit of each enterprise being considered, managers will attempt to find the combination of enterprises that provides the highest total profit for the farm. If there are more than a few enterprises to consider, or many resource restrictions, using paper and pencil to find the best combination would be difficult if not impossible. Linear programming (LP) is a mathematical technique that can be used to find the optimal combination of enterprises within the resource limits of the farm.

1.6. 11.1.6. Preparing budgetThe last step in the planning process is to prepare the whole-farm budget. A whole-farm budget can be used to: (1) estimate the expected income, expenses, and profit for a given farm plan; (2) estimate the cash inflows, cash outflows, and liquidity of a given farm plan (3) compare the effects of alternative farm plans on profitability, liquidity, and other considerations and (4) estimate the need for, and availability of, resources such as land, capital, labour, livestock feed, or irrigation water.

The starting point for a whole-farm budget is the income and variable costs used for computing enterprise gross margins. These values are multiplied by the number of units of each enterprise in the plan to get a first estimate of total gross income and total variable costs. Other farm income that does not come directly from the budgeted enterprises, such as custom work income and fuel tax refunds, should then be added into the budget. Past records are a good source of information for estimating these additional sources of income. Any costs not already included in the enterprise variable costs should now be added. In practice, expenses such as building repairs, car and truck expenses, interest, utilities, insurance, and other overhead costs are difficult to allocate to specific enterprises and are affected very little by the final enterprise combination. These fixed costs are often called indirect costs. Other expenses, such as cash rent or property taxes, may apply to part of the acres in the plan but not to others. Although these and other fixed costs do not affect the selection of a short-term profit-maximizing plan, they may be a major portion of total expenses and should be included in the whole-farm budget. Budgets based on farm plans that include new investments in additional fixed assets should have their fixed costs revised accordingly. Opportunity costs may or may not be included in the whole-farm budget. If they are included, the budgeted profit is economic profit. If not, it is accounting profit or net farm income.

1.7. 11.1.7. Monitoring progressThe final step after developing an action plan that is compatible with the goals set by you and your family is to monitor progress toward these goals. As the whole farm plan is implemented, try to evaluate how the plan is working and make corrections and refinements as time goes by. Keep records and check your progress toward the goals you set, so you can see how your plan is working. If the work you are doing is not helping reach your goals, or if something just is not working out the way you expected, it is time to revisit the plan. Goals themselves may need revision with time and changes in family/business life.

2. 11.2. Detailed enterprise planning2.1. 11.2.1. Assessment to establish enterprise planning



Assessment can be carried out on the basis of a simple survey or by use of ready-made data sheets. Analysis possibly should not be related only to the latest financial year, but to a longer period, e.g. to the past three years. If planning was made in the preceding years as well, then one of the most important areas is to compare the planned data with the factual data and to analyse the reasons of differences in detail. The most important elements of assessment can be divided into groups in the following manner: (1) Natural circumstances; (2) Economic, social circumstances and legal environment; (3) Disposable resource; (4) The structure of production; (5) The level of inputs and outputs, the efficiency of inputs; (6) Price conditions; (7) Production cost, production value and net income; (8) Financial position and (9) Maps and other necessary attachments.

In the course of the survey of natural circumstances, to weather- and climatic conditions as well as to the length of production time should be given high priority. The most crucial area is the examination of existing precipitation conditions and the relation of it with secure water supply. It is worth examining how possible lack of precipitation and arising aridity affected on the specific yields of own-produced forages in the past period.

During the consideration of economic and social circumstances to the infrastructural supply of the farm (accessibility, the state of roads, possibility for receiving industrial current etc.) should be given a high priority. Distance in purchasing inputs (e.g. forages etc.) and our distance from potential markets have to be taken into consideration. The micro- and macroeconomic environment of the enterprise are also necessary to be mentioned. It is practical to make a brief analysis on our competitors and our market share as well as to outline the external (purchasers, suppliers, creditors, insurers etc.) and internal system of relations of the enterprise. In the analysis of legal environment, conditions being dissimilar to the general enterprise operating regulation (e.g. environment- and nature protection laws) should be highlighted.

Agricultural production requires the existence of certain resources in any case, which can be own or rented properties. The capacity of disposable resources significantly determines the volume of production and the applicable technology. After the consideration of buildings and stocks, disposable other necessary machine capacities and outputs have to be taken into consideration and the bottle-necks have to be detected.

The structure of production in the past period also should be recorded. In the course of the analysis of inputs and outputs as well as production cost, production value and net income, it is practical to use data of several years and to define the specific value of them. Data series should at least arise from the last three years and the best, the worst and the average values of the past period should be revealed.

The analysis of price conditions is also worth making for years back, but in this case it is necessary to forecast the evolution of the expected input and output prices in the next financial year.

During the description of the financial position liquidity, indebtedness, loans outstanding (short- and long –term) and profitability of the enterprise as well as the evolution of result should be introduced in time series. It is worth attaching the annual reports of the preceding years.

The last part of the assessment contains the detailed maps of the farm and other necessary attachments, for example various sales (pre)contracts, agreements, lease contracts etc.

2.2. 11.2.2. Determination of conceptions, planning principles and objectivesPreparation of a concept plan is necessary for harmonizing the larger relations of the plan before the completion of the annual plan of a given farm. In the course of planning the concept plan contains the crop lands to be used, the size of the livestock and the structure of livestock in every species of animals. Paying attention to the above-mentioned the crop structure of arable crop production is developed. In defining of all this, the existing natural, economic and operating conditions of the given farm have to be taken into consideration.

Our objectives are recorded in the concept plan, which are necessary to be quantified if it is possible. In case of milk production the following economic expectations are worth being quantified in non-financial quantitative and in financial data: cost- and turnover-related profitability rate; net income per 1 litre or 1 kg marketed milk; yield; fodder utilization; feeding coefficients and the average cost of each product.

It is necessary to define the technology and to fix certain fundamental principles, for example in the course of the planning of milk production: two or three milking per day are required, how milk producer group can be formed, production based on own or purchased forage basis etc.



2.3. 11.2.3. Planning of annual operation in livestock sectors1

Primarily it is necessary to assess data to be used in planning (to be obtained from internal and external sources). It is important to consider the accuracy and reliability of data, and to carry out corrections if it is necessary. Production data, technological parameters, financial and accounting records from the preceding years can be very useful.

Second stage of planning is to make a brief concept plan, in which our objectives and most important principles being applied during planning, are defined and quantified.

Having obtained the appropriate data, technology to be used and the achievable, most important technological parameters are planned. Technology essentially determinates our inputs and yields to be achieved, which naturally vary between certain intervals.

After planning technology to be applied, at least monthly, but rather weekly change in livestock is planned obtaining data from technological parameters. Achievable yield can be calculated out of this, i.e. products to be marketed and to be used internally. Expected selling prices are estimated on the basis of disposable information. Revenue and production value can be figured out by the use of selling prices and yields.

The utilization of labour force is worth being planned after yields and production value, expressing it in non-financial quantitative (hour) and in financial data (HUF). Planning of labour force is followed by planning of machine works and auxiliary services.

Hereafter it is worth planning works and costs related to fixed assets (buildings, machines, equipment etc.) being used by the sector. The most important task is to calculate depreciation, repair and maintenance costs.

If the aforementioned tasks are carried out, then total, planned production cost emerging in the sector has to be taken into consideration. Following the calculation of production costs it is worth figuring out product unit costs, i.e. the average cost of each product after it was corrected by the value of by-products. Average cost is comparable with selling prices and difference between tem directly presents the volume of net income per product unit.

Cash flow plan can be carried out in case of disposable planned real expenditures and revenues per month.

The closing stage of planning is to complete the summary and balance tables, as well as to calculate the most important efficiency indicators. If the plan is made by a later presented computer model, then sensitivity analysis of it can be carried out. By carrying out sensitivity analysis, risks can be handled at a level, by the use of it and efficiency indicators the evaluation in text can be completed.

The introduced planning model gives an example primarily for smaller family farms to carry out enterprise plan, since in the majority of big farms professional planning software products are applied, which are more comprehensive than that we previously introduced. The model applies simplifications, i.e. it does not calculate with annual change in stocks, consequently it supposes that the opening stock early in the year and the closing stock in the end of the year conform to each other.

It is easy to see that if we took every product and service individually into consideration in planning, then it would result an extremely disintegrated structural distribution in case of activities within the agricultural enterprise. Thus products or services which are produced with the same technological process are worth handling in a contracted way. In compliance with this criterion, sectors can be defined as unites contained in the system, which are simultaneously handled as the units of planning and economic evaluation. Consequently sectors are the basic units of planning.

Production plan is based on plans presenting the change in livestock. As regards these plans we can differentiate: (1) monthly and (2) annual livestock change plans. Monthly livestock change plan serves as planning animal number and it eventually constitutes the basis of every part of the plan. Scope of knowledge related to animal husbandry is not dispensable in the course of carrying out a livestock change plan, e.g. name by age and gender, period of pregnancy, mating indicators etc.

In planning sheet of change in livestock, opening stock early in the month always corresponds to the closing stock of the preceding month, i.e. for example opening stock in January is equal to the closing stock in

11 All planning sheets are available in the enclosed ppt. presentation.



December. Opening stock can be increased by items like progeny, purchased animal, re-qualified animal and decreased by death, compulsory slaughter, sale and re-qualifying. If the sum of increasing items is added to the opening stock and the sum of decreasing items is taken away, then it gives the closing stock. The average number of animals is defined as the mean of opening and closing stocks. If the average number of animals is multiplied by the number of day in the given month it results in the number of feeding days. Total increase in body mass per month in given age-category can be calculated by the multiplication of feeding days and daily average body mass increase, expressed in tonne. The average breeding time is equal to the difference between the age getting into the group and the age leaving the group, expressed in days. The average individual body mass increase is equal to the difference between the average mass getting into the group and the average mass leaving the group. If individual body mass increase is divided by the average breeding time (day) it results in average daily body mass increase, but it can be planned in reserve order as well.

Sheets carried out for presenting change in livestock in each age-category are necessary to summarize per annum. A4 sheet can be applied to carry out this aforementioned summarization. This planning sheet is completed by determination of individual and total value of animal.

The annual livestock change plan constitutes the basis of planning the volume of yields and commodities, or to be more exact planning of them occurs on the basis of this plan. It contains cumulatively the changes in stock number.

If the change in livestock was planned, then the number of feeding days is disposable breaking down age-categories per 1 day, 1 week, 1 month and 1 year. In the light of this, the forage demand of the sector and the cover of that can be planned in details. The harmonization of demand and cover can be planned by use of forage balance, while demand can be calculated on the basis of planned individual forage portions in the most precise way.

During the planning of individual portions of forage it is practical to apply linear programming (LP model), when the objective function is the cost of the minimum portion (daily individual), i.e. optimization is carried out for the minimum cost of forage portion. The portion has to be optimized in such a way that its cost should be minimum, while it serves the nourishing substance demand of the animal in the given age- and production category, the animal is able to consume it and the necessary varieties of forages should be also available. The inline limits require great professional skill, since there is no mean carrying out a well-optimized forage portion, if animal is not able to consume that or one of its elements is not available.

Demand on forage should be determined per annum by varieties of fodders breaking down age-categories and periods as well, expressing both in non-financial quantitative and in financial data. It cannot be forgotten that losses always arise, thus quantities summarized on the basis of portions should be corrected by the expected losses, since unavoidable losses should be also planned and they also loaded the sector. Naturally the reduction of losses is always a basic objective and their planning occurs by annual experimental guide numbers.

After planning forage demand; total material input, labour force demand, machine work demand and cost, depreciation, repair and maintenance cost of the sector have to be considered. Subsequently it is necessary to plan revenues and expenditures at least breaking down monthly and the summarization of costs should be carried out in compliance with the cost types in pre-calculation.

The number of workers and employees in compliance with different jobs, the number of workdays (weekly, monthly, yearly), the schedule of annual holidays as well as the appropriated manner of waging (achievement, wage by the hour, combined), the volume of it and the related contributions should be planned (A12 sheet). It is also necessary to decide which jobs require permanent or periodical employment. The necessary work force reduction or extension is practical to examine carefully at that time, do not forget the possibly needed wage-increases.

As regards the entire sector, machine works required during the year should be take into consideration, and works can be carried out by own assets should be separated from those require external work (corporate and beyond that) as well (A13 sheet). Required and disposable capacities should be considered (daily, monthly, annual) as well as the requirements and in the course of their balance-like comparison (lack or surplus) decision has to be made on the necessary measures. Lack of capacity can be possibly solved by applying expanded shifts, or by using external (foreign) machinery service as well. The surplus of capacity is worth selling if it is possible. The required machine works as inputs should be expressed in financial (HUF) and non-financial quantitative data as well. The external machine works are most often connected to transportation and logistics that primarily covers the transport of forages, final products (milk, livestock etc.) and carrions.



Planning costs related to tangible assets: by use of A14 planning sheet. All disposable own assets in the sector should be overall take into consideration and the annual cost of depreciation (straight-line depreciation), repair and maintenance should be planned. Repair and maintenance costs can be planned on the basis of the real costs emerged in the preceding years. The repair and maintenance costs of the more aged machines and technical equipment with lower net value are usually higher than the newer ones.

Planning of overheads: every kind of input and cost loading overheads is planned here: administrative and leading as well as management costs (labour cost), telephone, fax, photocopying, field-work, banking and booking cost etc. These items are represented totally on the sheet of the summery of the costs (A16).

Cost plan and cash flow planning: costs are summarized on A16 sheet in compliance with the cost types in pre-calculation relating to the whole sector, but the value of each cost type is detected per 1 dam as well.

In cash flow plan (A15 sheet) revenues and expenditures are summarized for each month and their balance is determined. This balance is positive in each month while in other months it is negative. The opening money stock is modified by the monthly balances and thus we get the monthly closing money stock. The closing stock of the month concerned corresponds to the opening money stock of the next month. The only thing that is important to us is that we can anticipate and plan our expenditures and provide funds. Arising liquidity troubles should be avoided in any period of the financial year.

The main important economic indicators are planned on A17 planning sheet, where the average costs are calculated as well. It is particularly highlighted that in case of the arising by-products average cost is not calculated.

The complete plan is prepared in the beginning of the financial year (January-February) and the change in livestock, yields and inputs are also planned within that. Meanwhile, the year continuously passes by planned data have to be changed by factual data as regards both the inputs and costs and the change in livestock, complying with the rolling planning. Thus approaching to the end of the year our plan continuously becomes more punctual and our factor of uncertainty is continually smaller.

Sensitivity analysis, evaluation in text: As the planning model is made on computer, thus there is opportunity for a complete sensitivity analysis of the model (A18 planning sheet). Within the scope of that, different economic situations can be simulated and then the model can be run again. After the program recalculates the results and indicators in the model, it presents its effect on the final sectorial net income. The generally applied economic situations are the following: (1) output price change; (2) input price change and (3) change in yield level. By use of planning model it is easy to prove that for example as an effect of 10% reduction in the price level of milk how the corporate net income will decrease, or for example what an increase in milk selling price can compensate a 20% increase in forage cost in a way that the level of profitability does not change. Plan should be evaluated in text after the quantitative completion of it. In this chapter different indicators of efficiency should be evaluated and bottle-necks also have to be detected.

2.4. 11.2.4. Planning of annual operation in crop sectorPlanning of crop sectors is similar to planning of livestock sector, thus certain planning sheets are corresponding. This part of the chapter calls attention only to differences, which particularly relate to the plan of cultivation technology. In this case cultivation technology is planned by N4 sheets. N2 sheet contains the general characteristics of the planned technology, i.e. it records the most important parameters of the technology and other features, for example soil type, previous cropping, artificial fertilizers to be used, irrigation method etc.

During the planning of the technology, a so-called unit technology for 1, 10 and 100 hectares can be applied, but the complete, i.e. the actual size of the area can be used. A technological flow chart is also worth being prepared in any way, which can demonstrate the course of each technological operation. In such a flow chart cell it is important to indicate the required (1) engine and machinery relation; (2) the possible labour-force demand of the operation; (3) the material demand of the operation beyond the machine operation (e.g. artificial fertilizer, sowing-seed, pesticides etc.) expressed in non-financial quantitative and in financial data. Subsequently N4B planning sheet can be prepared, where functional cost structure in conformity with operation costs is planned.

N4A sheets are also used for technological planning. In this case in each line, operations following each other in time should be indicated introducing the related engine and machinery relation. The quantity of required working hour should be also indicated in the case of both machinery and labour work. Direct material use



related to the operations also has to be recorded. The central element of this sheet is the required hours in case of each operation, thus by use of the planning sheet of auxiliary services there is basis for planning by cost types. Both planning methods should give the same result referring to the same area.

The remaining planning sheets should be filled in as it was introduced in the previous chapters. However, do not forget about dynamic planning, i.e. if a value has already recorded, calculated in a cell, then we have to consistently refer to that, as the primary place of the datum. It is necessary in order to carry out the aforementioned sensitivity analysis without any complication.

3. References:1. Introduction to WHOLE FARM PLANNING: Combining Family, Profit, and Environment, Minnesota

Institute for Sustainable Agriculture (MISA) Saint Paul, Minnesota: www.misa.umn.edu

2. R.D. KAY – W. M. EDWARDS – P.A. DUFFY (2008): Farm management (sixth edition), McGrow-Hill International Edition


12. fejezet - 12. Farm Business and Enterprise Analysis (Szőllősi, László)This chapter introduces types, methods, framework and tools of analysis, balance sheet analysis, measures of solvency and liquidity, income statement analysis, measures of profitability, cash flow analysis, measures of size, measures of efficiency, diagnosing a farm business problem and enterprise analysis.

What are the strengths and weaknesses of the farm business? How can we measure how well the farm is doing? Which farm would you prefer? These and same questions are raised upon during a business. Performing a complete business and enterprise analysis can give correct answers. This is part of the control function of management.

1. 12.1. Types, methods, framework and tools of analysisFarm business analysis may involve either the whole farm or a single enterprise. Whole-farm analysis considers business features that affect the entire business. It includes:

• Balance sheet analysis which shows changes in total assets, liabilities and net worth.

• Income statement analysis which shows changes in business receipts expenses and various accounting adjustments.

• Cash flow analysis which indicates the amount of founds entering and leaving the business.

• Ratio analysis which can reflect what is happening in the entire business.

Only a part of the business, typically a single enterprise (e.g. dairy herd, crop, horticultural), is considered in an enterprise analysis. During enterprise analysis more attention is given to specific items of cost or production. Moreover, comparisons with other similar enterprises are typically a part of this kind of analysis (Jenkins, 2001).

A farm business analysis can be divided into five areas of investigation:

• Profitability: Profitability is analyzed by comparing income and expenses. High net farm income is usually an important goal of the farm manager, though not necessarily the only one.

• Farm size: Not having adequate resources is often a cause for low profits. Growing too rapidly or exceeding the size that the operator can manage effectively can also reduce profits.

• Efficiency: Low profitability can often be traced to inefficient use of resources in one or more areas of the business. Both economic and physical efficiency measures should be examined.

• Financial: Financial analysis concentrates on the capital position of the business, including solvency, liquidity, and changes in owner's equity.

• Enterprise: The efficiency and profitability of each enterprise should be analyzed. Low profits in some enterprises may offset high profits in others (Kay et al., 2008).

We can group analysis processes according to objectives as well. There are differences between financial accounting, investor analysis and managerial economics. Every fields has own objectives contained a number of analysis processes. This thinking’s structure is showed by the Figure 9.1.

12.1. ábra - Figure 12.1: The different objectives of financial/economic analysis processes


12. Farm Business and Enterprise Analysis (Szőllősi, László)

Source: Helfert, 2001

Our business examination will use various ratios and indicators taken from the financial statements. The most useful function of these tools is to illustrate trends over time. One year's (or one time period’s) figures by themselves have limited use. A series of these figures over time shows where the business is heading and helps us make decisions to alter course (Blokland, 2003).

Several methods are available in completing a farm business analysis. These include comparative analysis, ratio analysis, and projected analysis (Jenkins, 2001).

Once a measure has been calculated, the problem becomes one of evaluating the result. Is the value good, bad, or average? Compared with what? Can it be improved? These questions emphasize the need to have some standards against which the measures and ratios can be compared. There are 3 basic standards to use in analysing farm business results:

• Budgets: measures are compared against budgeted goals or objected identified during planning.

• Comparative farms: measures are compared against actual results from similar farms.

• Historical trends: the manager looks for improvement over time (Kay et al., 2008).

Three questions can be used to outline the process of farm business analysis: Where are we? Where do we want to be? How do we get there? These questions indicate that a business analysis begins with a review of current conditions – the resources available to the business, the current operating plan, the existing financial condition, and the skills and management ability of the operator. The analysis process should begin with consideration of the business as a whole. Then it is helpful to become more specific and consider individual enterprises (Jenkins, 2001).

The tools of business analysis are composed of the financial records maintained for a farm business and the various documents that are developed from those records:

• Budgets,

• Balance sheet,

• Income statement,

• Cash flow summary.

2. 12.2. Diagnosing a farm business problem



A complete whole-farm business analysis can be carried out using a systematic procedure to identify the source of problem. Figure 9.2 illustrates a procedure that can make the process more efficient. Profitability is generally the first area of concern. Low net farm income or returns to management can have many causes. The farm may not be large enough to generate the level of production needed for an adequate income. Measures of farm size should be compared to those of other farms supporting the same number of operators. If the level of production is too low, it may be because not enough resources are employed. If farm size cannot be increased, then fixed costs such as machinery and building depreciation, interest, and general farm overhead costs should be evaluated carefully. If adequate resources are available but production levels are low, then resources are not being used efficiently. Computing several economic efficiency measures can identify areas of inefficient resource use. Poor economic efficiency may be due to low physical efficiency, low selling prices, and/or high input costs (Kay et al., 2008).

12.2. ábra - Figure 12.2: Diagnosing a farm business problem


Control is critical for the entire business as well as for individual enterprises. Three steps in the control function are: establishing standards for comparing results, measuring the actual performance of the business, and taking corrective action to improve the performance once problem areas have been identified.

Performance measurement is an important topic. It plays a significant role in evaluation and achievement of objectives. Performance measures are quantitative or qualitative ways to characterize and define performance. They provide a tool for farms to manage progress towards achieving predetermined goals, defining key indicators of performance. Helfert (2001) groups financial indicators by area and viewpoint (Figure 9.3).

12.3. ábra - Figure 12.3: Performance measures by area and viewpoint



Source: Helfert, 2001

3. 12.3. Balance sheet analysisA balance sheet is a systematic organization of everything “owned” and “owed” by a business. The “balance” in balance sheet means the following equations: Assets = liabilities + owner equity; Owner equity = assets liabilities. The balance sheet can be completed at any time, but most prepared at end of accounting period. It provides measures of solvency and liquidity (Kay et al., 2008).

The balance sheet analysis uses the following measures:

1. Liquidity measures:

• Current ratio;

• Working capital;

• Dept structure ratio;

• Quick ratio;

2. Solvency measures:

• Debt/asset ratio;

• Equity/asset ratio;

• Debt/equity ratio;

• Net capital ratio;

3. Other terms:

• Assets – Current / Noncurrent

• Liabilities – Current / Noncurrent

• Owner equity

• Asset valuation: cost-basis / market-basis



3.1. 12.3.1. LiquidityLiquidity measures the ability of the business to meet financial obligations as they come due without disrupting the normal operations of the business. Liquidity measures the ability to generate cash needed to pay obligations. Liquidity is generally measured over the next accounting period and is a short-run concept (Kay et al., 2008). There are four main indicators of liquidity: the current ratio, working capital, the debt structure ratio, and the quick ratio.

Current ratio

The ratio is calculated by dividing the current assets by the current liabilities.

As a general rule, two dollars of current assets to one dollar of current liabilities represents a strong ratio. If, for example, a business has a current ratio of 2:1, it means that there are two dollars of current assets covering every one dollar of current liabilities. Agricultural lenders generally like a current ratio of at least 2:1. A current ratio of 1.5 to 1 is good, 1 to 1 is weak, and <1 to 1 often results in cash flow problems. If the ratio is 1:1, then the firm is barely liquid, and if the ratio is less than this, the firm has liquidity problems. A business with a weak current ratio and cash flow problems should evaluate stretching principal payments over more years (Wiebe, 2002, Blokland, 2003).

Working capital

A second liquidity guide is working capital, that is, current assets minus current liabilities. Working capital shows what is available after meeting debts due. Obviously, we need a positive figure; otherwise the firm is illiquid. But the amount of working capital considered reasonable depends on the size and type of the individual firm (Blokland, 2003).

Current assets are cash or other assets that are expected to be realized in cash or consumed (feed etc.) in production during a business year. Current liabilities are those due and payable on demand or within the operating year. Commodity credit loans should be added to this section.

Debt structure ratio

A third liquidity guide, debt structure ratio, illustrates the debt structure of the firm. This ratio is calculated by dividing current liabilities by total liabilities. A ratio of 0.6 means that 60 percent of the total farm debt is due the following year. If total debt is small, there is nothing to worry about. But most farms have considerable debt loads, and a debt structure ratio of 0.6 shows that too much of the farm debt is current. In general, a ratio of 0.2 or less is safe, and 0.5 or more is dangerous (Blokland, 2003).

The debt structure ratio should be interpreted with care. It probably should be used only in association with other analysis variables to put it into perspective (Jenkins, 2001; Kay et al., 2008).

Quick ratio

Final liquidity ratio is the quick or acid test ratio. This essentially revamps the current ratio by taking out noncash current asset items, including inventory in crops, livestock and supplies, plus cash invested in growing crops, and dividing this numerator by current liabilities. The remaining assets are cash, marketable securities, and accounts receivable. If these assets are sufficient to cover all current liabilities, the farm is decidedly liquid.



However, on most farms which already have a healthy current ratio, a quick ratio around 0.5 is probably reasonable. A ratio of less than 0.3 usually means that the farmer has a lot of inventory and will have to take current market prices in any forced sale (Blokland, 2003).

3.2. 12.3.2. SolvencySolvency measures the liabilities of the business relative to the amount of owner equity invested in the business. It provides an indication of the ability to pay off all financial obligations or liabilities if all assets were sold. If assets are not greater than liabilities, the business is insolvent (Kay et al., 2008). It is a long-range concept. We have looked at the as a measure of solvency. Solvency ratios are expressed as follows: debt to assets ratio, equity to asset ratio, debt to equity ratio. Regardless of which ratio is chosen, they all speak to the same issue of the farm's ability to meet its total debt obligations (Wiebe, 2002).

Debt to asset ratio

The ratio is calculated by dividing the total liabilities by the total assets and is expressed as a percentage. Liabilities are all obligations that are owed as of the statement date. It shows the percentage of the assets that are financed by outside creditors. Is a measure of the business' ability to meet its total debt obligations, if all the assets were to be sold (Wiebe, 2002).

As a general rule, a farm business having under 25% of its assets financed is in a fairly strong position, while between 25% to 40% is moderate, and between 40% and 60% is in an increasingly weaker position. The higher the debt ratio, expressed as a percentage, the greater the financial risk as a result of the higher borrowing costs (Wiebe, 2002). Ratios higher than 65% are considered to be “weak”, with ratios less than 35% considered to be “strong”. A goal may be a debt to asset ratio below 60% even during a major expansion. It is also called the leverage ratio.

Equity to Asset Ratio

The ratio is calculated by dividing the owner equity by the total assets and is expressed as a percentage. The sum of debt-asset ratio and equity-asset ratio is 1.

Debt to Equity Ratio

The ratio is calculated by dividing the total liabilities by the owner equity and is expressed as a percentage.

Lenders prefer a debt-equity ratio of less than one. This indicates that the owner’s contribution is more than that of the lender. A financially healthy business will generally have a debt-equity ratio of 0.67 (67%) or less (Jenkins, 2001; Kay et al., 2008).

Net Capital Ratio



The ratio is calculated by dividing the total assets by the total liabilities. It is the reciprocal of the dept-asset ratio.

A business is solvent if the ratio is more than 1. However, a financially healthy business will have a net capital ratio of approximately 2.5 or more (Jenkins, 2001; Kay et al., 2008).

4. 12.4. Income statement, measures of profitabilityThe income statement is a summary of revenues and expenses as recorded over a period of time. This is the only tool of farm business analysis that measures profitability. By comparing profit and loss statements for several years, you can see trends in your business. If you use a profit and loss statement along with a balance sheet, you can calculate your return on investment. There are several measures of profitability:

• Net income;

• Rate of return on assets;

• Rate of return on equity;

• Operating profit margin ratio;

• Return to labour and management;

• Return to management.

The income statement starts with the net cash farm income that is simply the difference between total cash income and total cash expenses. Then it makes inventory adjustments, takes into account inventory changes of current assets and unpaid bills to determine net operating profit. Depreciation and other capital adjustments are made next to determine net farm income. This is where the cost of machinery, buildings and other assets with a life of more than one year gets accounted for. The net farm income provides the answer to the question of how much profit the farm has made (Jenkins, 2001; Kay et al., 2008).

Rate of return on assets (ROA)

It is known as the rate earned on capital investment. It is a measure of profitability, measuring the rate of return that the farm business earns on its average asset base over the period. The higher the return means the more profitable the farm business.

For rate of return on assets, ratios less than 4% are considered “weak”, while higher than 10% are considered to be “strong” (Betz et al., 2001; Wiebe, 2002; Kay et al., 2008).

To calculate this indicator the amount of return to assets need to be determined according to following:



The opportunity cost of unpaid labour is the estimated amount that any unpaid farm labour could have earned elsewhere. The opportunity cost of management is the estimated amount that the operator could have earned for that management time had it been used in paid work (Kay et al., 2008).

Rate of return on equity (ROE)

It is a measure of the return to the net worth (equity) in the business. The farm equity is the capital that could be invested elsewhere (if you were not farming), and so this analysis provides an interesting perspective to see just how good a return you are receiving on your investment in farming, as compared to other alternatives.

Source: Wiebe, 2002

Rate of return on equity should be higher than rate of return on assets, but ratios less than 6% are considered “weak”, while ratios higher than 12% are considered “strong” (Betz et al., 2001; Wiebe, 2002; Kay et al., 2008).

To calculate this indicator the amount of return on equity need to be determined according to following:

Comparing ROA and ROE we need to consider the following. If ROA > i then ROE > ROA; if ROA < i then ROE < ROA. “i” is the interest rate on borrowed capital. Thus, if ROA > ROE borrowed capital is earning, on average, less than the interest rate. If ROA < ROE, borrowed capital is earning, on average, more than the interest rate (Kay et al., 2008).

Operating profit margin ratio

This ratio essentially shows the return to the family's management and farm capital for every dollar of farm production (Blokland, 2003).

Operating profit margin ratios less than 10% are considered “weak”, while ratios higher than 20% are considered “strong” (Betz et al., 2001; Kay et al., 2008).

To calculate this indicator the amount of operating profit need to be determined according to following:

Return to labour and management



Retum to labour and management is a dollar amount that represents the part of net farm income from operations that remains to pay for operator labour and management after all capital (total asset value) is paid a return equal to its opportunity cost (Kay et al., 2008). It is computed as follows:

To find the opportunity cost of capital, multiply the opportunity interest rate (e.g. what the capital could earn elsewhere) times the average total asset value.

Return to labour and management is deducted by the opportunity cost of capital, we get the amount of return to labour. Return to management can be computed by the same way, but opportunity cost of labour should be deducted.

5. 12.5. Cash flow analysisA cash flow budget is a summary of the projected cash inflows and outflows for a business over a period of time. The time period is usually a future accounting period and is divided into quarters or months. As a forward planning tool, its primary purpose is to estimate the amount and timing of future borrowing needs and the ability of the business to repay loans. This statement is organized around five broad categories: operating, for example cash farm income and expenses; investing, for example capital assets; financing, for example loans and repayments; nonfarm items; and a balancing section for cash on hand. Noncash transactions, even though they affect farm profit or net worth, are not included in a statement of cash flows (Kay et al., 2008).

6. 12.6. Measures of sizeAn income or profitability problem can exist in any single year due to low selling prices or law crop yields. If the problem persists even in years with above-average prices and yields, it may be caused by insufficient farm size. For example common measures of farm size are: quantity of sales, total or gross revenue, value of farm production, total farm assets, total area (ha) farmed, livestock numbers and total labour used. Some measures of farm size are measures of production (such as sales, gross revenue, and value of farm production), others (such as land area, value of total assets, labour employed, and number of breeding livestock owned) measure the quantity of resources used (Kay et al., 2008).

7. 12.7. Measures of efficiencyEfficiency guides basically measure the relationship between inputs and outputs (Blokland, 2003). Efficiency indicators can be measured by collating input and output. More poignantly, efficiency is the random combination quotient of output and input. Efficiency indicators can be subsumed into three main groups on corporate level:

1. Based on derived data:

• Physical efficiency;

• Economic efficiency;

2. Based on relations or origins (Input/Output):

• Productivity;

• Intensity;



• Endowment;

• Output-proportionality;

3. Based on input types:

• Average efficiency;

• Additional efficiency;

• Marginal efficiency (Nábrádi et al., 2009).

Basically, there are two main categories of efficiency on the grounds of derived data. The first is physical efficiency and the second is economic one. We use the term of physical efficiency if in input-output relations both input and output are measures expressed in physical dimension. In the SI system: mass (e.g. kg), distance (e.g. m), area (e.g. m²), capacity (e.g. Kw) etc. If any of the elements (input-output) are expressed in money value, economic or business efficiency is mentioned. Its measurement unit reflects the economic notion by including money value (e.g. €/kg, €/m²), or their reciprocals. The mostly used indicator groups can be calculated on the grounds of relations. The first group of indicators is too general, the third is in-plant one (field register, log of animal feed etc.). Relation-based classification is used when the existence and measurability of several input-output relations are discussed on corporate level (Nábrádi et al., 2009).

A realistic reflection of relations suggests that a certain input in the resource need of a company is the part of another input, therefore efficiency indicators can also be generated from input/input relations. This correlation can be found on the output side as well. A certain corporate output is the part of another output; consequently, output/output relations can generate efficiency indicators (Nábrádi et al., 2009).

According to relations of any input and output category there are four different groups of efficiency indicators, where input and output can be expressed in physical and money dimension:

• Indicators of endowment, which are the quotients of input/input,

• Indicators of intensity, which are the quotients of input/output results,

• Indicators of productivity, which are the quotients of output/input,

• Output-proportionality indicators, which are the quotients of output/output values (Nábrádi et al., 2009).

Figure 9.4 illustrates the system of efficiency indicators created by Nemessályi (2000). These indicators can be used mainly in enterprise analysis.

12.4. ábra - Figure 12.4: Index system of economy efficiency



Source: Nábrádi et al., 2009

If we examine the output change achieved through the input surplus as compared to the previous input level, we get the additional efficiency index. With respect to the output change caused by the last unit of input change, we can form the marginal efficiency indicator (Nábrádi et al., 2009). These are shown by a comprehensive table in Figure 9.5.

12.5. ábra - Figure 12.5: Classification of efficiency by manner of input

Source: Nábrádi et al., 2009

8. 12.8. Enterprise analysisA profitability analysis done for a whole farm may indicate a problem, but the source of the problem is often difficult to find if there are many enterprises. Enterprise analysis can identify the less profitable enterprises. An enterprise analysis consists of allocating all income and expenses among the individual enterprises being carried out. Manual farm accounting systems often use a separate column for each enterprise. Computer systems assign enterprise code numbers entered with each transaction. The result is similar to an income statement for each enterprise, showing its gross revenue, expenses, and net income. Data gathered during an enterprise analysis are



extremely useful in developing enterprise budgets for future years. They can also be used to calculate the total cost of production, which is helpful for making marketing decisions. Some analyses compute a cash flow break-even cost, which is useful for financial management, as well as an economic break-even cost (Kay et al., 2008).

9. 12.9. SummaryFarm business analysis is the process of retrieving, organizing, processing, and comparing financial information from a farm business. The process is directed at providing the manager the information needed to make decisions regarding organization and operation of the farm business. A farm business analysis may involve the whole farm or one enterprise. The analysis may be completed using comparative analysis, ratio analysis, or projected analysis. The latter is typically used with cash flow or the income statement as an estimate of future business performance.

10. References1. Betz, R. – Staton, M. – Knuth, J. – Schwab, G. – Nott, S. (2001): Swine Farm Business Analysis Workbook.

Staff Paper 2001-15 Department of Agricultural Economics Michigan State University, East Lansing, Michigan. https://www.msu.edu/~steind/Workbook_Buss_Alal_wkb_Swine.pdf

2. Blokland, P.J. van. (2003): Introducing Farm Business Analysis. Circular 655. Department of Food and Resource Economics, Florida Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida. http://edis.ifas.ufl.edu/pdffiles/fe/fe01000.pdf

3. Helfert, E.R. (2001): Financial Analysis: Tools and Techniques, A Guide for Managers. McGraw-Hill.

4. Jenkins, L.C. (2001): Farm Business Analysis: Key to Pennsylvania Farm Profitability. College of Agricultural Sciences Cooperative Extension. Extension Circular 375. http://pubs.cas.psu.edu/freepubs/pdfs/ec375.pdf, File No. IVE1m R2.5M296ps.

5. Kay, R.D. – Edwards, W.M. – Duffy, P.A. (2008): Farm Management. 6th ed. McGraw-Hill.

6. Nábrádi, A. – Pető, K. – Balogh, V. – Szabó, E. – Bartha, A. – Kovács, K. (2009): Efficiency indicators in different dimension. In.: APSTRACT. Volume 3, Numbers 1-2, 2009. 7-23. p.

7. Nemessályi, Zs. (2000): A gazdálkodás elemzése. In.: Mezőgazdasági üzemtan I. (Ed.: Buzás Gy. – Nemessályi Zs. – Székely Cs.) Mezőgazdasági Szaktudás Kiadó. Budapest, 329-339. p.

8. Wiebe, I. (2002): Analyzing a Farm Business. Manitoba Agriculture and Food. Farm Management. http://www.gov.mb.ca/agriculture/financial/farm/pdf/farmplananalyzingafarmbusiness.pdf

11. Questions1. Introduce types of analysis!

2. Introduce methods of analysis!

3. Introduce tools of analysis!

4. Introduce measures of solvency!

5. Introduce measures of liquidity!

6. Introduce measures of profitability!

7. Introduce measures of efficiency!

8. What is the difference between farm and enterprise analysis?


13. fejezet - 13. Competitiveness and sustainability in agriculture, the economic questions of the agro-environmental management (Andrea Bauer Gáthy)1. Global “Environmental” ProblemsThere is no global challenge facing humanity that is more important than managing the earth’s environment to assure that it can sustain life in all its forms. The ecological balance on which current and future generations depend can only be preserved through food chains that balance energy and nutrient flows. The challenge is to balance the competing demands of different users of the same resources and of managing the resources to optimize the benefits to be derived on a sustainable basis.

World population continues to grow and is predicted to reach about nine billion in 2050. The demand for agricultural and food industry product will continue to grow, needing to double the production by 2050, driven by population growth and changing food habits. (figure 1)

FAO estimates that „the future may see some drastic decline in the growth off aggregate world production, to 1.5 percent p.a. in the next three decades and on to 0.9 percent p.a. in the subsequent 20 years to 2050.” (FAO - COAG, 2007)

Over the past 50 years, humans have changed ecosystems more rapidly and extensively than in any comparable period of time in human history. Between 1960 and 2000, the demand for ecosystem services grew significantly as the world population doubled to 6 billion people and the global economy increased more than six fold. To meet these growing demands, food production increased by roughly two-and-a half times, water use doubled, wood harvests for pulp and paper production tripled and timber production increased by more than half. (FAO - COAG, 2007)

13.1. ábra - Figure 1: Global trends


13. Competitiveness and sustainability in agriculture, the economic questions of the agro-

environmental management (Andrea Bauer Gáthy)

(Source: Meadows et. al., 1972)

Agriculture is an essential component of societal well-being. It occupies 40 percent of the land surface, consumes 70 percent of global water resources and manages biodiversity at genetic, species and ecosystem levels. (FAO - COAG, 2007)

At every point of production, agriculture influences and is influenced by ecosystems, biodiversity, climate and the economy, including energy trade. Modern agriculture is a fossil fuel energy-intensive industry and its development is tightly ulinked to energy factors. Just as the successes in agriculture production over the last half decade are heralded, the inequitable benefits and unsustainable impacts on natural resources are becoming more evident.

1. Global climate change

• Greenhouse gases

• Ozone depletion

2. International air pollution

• Acid rain

3. Local air pollution

• Traffic pollution

• Factory emissions

• Smogs

4. Water pollution and water scarcity

• Nitrate spillovers

• Intensive agriculture

• Population conglomeration




5. Others

• Loss of biodiversity

• Irreversible eco-system change

• Soil fertility losses

• Accumulation of toxins in various media

Just as hunger and poverty heighten vulnerability and instability to the detriment of all, the acceleration of environmental degradation and climate change have direct effects on agricultural productivity and food security. (FAO - COAG, 2007)

2. Main Environmental Impacts of AgricultureBased on FAO data, world food production, measured as the sum of cereals, coarse grains and root crops, almost doubled from 1961 to 1996. Linear regressions, and 95% and 99% confidence intervals for the regression, are shown. (Figure 2)

13.2. ábra - Figure 2: Historical trends of food production 1960-2000

Source: http://www.pnas.org/content/96/11/5995.full#F2

Many factors contributed to the recent doubling of world food production. The development of higher-yielding strains of crops and better agricultural practices were important, as were increased use of herbicides for weed control and insecticides and fungicides for pest control.

In addition, there were marked increases in the amounts of nitrogen and phosphorus fertilizers applied each year worldwide, in the proportion of arable land that was irrigated, and in the total amount of land that was cultivated annually worldwide. (Tilman, 1999)





The global rate of application of nitrogen fertilizer (A) increase from about 75 × 106 metric tons per year to 235 × 106 metric tons per year. Nitrogen fixed by legume crops also would need to more than triple.


The global annual rate of application of phosphorus fertilizer (B) would have to increase from about 37 × 106 metric tons per year to 94 × 106 metric tons per year for food production to double. (Tilman, 1999)





The worldwide proportion of arable lands (C) that are irrigated would have to increase from the current 17% to about 32%.


The total amount of land in cultivation (D) would have to increase from about 1.47 × 109 hectares to 1.73 × 109 hectares. This change represents an 18% increase in the amount of land farmed. (Tilman, 1999)

3. Sustainability versus CompetitivenessFirstly we have to define shortly what the sustainability is and what the competitiveness is.

Sustainability is „The ability of humanity to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.” (World Commission on Environment and Development’s (the Brundtland Commission) Report „Our Common Future”, 1987). It was the first definition of sustainable development in 1987, but today we also have to talk about the differences between weak and hard sustainability.

13.3. ábra - Figure 3: Weak Sustainability v. Hard Sustainability

Weak sustainability is the prevailing approach to sustainability in the industrialized world. (Figure 3) It allows for the continuation of current trends by placing growth ahead of development. It allows the substitution between the pillars. Strong or hard sustainability does not make allowances for the substitution of human and human-made capital for natural capital. The products created by mankind cannot replace the natural capital




found in ecosystems.

Competitiveness can be defined as the ability to produce and sell products that meet demand requirements (price, quality and quantity) and, at the same time, ensure profits over time that enables the firm to thrive. Productivity and efficiency are often cited as indicators or measures of competitiveness. A general definition of productivity is the ability of production factors to produce the output. (Latruffe, L., 2010)

And secondly we try to analyze what might be done to decrease the environmental impacts of agriculture while maintaining or improving its productivity, stability, or sustainability? Partial answers will come from increases in the precision and efficiency of nutrient and pesticide use, from advances in crop genetics including advances from biotechnology, and from a variety of engineering solutions.

4. Eco-efficiency of agricultureEco-efficiency in the simplest of terms is about achieving more with less—more agricultural outputs, in terms of quantity and quality, for less input of land, water, nutrients, energy, labour, or capital. The concept of eco-efficiency encompasses both the ecological and economic dimensions of sustainable agriculture. Social and institutional dimensions of sustainability, while not explicitly captured in eco-efficiency measures, remain critical barriers and opportunities on the pathway toward more eco-efficient agriculture.

If efficiency is simply the level of output per unit of input, “eco-efficiency” targets this simple notion toward the production of food and fiber products relative to the ecological resources used as inputs, mainly land, water, nutrients, energy, or biological diversity. Such focus should not be considered in isolation of the critical human and economic dimensions of labour and capital nor ignoring outputs such as environmental loads on wider ecosystems – nutrient, salt, acid, or sediment losses to terrestrial, aquatic, or marine ecosystems, greenhouse gas emissions to the atmosphere – or other ecosystem services that might be positively or negatively influenced by agricultural practice. (Keating, 2010)

5. Economic questions of the agro-environmental management – ExternalityExternality

A consequence of the economic activity that is experienced by unrelated third parties, that is not reflected in the price of the goods or services being produced. An externality can be either positive or negative. An example of a negative externality is pollution emitted by a factory that spoils the surrounding environment and affects the health of nearby residents. An example of a positive externality is the effect of a well-educated labour force on the productivity of a company.

The Socially Optimal Resource Use Levels:

MSC=MSB

Marginal Social Cost (MSC)

The total cost to society as a whole for producing one further unit, or taking one further action, in an economy. This total cost of producing one extra unit of something is not simply the direct cost borne by the producer, but also must include the costs to the external environment and other stakeholders. For example: take the case of a coal plant polluting a local river. If the coal plant's marginal social costs are more than its marginal private costs, the Marginal External Cost (MEC) must be positive (and therefore resulting in a negative externality, or effect on the environment.) The cost of the produced energy is more than just the rate charged by the company, as society must bear the costs of a polluted river and the effects of that action.

Marginal Social Benefit (MSB)

Marginal social benefit is equal to the private marginal benefit a good provides plus any external benefits it creates. In other words, MSB gives the total marginal benefit of the good to society as a whole. For example: suppose a company is thinking about buying and redeveloping part of an old abandoned industrial site near the




centre of a city. Such areas are called "brownfields" and are a big problem for many cities because they are unsightly and may be polluted. Redeveloping them often produces big external benefits.

6. Socially Optimal Pollution LevelsFirstly we could think that the zero pollution is the optimal pollution level, but it could not carry out in our world. From an economic perspective the socially optimal level of pollution occurs when the marginal benefit of the last unit of pollution exactly equals the marginal cost of pollution. At this level the net benefits to society are maximized. If all of the externalities of pollution are accounted for, the resulting level of pollution will be optimal.

7. Mechanisms to achieve pollution reductionRegulatory and Incentive-based Policies:

• Emission Charges

Emission Charges are prices established for the right to emit a unit of a pollutant. Advantage: Directly internalizes a negative externality by pricing the use of the environment to dispose of waste. For example: In




the United Sates industrial polluters pay effluent fees for the right to dump waste in municipal water treatment plants.

• Emission Standards I.

Limits established by government on the annual amounts and kinds of pollutants that can be emitted into the air or water by producers or users of certain products. Disadvantages: Allow emission of less than the standard free of charge; Firms are restricted in the method of compliance; Does not take into account differences among firms; Does not take into account differences among regions

• Emission Standards II.

For example: EPA places limits on the number of grams/mile of hydrocarbons, nitrogen dioxide and carbon monoxide emitted per automobile. The automobile industry satisfies these standards by equipping cars with catalytic converters. In turn, this device raises the cost of cars.

• Emission Offsets

EPA policy which allows a new firm to be established in an area where additional polluting emissions resulting from the firm's operations normally would prevent the firm from being approved by EPA. Under this policy the new firm, before it is approved, most induce other firms in the area to reduce emissions usually through a cash payment.

• The Bubble

Environmental Protection Agency policy which allows a firm to exceed the amount of emission of a pollutant, if it reduces another pollutant by more than the current standard. This policy has been named the bubble because it places a virtual enclosure over the firm to monitor various types of emissions.

8. References1. FAO Committee on Agriculture (COAG): Environment and Agriculture, Twentieth Session Item 6 of the

Provisional Agenda Rome, 25 - 28 April 2007

2. Kay, R. D. –. Edwards, W. M –Duffy, P. A.: Farm management, 6th edition, 2008, The McGraw-Hill Companies, ISBN: 978-0-07-302829-3

3. Keating, B. A.– Carberry, P. S. –Bindraban, P. S. –Asseng, S.– Meinke, H. –Dixon, J. (2010): Eco-effi cient Agriculture: Concepts, Challenges, and Opportunities, CROP SCIENCE, VOL. 50, MARCH–APRIL 2010

4. Latruffe, L. (2010): “Competitiveness, Productivity and Efficiency in the Agricultural and Agri-Food Sectors”, OECD Food, Agriculture and Fisheries Papers, No. 30, OECD Publishing. http://dx.doi.org/10.1787/5km91nkdt6d6-en

5. Meadows, D.H.– Meadows, D.L. –Randers, J.– Behrens III, W.W. (1972): The limits to growth, New York, New American Library, 1972

6. Tietenberg, T.: Environmental Economics and Policy, Fourth Edition, Pearson, 2005. ISBN: 0321194128

7. Tilman, D.: Global environmental impacts of agricultural expansion: The need for sustainable and efficient practices, PNAS, vol. 96, no. 11., 1999


14. fejezet - 14. Economic and methodological aspects of the crop production structure (Lajos Nagy)1. Features of crop productionCrop production usually consists of more enterprises, among which there are differences in

• their products’ market perception,

• production technology,

• resource-demand,

• time-scattering, in their time and need for field,

• agronomical interactions,

• the level of expenditures and profitability.

Crop production is a complex business, requiring many skills (such as biology, agronomy, mechanics, and marketing) and covering a variety of operations throughout the year.

The crop structure represents the production structure.

The crop structure is defined by:

• the market, the demand for the product

• the amount and the composition of the corporate resources

• the profitability of each sector.

The arable land is a shared resource in crop production, which requires all the plant. The features of arable land are the quality, the geographical location and the climate and natural conditions resulting from its immobility. The additional resources are the labour, the machines, the working capital and the fixed assets (barns, storage facilities, etc.) The properties of the first three: these are not closely tied to the production area; their capacity can be changed and available for transfer. Immobility is a characteristic of fixed assets and that their capacity can be varied with difficulties.

Demand for the products is influenced by the internal needs and the sales opportunities and relations. There is a competition between the sectors for economic resources under the conditions set by the market. The profitability of the sector is the decisive criterion for remaining in the competition (this is the objective function of the model).

Production site conditions have an impact on the market, the sector's profitability, the size of the sector, the crop rotation, the economic value of the species and the risk. Standard of asset supply affects the uncertainty (higher asset supply associated with less risk) and the sector’s size (Figure 1).

The competition for the current assets, labour, arable land and the machines creates a very strong horizontal relationship. The vertical structure means the hierarchical structure of the technological operations. The strength of the horizontal structure between sectors depends on the demand for the machines. Two groups can be distinguished, depending on whether how many sectors and operations may use the machines. The horizontal machine system can be used for various operations in one or more sectors. These are known as universal machines. A vertical machine system can typically be used in a sector for one or more operations. These are so called specialized machines. For example, sugar beet machine line, potato harvester.


14. Economic and methodological aspects of the crop production

structure (Lajos Nagy)14.1. ábra - Figure 1: Economic context of crop structure planning

Source: Own development based on ERTSEY, 1986

The machine system is more universal, the horizontal relationship is getting stronger between the sectors who request it. The sectors require different volume of time and capacity of the system. If demands of the sectors occur at the same time, this sector association (structure) increases demand for the machine, and if demands of the sectors occur at different times, the sector association reduces the system requirement and improves the machine utilization (Figure 2).

These economic impacts of relationships characterized by significant and well the linear programming model. Mathematical programming is one of the most important ranges of tools for optimizing problems. Its most simple case is linear programming (LP), where a convex set is determined with the help of limiting conditions and then with the help of a hyperplane stated in an objective (parametric) function the point is found where the value of the objective function is extreme (minimum or maximum). The simplex algorithm was developed by Dantzig in 1947 to solve linear programming problems. Due to its efficiency and systems approach the method quickly gained ground and making decision-making. The application of linear programming in making plans was wide-spread right from the beginning.

14.2. ábra - Figure 2: Crop production system model



structure (Lajos Nagy)


STIGLER’S (1945) LP model for solving dietary problems was a first one and it has also been solved with the help of a computer. BÁLINTFY (1976) applied integer-valued programming for the weekly or monthly planning of menu-like catering at different institutions. A peculiar area of application is the LP model used for solving work-organization problems. Modelling appropriation of funds has been a task that several people have been dealing with (WEINGARTNER, 1963; MYERS – POGUE, 1974). NEAVE – WIGINTON in 1981 used short-term financial models in decision-making. Dynamic (multi-periodic) simultaneous or recursive LP models can be used for long-term planning (ROBICHEK et al., 1965; WAGNER, 1975; LANZENAUER et al., 1987; ROHN, 1987). One of the most frequent solution tools for shuffling problems is linear programming (GARVIN et al., 1957; GLASSEY – GUPTA, 1975). And last but not least mention has to be made of the use of linear programming in production models.

Mathematical programming quickly gained ground in agriculture as well. HEADY’s (1957); HEADY – CANDLER’s (1958) research results appeared from the second half of the 1950s. KREKÓ’s (1965, 1966, 1972) works were methodological funding ones in Hungary. As regards its application in agriculture highly important research was conducted by TÓTH (1969, 1973, 1981), ERTSEY (1974, 1986), ERTSEY-KÁRPÁTI (1981), ERTSEY-TÓTH (1985), who had excellent results in feed utilization, feed production, and optimizing complex business plans, crop production technologies and automating business planning. CSÁKI – VARGA (1976) dealt with optimizing business machine stocks and the further development of dynamic and stochastic models. CSÁKI – MESZÁROS (1981) were the editors of the first volume on operations research in Hungary, which was written for application in agriculture.

By the 1980s there was established in Hungary scientific background that supported optimized production as well as a technical advice system (e.g., CADMAS that worked together with Debrecen Agricultural University) and the well-trained specialists who worked in the large-scale farms of the time were willing and able to think in models. At this time everything pointed in the direction of quick changes following the explosion-like developments in informatics. The change of the regimes and the fragmentation of land property that accompanied privatization and the widening of circle of inexperienced farmers working on small- and medium-sized farms – often in juridical insecurity - however, the market for the models described above and the related systems dwindled and so the Hungarian agriculture could not make use of their inherent potentials.

In opposition to the conditions in Hungary, in the developed countries on the 1990s PC-based application, decision-support modules began spreading rapidly, part of which used production structure optimization based on linear programming models or models based on multi-purpose programming. HARDAKER et al., (1997,



structure (Lajos Nagy)2004) presented a wide range of managing risks in agriculture. Silsoe Whole Farm Model software-kit developed by Silsoe Research Institute, IACR-Rothamsted, ADAS and Morley Research Centre appeared on the market in 2001-2002. The development of models based on linear programming and multi-purpose programming was conducted by AUDSLEY et al. (2001).

2. Work planning phasesThe crop production planning consists of several steps (Figure 12).

• Assessment of the situation: In this step, we analyze the market conditions, the quantity and quality of available resources. We define what kind of producable and marketable plants are there. We look at the expenses, income conditions and the sector's profitability. We analyze the macro-economic environment and the expected economy changes. In essence: This is the professional description of the system, making a verbal model.

• Concept design: It represents the main concepts of the framework for future action. We formulate the model variables. We give the yield and input (expenses) variations. We define the market constraints and objective function of the model. We have to formulate the economic substance of the objective function. That is the decision criterion.

• Technology planning: We design the technology of each variable of the model. We must specify the exact base of composition of the model. The realism of the model largely depends on the reliability of the data.

• Model construction: In this step, we compile the LP model. This is a static, one-year, a deterministic model.

14.3. ábra - Figure 3: Work planning phases


• Model solution, creating variants:

• In general principle is that the minimum number of constraints to be specified. Thus, the range of possible production programs does not fall too far.



structure (Lajos Nagy)• Always just one more constraint should be incorporated into a new version. So we can examine its impact

on the system as a whole.

• We should always make and compare a lot of variants because it helps us in the development of an optimal production structure. The model solution will be accepted only with reservations. The reason is that the model realism - having regard to the complexity of the economic system - is questionable.

• Analysis of the results of the versions gives a framework for systematic technical analysis which helps in identifying the relationships.

• Analysis and selection of the final version

• Analysis of the variants, sensitivity analysis

• The decision does not necessarily coincide with any version. The decision is a subjective management decision.

• The LP model helps to enhance the objectivity of the decision. Important feature of the analysis is the system approach and it takes into consideration the principles of rational management

The different versions can help the decision makers to select the best plan. After the decision, detailed plans are made for all sectors.

3. Construction of the model3.1. Defining the decision variablesThe basic decision faced by the management of a farm how many hectares of wheat (corn, sunflower etc) to sow

• xj: jth plant (the product will be sold) Unit:100 ha

• xjt: jth fodder plant (the product will be used in animal husbandry)

• We plan only costs

• We plan the produced quantity of nutrients

• Unit: 100 ha

• xjtv: Fodder buying

• Technology plan not needed, they are simple activities

• unit: 1 ton

• β: Labour

• seasonal labour needs; unit: 1 person or 1 hour

• δbh: Investment

• investment in hth machine type

• Unit: number of machines

• Hi: Credit variable

• the amount of credit in the ith period

3.2. Defining the constraints• Constraints of arable land




• Nutrient quantity constraints

• Feed quantity limits

• Constraints of labour




• Constraints for machines

We build the constraints by periods, machine types and by machine categories into the model. We do this usually by months or decades.

• Constraints for investment

• Working capital requirement




• Constraints for borrowing

3.3. Defining the objective functionThe management wants to maximize the income. There are a lot of income categories. You should choose the contribution margin in an LP model. A company's contribution margin is the amount the company has to cover fixed costs after all variable costs are paid from sales revenue. The formula is Sales per Unit minus Variable Expenses per Unit.

4. Implemeting the modelOne approach to implementing the crop production model is shown in Figure 13.

The variables can be seen in the columns. An individual name means a group. For example: Plants (for sale) can be wheat, corn, barley, etc. Of course, the wheat, the barley and the others ones can be also feed crops. The technology and the resource-demand are the same, but the goals of the production are different, so they must be in two groups. The plants (for sale and for animals) are the production variables. The others are the resource variables. It is important to tell them apart, because we calculate only the plus quantities of the resource variables on the model.

14.4. ábra - Figure 4. LP model schema for crop production planning and analyzing




Source: Own development

The model does not include animal husbandry sales revenues, only animal husbandry feed needs. However, the objective function includes the contribution margin of plants for sale, the cost of animal feed and other additional resources. We do not calculate with the animal husbandry revenue, because this revenue is fixed.

5. SummaryCrop production is a complex business, requiring many skills (such as biology, agronomy, mechanics, and marketing) and covering a variety of operations throughout the year.

The crop structure represents the production structure. The crop structure is defined by the market, by the demand for the product, by the amount and the composition of the corporate resources, by the profitability of each sector.

The arable land is a shared resource in crop production, which requires all the plant. The features of arable land are the quality, the geographical location and the climate and natural conditions resulting from its immobility. The additional resources are the labour, the machines, the working capital and the fixed assets.

There is a competition between the sectors for economic resources under the conditions set by the market. The profitability of the sector is the decisive criterion for remaining in the competition. The competition for the current assets, labour, arable land and the machines creates a very strong horizontal relationship. The vertical structure means the hierarchical structure of the technological operations. The economic impacts of relationships characterized by significant and well the linear programming model.

The crop production planning consists of several steps:

• Assessment of the situation

• Concept design

• Technology planning

• Model construction

• Model solution, creating variants

• Analysis and selection of the final version

First step is the defining the decision variables during construction of the model. The most important variables are the plants produced. The flexible resources (labour, machines, working capital) can be also variables.



structure (Lajos Nagy)The resources are available in limited quantity. We must define these limits: constraints for arable land, nutrient quantity, feed quantity, labour, machines, investment, working capital and borrowing. Our goal to maximize the contribution margin, this is the objective function.

6. ReferencesAudsley E. (2001) Agricultural mechanisation and automation: Expenditures and returns. UNESCO Encyclopedia of Life Support Systems http://www.cranfield.ac.uk/sas/naturalresources/research/projects/silsoewholefarmmodel.jsp (2004.09.12.)

Bálintfy J. (1976): A mathematical programming system for food management applications. Interfaces 6 no.1, pt.2; p.13-31.

Csáki Cs. – Mészáros S. (1981): Operációkutatási módszerek alkalmazása a mezőgazdaságban. Mezőgazdasági Kiadó, Budapest

Csáki Cs. – Varga Gy. (1976): Vállaltfejlesztési tervek lineáris dinamikus modellje. Akadémiai kiadó, Budapest

Ertsey I. (1974): A lineáris programozás alkalmazása a termelőszövetkezetek távlati fejlesztési tervének készítésében. Doktori értekezés kézirat. Debreceni Agrártudományi Egyetem, 134.p.

Ertsey I. (1986): Some methodological problems of modelling crop production. Bulletin for Applied Mathematics XLIII. köt.

Ertsey I. – Kárpáti L. (1981): Növénytermesztési ágazatok számítógépes interaktív tervezési-elemzési rendszere. XI. Magyar Operációkutatási Konferencia előadás-kivonatai. Miskolc.

Ertsey I. – Tóth J. (1985): The application of an automated technological planning system and linear programming in the foundation of decisions relating to the utilization of machines. Bulletin for Applied Mathematics XXXVIII. köt.

Garvin W. W. – Crandall H. W. – John J. B. – Spellman R. A. (1957): Applications of linear programming in the oil industry. Management Sciences 3 p.407-430.

Glassey R. – Gupta V. (1975): An LP analysis of paper recycling. In: Studies linear programming. Ed.: SALKIN H. – SAHA J. New York: North-Holland

Hardaker J.B. – Huirne R.B.M. – Anderson J.R. (1997): Coping with Risk in Agriculture. CAB International, Wallingford p. xi + 274.

Hardaker J.B. – Richardson J. W. – Lien G. – Schumann K. D. (2004): Stochastic Efficiency Analysis with Risk Aversion Bounds: a Simplified Approach. Australian Journal of Agricultural Economics p. 253-270.

Heady E. O. – Candler W. (1958): Linear programming methods. Iowa States University Press, Ames

Krekó B. (1965): Mátrixszámítás. Közgazdasági és Jogi Könyvkiadó, Budapest

Krekó B. (1966): Lineáris programozás. Közgazdasági és Jogi Könyvkiadó, Budapest

Krekó B. (1972): Optimumszámítás. Közgazdasági és Jogi Könyvkiadó, Budapest

Lanzenauer C. H. – Harbauer E. – Johnston B. – Shuttleworth D. H. (1987): RRSP Flood: LP to the rescue. Interfaces 17 no.4 p.27-41.

Myers S. – Pogue C. (1974): A programming approach to corporate financial management. Journal of Finance 29 p.579-599.

Neave E. – Wiginton J. (1981): Financial management: Theory and Strategies. Englewood Cliffs, N.J.: Prentice Hall

Robichek A.A. – Teichroew D. – Jones J.M. (1965): Optimal short-term financing decisions. Management Sciences 12. p.1-36.



structure (Lajos Nagy)Rohn E. (1987): A new LP approach to bond portfolio management. Journal of Financial and Quantitative Analysis 22. p.439-467.

Stigler G. (1945): The cost of subsistence. Journal of Farm Economics 27. p. 303-314.

Tóth J. (1969): A takarmánygazdálkodás matematikai tervezése. Akadémiai Kiadó, Budapest 165 p.

Tóth J. (1973): A termelési tényezők felhasználásának optimalizálása a mezőgazdaságban. Közgazdasági és Jogi Könyvkiadó, Budapest 232. p.

Tóth J. (1981): Mezőgazdasági vállalatok automatizált tervezése, Mezőgazdasági kiadó, Budapest 240. p.

Wagner H. (1975): Principles of operations research 2d ed. Englewood Cliffs, N.J.: Prentice Hall 937 p.

Weingartner H. (1963): Mathematical programming and the analysis of capital budgeting. Englewood Cliffs, N.J.: Prentice Hall


15. fejezet - 15. Economics of agricultural inputs (horizontal activities of farming) (Attila Bai)From 1960 to present, the human population has more than doubled to reach 7 billion people. In 2050, the population is projected to increase by 30 % to about 9.2 billion. Due to increasing global population and changing diets in developing countries towards meat and milk products, demand for food production is projected to increase by 70 % (FAO 2009).

Global economy has passed through considerable turm oil in the recent years, from spike in commodity prices followed by deep recession. Besides other sectors, agriculture has experienced a number of shocks including, high energy prices, high input prices, food security concerns and deep recession (FAO, 2012). In spite of these reasons the amount of utilized chemicals has been continuously grown and represents a significant part of the global economy (Table 1).

15.1. ábra - Table 1: Use of chemicals in some countries and areas

1. 1. Plant protectionGlobally, an average of 35% of crop yields is lost to pre-harvest pests. In some developing countries pre-harvest losses can go as high as 70%. The conservation of fertile soils, the development of high-yielding varieties and the reduction of current yield losses caused by pests, pathogens, and weeds are major challenges to agricultural production Whilst technology will undoubtedly hold many of the keys to long term global food security, the development and testing of new varieties or techniques takes time. The insects, weeds and microbial pests cause the most problems but research, education and training can play a key role in helping the world lose less after harvest along the food chain (Nábrádi-Popp, 2012).

Globally, agricultural producers apply around USD 40 billion worth of pesticides per annum. The market share of biopesticides is only 2 % of the global crop-protection market (McDougall 2010). Farmers in highly developed, industrialised countries expect a four- or fivefold return on money spent on pesticides (Gianessi 2009).

Crop productivity may be increased in many regions by high-yielding varieties, improved water and soil management, fertilisation and other cultivation techniques. An increased yield potential of crops, however, is often associated with higher vulnerability to pest attack leading to increasing absolute losses and loss rates. An average of 35 % of potential crop yield is lost to pre-harvest pests worldwide (Oerke 2005). In addition to the pre-harvest losses transport, preprocessing, storage, processing, packaging, marketing and plate waste losses along the whole food chain account for another 35 % (Fig. 1).

15.2. ábra - Figure 1. Losses along the food chain


15. Economics of agricultural inputs (horizontal activities of

farming) (Attila Bai)

Source: IWMI (2007)

The costs of pesticides and non-chemical pest-control methods alike are low relative to crop prices and total production costs. Pesticides account for about 7–8 % of total farm production costs in the EU (Popp et al, 2013).

The correct use of pesticides can deliver significant socio-economic and environmental benefits in the form of safe, healthy, affordable food; contribute to secure farm incomes and enable sustainable farm management by improving the efficiency with which we use natural resources such as soil, water and overall land use. Obviously, when pesticides are not used correctly, then the socio-economic and environmental benefits may not be realised and the economic damage resulting from widespread pesticide use should also be highlighted (Popp et al, 2013). The estimated macro-economic damages int he US are detailed in Table 2.

15.3. ábra - Table 2: Total estimated environmental and social costs from pesticide in the USA

Source: Popp-Hantos, 2011

The GM crop sector is also expected to continue to move increasingly toward multiple trait stacked gene varieties, in both established and developing markets. The commercial cultivation of genetically modified (GM) crops began in 1996 and has been continuously expanding ever since, both in industrialised and developing countries. By 2009 it had reached a global area of 134 million hectares, cultivated by 14 million farmers in 25 countries (Fig. 2). However, acceptance of GM crops is very heterogeneous. The resultant rejection of agricultural imports has already caused high economic losses and threatens to disrupt global agri-food supply chains (Nábrádi-Popp,, 2011).



farming) (Attila Bai)15.4. ábra - Figure 2: Share of GM crops in global plantings of key crops in 2009*

Source: James [2010]

2. 2. FertilizationProfitable crop production requires appropriate soil phosphorus (P) and potassium (K) levels, so careful fertilization planning is required. Grain and fertilizer prices have increased significantly during the last two years. Increasing prices may not be a major issue as long as the historical ratio between crop and fertilizer prices is approximately maintained. Recently, however, fertilizer prices have been increasing steadily while grain prices have fluctuated significantly. If there is a crop yield response to fertilization, high crop prices certainly help pay for more expensive fertilizer and may result in even greater net return to fertilization than when crop prices are low. Farmers in the well-developed countries spent less on phosphate and potash in the last years to balance the budget due to high prices of fertilizers against un-remunerative crop prices. Total global consumption of mineral fertilizers reached 175 Mt NPK-content in 2011. World growth in fertilizer demand 2,6 % in average, much bigger in K2O-content and int he Asian region (FAO, 2012).

Manure can supply many nutrients required by crops, including nitrogen (N), P, and K and is a resource that can always be used but especially when fertilizer prices are very high. Because manure contains many nutrients, applications should consider not only what is needed for the crop to be grown but also the ratio of nutrients as determined by manure analysis (Mallarino, 2008).

Solid and semi-solid manures have a higher organic content than liquid. When using manure as a fertilizer, it is important to understand that only a portion of the manure nutrients are immediately available.

A major difference between animal manure and commercial inorganic fertilizers is that some of the nutrients in manure are in the organic form and must go through a decomposition process (mineralization) in order to be converted to inorganic forms available for plant uptake. This makes animal manure a more slowly available source of plant nutrients than commercial inorganic fertilizer N. However, it is the organic fraction of manure that also plays an important role in increasing soil organic matter content and tilth.

Despite the value of manure as a fertilizer and soil amendment, there are challenges in effectively using manures as fertilizers. Some of these challenges are:

• Variability in nutrient content and form, which necessitates manure sampling and analysis to determine appropriate rates of application to meet crop nutrient requirements.

• Manure is not an “off-the-shelf” fertilizer and may not match the crop’s relative requirements. Examples of this would be manures that contain more phosphorus relative to nitrogen than what the crop can use, or an inadequate amount of sulphur relative to nitrogen.

• Low nutrient content per unit weight or volume, which limits the distance which manures can be transported economically.

As with any fertilizer, over-application of manures (e.g. repeated application at rates which greatly exceed the crop nutrient removal) and improper application increases the risk of manure nutrient losses to the environment and deterioration of environmental quality, including:



farming) (Attila Bai)• Transport of nutrients to ground water and surface water bodies through leaching and overland flow.

• Escape into the atmosphere of gases such as ammonia and nitrous oxide derived from manure nutrients.

• Accumulation of manure salts under conditions of poor drainage, leading to development of saline and sodic soils.

The risk of manure nutrient accumulation and loss can be minimized and the maximum agronomic benefit realized from these nutrients through the use of sound (local and immediate) manure nutrient management practices.

Animal manure can be an effective source of nutrients for crop growth and should be viewed as a resource rather than as a waste product. As with commercial inorganic fertilizers, when managed properly they can provide economic return for the user and do not adversely impact the environment. Both liquid and solid manures provide nutrients in fairly low concentrations by volume when compared to a commercial fertilizer. As a result, current limitations to more widespread use are mainly in transportation costs, as break-even hauling distances for unprocessed manure are typically only a few kilometers from the site of the manure production (Table 3). Composting and other processing techniques that help reduce the volume of manure will increase the economic hauling distance.

15.1. táblázat - Table 3: Differences between manures and mineral fertilizers

Characteristics Manures Fertilizer

Origin Plant or animal origin Chemical synthesized or manufactured

Nature Organic in nature Inorganic in nature

Type Natural product Artificial product

Conc. of nutrients Less concentrated More concentrated

Application Uncertain amount of NPK Punctually (precision farming)

Material Supply organic matter Supply inorganic matter

Nutrient availability Slowly available May or may not be readily available

Nutrients Supply all the primary nutrients including Micronutrient

Supply specific type of nutrients one, two or three. micro nutrients may or may not be present

Effect on soil health Improves physical condition of soil Do not improve the physical condition of soil

Cash flow A little cash expenses (material cost is excluded)

Significant cash demand (including material cost)

Most important element of costs Storage and application (great loss potential)

Material cost

Effect on plant growth No bad effect when applied in large quantities.

Adverse effect on plant whenever there is deficiency or excessive application



farming) (Attila Bai)It is a practice of ploughing in the green plant tissues grown in the field or adding green plants with tender twigs or leaves from outside and incorporating them into the soil for improving the physical structure as well as fertility of the soil. It can be defined as a practice of ploughing or turning into the soil, undecomposed green plant tissues for the purpose of improving the soil fertility.

The object of green manuring is to add an organic matter into the soil and thus, enrich it with ‘N’ which is most important and deficient nutrient. There are two types of green manuring:

• Green manuring in-situ: when green manure crops are grown in the field itself either as a pure crop or as intercrop with the main crop and buried in the same field, it is known as Green manuring. These crops are sown as: (1) Main crop, (2) Inter row sown crop, (3) On bare fallow, depending upon the soil and climatic conditions of the region.

• Green leaf manuring: it refers to turning into the soil green leaves and tender green twigs collected from shrubs and trees grown on bunds, waste lands and nearby forest area.

Characteristics/desirable qualities of a good manuring:

1. Yield a large quantity of green material within a short period.

2. Be quick growing especially in the beginning, so as to suppress weeds.

3. Be succulent and have more leafy growth than woody growth, so that its decomposition will be rapid.

4. Preferably is a legume, so that atmospheric ‘N’ will be fixed.

5. Have deep and fibrous root system so that it will absorb nutrients from lower zone and add them to the surface soil and also improve soil structure.

6. Be able to grow even on poor soils.

A green manuring (G.M.)crop may be turned in at the flowering stage or just before the flowering. The majority of the G.M. crops require 6 to 8 weeks after sowing at which there is maximum green matter production and most succulent.

Advantages of green manuring:

• It adds organic matter to the soil and simulates activity of soil micro-organisms

• It improves the structure of the soil thereby improving the WHC, decreasing run-off and erosion caused by rain.

• The G.M. crop takes nutrients from lower layers of the soil and adds to the upper layer in which it is incorporated.

• It is a leguminous crop, it fixes ‘N’ from the atmosphere and adds to the soil for being used by succeeding crop. Generally, about 2/3 of the N is derived from the atmosphere and the rest from the soil.

• It increases the availability of certain plant nutrients like P2O5, Ca, Mg and Fe.

Disadvantages of green manuring:

• Under rain fed conditions, the germination and growth of succeeding crop may be affected due to depletion of moisture for the growth and decomposition of G.M.

• G.M. crop inclusive of decomposition period occupies the field least 75-80 days which means a loss of one crop.

• Incidence of pests and diseases may increases if the G.M. is not kept free from them.Application of phosphatic fertilizers to G.M. crops (leguminous) helps to increase the yield, for rapid growth of Rhizobia and increase the ‘P’ availability to succeeding crop.

http://www.agriinfo.in/default.aspx?page=topic&superid=1&topicid=356



farming) (Attila Bai)The main characteristics of some G.P. crops produced in Europe:

• Rescue grass (Facélia)

• Cyst Eelwarm, honey

• Moderately resistant for frost,

• Sensitive for weed

• Yield: 25-30 t/ha

• White mustard

• Cyst Eelwarm,

• Sheep pasture

• Not sensitive for weed


• Oil radish

• Cyst Eelwarm, tolerant for drought and weed and frost.

• Rich in carotyne, pasture for sheep


3. 3. IrrigationIrrigated agriculture has expanded enormously over the past five decades—resulting from a revolution in irrigation development—which has increased from less than 100 million ha in 1950 to more than 275 million ha in 2000. Most of the expansion in irrigated area during the period has taken place in developing countries. Increasing environmental problems associated with irrigation development and management has led to a controversial debate on the impacts of irrigation. Proponents argue that irrigation has contributed substantially to increased food production and that further expansion in irrigation would be essential to meet increasing food needs of rapidly growing populations, while opponents argue for contraction in irrigation to reduce its negative effects on the environment, and also for reallocating more water for environmental needs. Often, these arguments are based on extreme situations—where irrigation has provided enormous benefits, and where it has resulted in substantial costs including indirect costs to societies and nations. Irrigation water has multiple effects

Irrigation involves several types of costs. These may be broadly classified into three categories at macro-economic level: economic costs, social costs and environment costs. These costs may be direct (cost associated with the direct provision of irrigation services, or infrastructure costs, such as financial costs and economic costs in terms of opportunity costs of resources use) where as others may be indirect (costs associated with the secondary effects of the project, like feedback effects and externalities). Some of these costs, especially those associated with negative externalities, may either be treated as dis-benefits of irrigation and analyzed under benefits/dis-benefits side or can be included on the cost side.

Regarding farm level the most important characteristics of irrigation should be the followings:

• It has a yield-levelling function, but its effects on quality are not clear.

• The optimal level and its effectiveness depends on other agrotechnical elements and on the plant

• Because of possible yield growing it has a land saving effect

• Large investment is needed; depretiation is a fix cost, which can reach the half of the total irrigation costs. It remains even non-using of the irrigation machineries and may cause economical loss, full utilization of capacity basically effects on profit so irrigation grows the economical risk.



farming) (Attila Bai)• Especially plants with large production value make economically viable the investment.

Plant protection has a very many-sided effect on the farm activity, especially the following areas:

• Reduction of yield loss, (possible) improving of quality

• Isolation, chemical, biological, integrated plant protection

• About 1/10 part of machinery capacity

• 10-30 % of direct costs (as fix cost!)

• Environmental pollution (2-2,5 kg/ha active agent/ha)

• Indirect effects on employment, cleaning

• Disease problems

• Plant protection products with long durability (e.g. two-year-long effect in maize)

• Other specialities:

• Directly not effects on the sowing crops

• Limited timing (peak of work)

• It is hard to evaluate objectively the actual effectiveness

Major direct economic costs of irrigation include:

• Capital costs

• annual depreciation,

• annual interest charges on capital

• Operation and maintenance costs, including administration costs.

• (Rehabilitation costs)

The capital costs include depreciation and interest charges associated with capital investment in irrigation infrastructure. These also include costs incurred on drainage works. Operation and maintenance costs include costs incurred in maintaining and managing the system. The specific components of these costs depend on the scale of analysis: national aggregate level, project level impact assessment or farm level impact assessment.

For the country level analysis, the entire irrigation infrastructure can be divided into two parts: (1) The system of dams, storage facilities and canals (main canals, branch canals and distributaries) that capture, store and distribute water to irrigated areas—primary and secondary levels; and (2) Local system of field channels carrying water to farms— tertiary level. While primary and secondary level infrastructure in most countries has historically been owned and managed by public authorities, the tertiary level infrastructure has been developed, owned and managed by farmers, except in cases where public authorities have implemented on-farm water management programs. Tertiary level irrigation infrastructure also involves costs including operation and maintenance costs, which are generally borne by farmers (mostly in kind). Whether costs of irrigation incurred by farmers at the tertiary level should be included in total costs of irrigation remains an issue.

The marginal returns to irrigation vary across time, space and across water using sectors. Irrigation has a very high value at certain times of the year; say it would be very high at certain critical crop growth stages as compared to other periods of crop growth. Value of irrigation also depends upon the type of crops grown in an area, it would be high in a region growing fruits, and vegetables compared to an area growing fodder and other low value cereal crops. If water is allocated a low value and is utilized for agricultural uses at the expense of high value uses, the lost opportunity resulting from misallocation of water represents an economic cost to society. However, agriculture is the dominant user of water, the entire volume of water reallocated from agriculture cannot be used in other sectors or in locations where the value of water is very high, implying that



farming) (Attila Bai)the opportunity cost of water in agriculture would be zero after demands in other high value sectors are fully met. Thus, the opportunity cost of water would apply only to a certain proportion of the total volume of water used in agriculture, beyond which the opportunity cost would be zero. The opportunity cost applicable to that part of water would be equal to the estimated value of water used in other sectors.

It should be emphasized that economic principles of MVP=MIC and least-cost combinations should be considered when selecting input levels. If the available budget is less than the optimal, the marginal efficiency of differential plants and differential inputs should be equal (equimarginal efficiency).

4. 4. MechanizationIncreased agricultural production is most often brought about by the introduction of improved crop varieties and by creating an optimal environment such that the plants and animals can develop to their full potential. Planting, tending and harvesting a crop requires both a significant amount of power and a suitable range of tools and equipment. Mechanization of farming has allowed an increase to the area that can be planted and has contributed towards increased yields, mainly due to the precision with which the crop husbandry tasks can be accomplished (www.fao.org/ag/ags/agricultural-mechanization/en)

Agricultural mechanization is not an isolated activity but is part of a complex array of interactions between numerous actors. Besides agronomic, technical and social aspects there is also an important role played by institutional aspects such as agricultural education, extension and research.

Farm mechanization, which substitutes farm machinery for manual or animal labour, is understood to be an improvement in farm management. In addition to the situational changes to the agricultural sector, such as hikes in rural wages caused a shortages of rural workers, reinforced purchasing power, developments in farming technology, increases in off-farm job opportunities, and strong demand for improved welfare, government policies supporting the agricultural machinery industry and distributing farm machines have accelerated agricultural mechanization. Acceleration factors of agricultural mechanization are the followings:

• Decreasing farm labour

• Enlargement of farm size

• Rapid rise in rural wages and decline in relative price of agricultural machinery

• Increase in off-farm employment and income

• Joint utilization system of agricultural machinery

Annual machinery costs are a large part of a farm's total annual costs. Ownership costs include depreciation, interest, taxes, insurance, housing, and lease payments. Repairs, fuel, lubrication, labour, custom hire, and rental payments are included in operating costs.

Selection of the optimum machine size to own should consider total costs and the effects of timeliness in completing operations. Rental, leasing, and custom hiring are other alternatives for acquiring the use of farm machinery, particularly for specialized machines with low annual use. Operators short of capital or skilled in machinery repair can benefit from investing in used rather than new machinery (Kay et al, 2003). Fully utilization should be the crucial effect to decide that which is the more profitable way: (1) to own a machine, or (2) to hire it (Fig. 3)?

15.5. ábra - Figure 3: Effect of machinery utilization on the debate of ownership/hiring



farming) (Attila Bai)


Machinery efficiency can be improved by proper operation, finance and fully utilization.

Using an expensive specialized machine on only a few acres also contributes to high machinery costs. Because of this, some farmers purchase low-use machines jointly with other operators. Some producers have even formed machinery cooperatives with 5 to 10 members owning alI their machinery in common. This not only decreases the fixed costs per unit but also decreases the investment required from each individual. Machinery costs per unit of output can also be reduced by performing custom work for other operators.

Farm machines, particularly tractors and other self-powered machines, decline in market value most rapidly during the first few years of their useful lives. Buying used machinery is an econornical way to lower machinery investment and ownership costs. Offsetting some of the lower ownership costs may be higher repair costs and decreases in reliability and timeliness. A used machine may also become obsolete sooner than a new one. The owner's ability as a mechanic and availability of the facilities and time to do major repair work at home are often crucial factors for owning used machinery. Used machinery should be considered when capital is lirnited, interest rates are high, the machine will have a relatively small annual use, and reliability and timeliness are not critical (Kay et al, 2003).

When to replace or trade a machine is one of the most difficult decisions in machinery management. The decision to replace a machine can be made for any of the following reasons (Kay et al, 2003):

• The present machine is worn out and obsolete

• Total machinery costs are increasing, the fix costs of a new machine is lower than the repair costs and the higher diesel costs of the old one

• The capacity became too small (available farmland entends)

• Income taxes - in a high-profit year to save a part of taxes.

• Cash flow - replacement of machinery is often postponed in years when cash flow is tight.

5. References1. 2008 Integrated Crop Management Conference - Iowa State University, 261-266

2. FAO (2009): Feeding the world in 2050. World agricultural summit on food security 16–18 November 2009. Food and Agriculture Organization of the United Nations, Rome

3. FAO Bulletins (2012) about Current world fertilizer trends and outlook to 2014, www.fao.org

4. Gianessi L P (2009): The value of insecticides in U.S. crop production. Croplife Foundation, Crop Protection Research Institute (CPRI), March 2009



farming) (Attila Bai)5. Hussain-Bhattarai, 2002: Comprehensive Assessment of Socio-Economic Impacts of Agricultural Water

Uses: Concepts, Approaches and Analytical Tools www.iwmi.cgiar.org/.../IrrigationCAPaper24July2002

6. IWMI (2007): “Water for Food, Water for Life: A Comprehensive Assessment of Water Management in Agriculture”, Earthscan and Colombo: International Water Management Institute, London, United Kingdom.

7. James, C. [2010]: Global Status of Commercialized Biotech/GM Crops: 2009. The International Service for the Acquisition of Agri-Biotech Applications (ISAAA).

8. Kay-Edwards-Duffy (2003): Farm Management. McGraw Hill Higher Education, http://highered.mcgraw-hill.com/sites/0072428686/

9. Mallarino, Antonio P.: Fertilizing crops in the new price age – phosphorus and potassium

10. McDougall (2010) Phillips McDougall, AgriService, Industry Overview—2009 Market, Vineyard Business Centre Saughland Pathhead. Midlothian EH37 5XP Copyright 2010

11. Nábrádi, András - Popp, József: Economics Of GM Crop Cultivation. Applied Studies in Agribusiness and Commerce – APSTRACT Agroinform Publishing House, Budapest, Vol. 5. Numbers 3–4. 2011, pp. 7-20

12. Nábrádi, András - Popp, József: Policy Challenges For Food, Energy And Environmental Security. Applied Studies in Agribusiness and Commerce – APSTRACT. Agroinform Publishing House, BudapestVol. 6. Numbers 1–2. 2012, pp. 15-26

13. Oerke EC (2005) Crop losses to pests. J Agr Sci 144:31–43.doi:10.1017/S0021859605005708

14. Popp J & Pető K & Nagy J (2013): Pesticide productivity and food security. A review Agronomy for Sustainable Development. DOI 10.1007/s13593-012-0105-x Vol 33, pp. 243–255

15. Popp, J and Hantos, K (2011): The impact of crop protection on agricultural production. Studies in Agricultural Economics, 2011, vol. 113, issue 1 http://EconPapers.repec.org/RePEc:ags:stagec:102401


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