Mekelle University: CDANR: Department of Agricultural and Resource Economics

Lecture Notes on Farm Management (AgEc3121)

CHAPTER ONE
Introduction to farm management
1.1 The importance of Farm management
Farm business management has assumed greater importance not only in
developed and commercial agriculture all round the world but also in
developing and subsistence type of agriculture. A farm manager must
not only understand different methods of agricultural production, but
also he must be concerned with their costs and returns. He must know
how to allocate scarce productive resources on the farm business to
meet his goals and at the same time react to economic forces that arise
from both within and outside the farm.
The need for managing an individual farm arises due to the following
reasons:
i) Farmers have the twin objectives, viz., and maximization of farm
profit and improvement of standard of living of their families.
ii) The means available to achieve the objectives, i.e., the
factors of production, are scarce in supply.
iii) The farm profit is influenced by biological, technological, social,
economic, political and institutional factors.
iv) The resources or factors of production can be put to alternative
uses.

Farm management is concerned with resource allocation. On one hand, a

farmer has a set of farm resources such as land, labour, farm buildings,
working capital, farm equipments, etc. that are relatively scarce. On the
other hand, the farmer has a set of goals or objectives to achieve may be
maximum family satisfaction through increasing net farm income and
employment generation. In between these two ends, the farmer himself is
with a specific degree of ability and awareness. This gap is bridged by taking
a series of rational decisions in respect of farm resources having alternative
uses and opportunities.

1.2 Definitions of Farm Management

Farm means a piece of land where crop and livestock enterprises are
taken up under a common management and has specific boundaries. All
farm management economists can be categorized into three groups on the
basis of whether they consider farm management as an art, science or
business.

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 Mekelle University: CDANR: Department of Agricultural and Resource Economics
Lecture Notes on Farm Management (AgEc3121)

1. The first group of farm management economists comprising of Andrew

Boss, H.C.Taylor and L.C. Gray viewed farm management as “an
art of organization and operation of the farm successfully as
measured by the test of profitableness”.
2. The second group comprising of G.F. Warner and J.N. Effersen
considered farm management “as a science of organization and
operation of the farm enterprises for the purpose of securing the
maximum profit on a continuous basis”.
3. The third group of economists like L.A. Moorehouse and W.J. Spillman
defined farm management “as a study of the business phase of
farming”.

The most acceptable definition of farm management is given below

Farm Management is a science that deals with the organization and

operation of a farm as a firm from the point of view of continuous maximum
profit consistent with the family welfare of the farmer. Thus, in an
environment where a farmer desires to achieve objectives like profit
maximization and improvement of family standard of living with a limited
stock of factors of production which can be put to alternative uses, farm
management in an essential tool.
Objectives of Farm Management
The General objective of Farm management is the theory of optimal decision
making in the organization and operation of a farm for profit and utility
maximization.
Broadly speaking the objectives of farm management are:
 To study the existing resources-land, labor, capital and management-
and the production pattern on the farm.
 To perform the strategic task of finding out the deviation of the
resources from their optimum utilization.
 To explain the means and the procedure of moving from the existing
combination of resources to their optimum use for profit maximization.
 To outline conditions that would simultaneously obtain its objectives of
profit maximization and maximization of family satisfaction through
optimum use of resources and judicious income distribution.
 To workout costs and returns on individual enterprises and on the farm
as a whole.

1.3 Scope of Farm Management

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 Mekelle University: CDANR: Department of Agricultural and Resource Economics
Lecture Notes on Farm Management (AgEc3121)

Farm Management is generally considered to be MICROECONOMIC in its

scope. It deals with the allocation of resources at the level of individual farm.
The primary concern of the farm management is the farm as a unit. Farm
Management deals with decisions that affect the profitability of farm
business. Farm Management seeks to help the farmer in deciding the
problems like what to produce, buy or sell, how to produce, buy or sell and
how much to produce etc. It covers all aspects of farming which have
bearing on the economic efficiency of farm.
Farm management covers all aspects of farm business which has a bearing
on the economic efficiency of production resources.
The types of enterprises to be combined, the kind of crops and varieties to
be grown, the dosage of fertilizer to be applied, the implement to be used,
the way the farm functions fall within the subject of farm management.
In general terms, farm management is concerned with:
 The resource allocation at the level of individual farm;
 The type of enterprises combined;
 The choice of input- output combinations;
 Formulation standard farm plan and optimum cropping patterns for
different area and type of crops;
 Developing suitable model of mechanization and modernization;
 Evaluation of agricultural policies, bearing development growth of the
farm.
1.4 Decision Making Process in Farm Management
Farmers must be able to take appropriate decisions at appropriate time.
Incorrect judgement and decisions would result in the failure of execution of
farm plan and in turn economic loss. The allocation of limited resources
among a number of alternative uses requires a manager to make decisions.
Without decision nothing would happen. Even, allowing things to continue, as
they are implies a decision. Decision- making runs through the whole
process of management.
As farm management is the science which concerns with making decisions
and choices about combining different enterprises and optimal utilization of
resources available, it is necessary to understand the typical farming
decisions. Decisions can be classified into production and organizational
management decisions, administrative management decisions and
marketing management decisions which are discussed as below:
Classification of Decisions
1) Production and Organization Decisions: The farm manager has to
take vital decisions on production of enterprises and organization of his
business. His decisions centre on what to produce and how to produce. Such
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 Mekelle University: CDANR: Department of Agricultural and Resource Economics
Lecture Notes on Farm Management (AgEc3121)

decisions can be further classified into i) strategic and ii) operational

decisions.

i. Strategic Management Decisions: These are the management

decisions, which involve heavy investment and have long lasting
effect and cannot be altered. However, in the case of reversal of
these decisions farmer has to incur high cost. These decisions are
also known as basic decisions. These decisions give shape to
overall organization of the business.
Examples: size of the farm, machinery and labor programme, construction
of farm buildings, permanent improvements on the farm like development
of irrigation facilities, soil conservation, reclamation, etc.

a) Deciding the best size of the farm: The size of farm depends upon
type of farm business, irrigation potential, level of mechanization,
intensity of usage of land and managerial ability of the farmer. The
economic efficiency of each crop/or live stock enterprise and their
combinations, when they are operated on different scales, are
considered to decide upon the optimum size of the holding.

b) Decisions on farm labour and machinery programmes :

Deciding the most profitable combination of the factors to be used in
producing a commodity is one of the important farm management
decisions. What combination of farm labor and machinery should be
adopted to get maximum returns? Would it be profitable to vary
labor or land to better utilize a given set of machinery? These decisions
are to be taken so as to reduce the cost of production.

c) Decisions on construction of buildings: Decisions on size

and type of buildings involve heavy investment, which become
fixed resource for the business. Type of buildings, for the present
pattern and level of production depends upon the kind and level of crops
or livestock produced.

d) Decisions regarding irrigation, conservation and

reclamation programmes: As improvements of alkalinity, salinity
and other soil defect s require heavy investments, soil conservation
and reclamation programmes often have to be spread over years. The
choice of most economical method or a combination of methods of

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 Mekelle University: CDANR: Department of Agricultural and Resource Economics
Lecture Notes on Farm Management (AgEc3121)

reclamation has to be made from among mulching, contouring, bunding,

terracing and application of soil amendments, laying down of proper
drainage and so on. Decision on irrigation programme is also very
crucial because it involves heavy investment and it gives a flow service
over long period of time and also improves the productivity of other
related inputs.
ii. Operational Management Decisions: Operational management
decisions are continuously made to carry out the day-to-day operations
of the farm business. The investment involved in such decisions is
relatively small and hence, the impact of such decisions is short- lived.
These decisions are generally: i) what to produce? ii) how much to
produce? how to produce? and when to produce? A brief discussion is
made on these decisions below:

a) What to produce? (Selection of enterprises): The objective of the farm

business, i.e., maximization of returns, could be achieved through the
best combination of different enterprises. The relative profitability of
these enterprises will be useful to determine what to produce and what
not to produce.

b) How much to produce? (Enterprise mix): This decision has two

aspects: Enterprise mix and resource use.

i) Enterprise Mix: Combination of crop and livestock enterprises will

depend upon the level of resources available, fertility of the soil, prices of
factors and products in addition to the existence of complementary and
supplementary relationship. Principle of substitution is used to
decide the level of each enterprise, i.e., the scarce farm resources are
first used for the most profitable enterprise and then the next best
profitable enterprise is considered for inclusion. However, apart from
p rofitability of each enterprise, factors like labour availability
for each enterprise, size of land holding, use of by -
products, maintenance of soil fertility, relative risks, distribution of
incomes over time and efficiency in the use of machine power and
building are considered to decide the level of each enterprise.

ii) Resource Use: The best combination and optimum level of inputs can
be determined based on the substitution principle and these have to be
decided for minimizing the cost of production and maximization of
returns.
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Lecture Notes on Farm Management (AgEc3121)

c) How to produce? (Selection of least - cost / efficient method or

practice): Decisions, here, are made on the best practice or combination
of practices and methods, which involve the least cost. The choice
making from among the various alternatives has become a management
problem. Although the objective generally is to select the least cost
combination of inputs methods, consideration has to be given on the
availability of resources in required quality and quantity at right time.
d) When to produce? (Timing of production): Since
the agricultural production is season-bound, it’s timing has to be
properly decided. However, farmer faces difficulty in selecting
season, i.e., normal, early or late, for a particular crop due to non-
availability of inputs in time and as a result he could not fetch
maximum price for the produce.
2. Ad m i n i s t r a t i v e
D e c i s ion s
Along with production and organization decision, the former has to see
that the work is done in a right way. Such administrative decisions are
briefly discussed below:
i) Financing the farm business: While some farmers have their
own sufficient funds, others may have to borrow. The problem is
two fold, viz., a) utilization of funds within the farm business, and
b) acquisition of funds, i.e., proper agency, time, type, and terms of
credit. Cash flow analysis would be used to decide the timing and
quantum of credit required.
ii) Supervision o f work: The farm manager has to ensure
that each job is scrupulously done as planned.
iii) Accounting and book keeping: Collection, analysis and
evaluation of data h a v e t o b e d o n e in o r d e r t o ass es s t h e
p e r fo r ma n c e o f t h e fa r m a t a n y p o i n t of time. Here
decision is to be made on the kinds of farm records, time
allocation and money to be spent on this activity.
v) Adjustments to government programmes and policies: Government
programmes and policies on food zones, restriction on product
movements, price support policy, input subsidy, etc. influence farm
production and marketing. The farmer has to decide on the level of
production and resource-use with the maximum economic efficiency at
the farm level consistent with the government policies concerned.

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Lecture Notes on Farm Management (AgEc3121)

3. M a r k e t i n g
De c i s i on

A farm manager has to buy various farm inputs and sell out the produces
in which he has to take rational decisions. While purchasing inputs he has
to consider the following aspects: a) what to buy? b) When to buy? c)
From whom to buy? d) How to buy? and e) how much to buy? Similarly, in
selling out the farm produces he has to carefully ponder over the
following points in order to maximize his farm income: a) what to sell? b)
When to sell? c) to whom to sell? d) How to sell? and e) how much to sell?

Decision Making
Process
Every farmer has to make decisions about his farm organization
and operation from time to time. Decisions on the farms are often made by
the following three methods:

a) Traditional method: In this method, the decision is influenced by

traditions in the family or region or community.

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Lecture Notes on Farm Management (AgEc3121)

b) Technical method: In this method, the decisions require the use of

technical knowledge. For example, a decision is to be made about the
quantity of nitrogen requirement to obtain maximum yield of wheat.

c) Economic method: All t he problems are considered in relation to t

he expected costs and returns. This method is undoubtedly the most useful
of all the methods for taking a decision on a farm.
Steps of Decision-Making Process
The process of making a decision can formalize into a logical and orderly
series of steps. Important steps in the decision making process are:
1. Identify and define the problem: Many problems confront a farm
manager. The basic problems faced by all managers are:
 What to produce?
 How much to produce?
 How to produce?
Identifications of problems need attention. Manager must be alert to identify
problems as quickly as possible. Once the problems identified, they should
be concisely defined. Good definitions of problems will minimize the time
required to complete the remainder of the decision-making steps.
2. Collect relevant data, facts, and information: Once a problem has
defined and identified the next step is gathering data, relevant facts,
evidences and information. The concise definition of problem help to
identify the types of data needed. Data may be obtained from various
sources. Whatever the source, the relative accuracy and reliability of the
information obtained should be considered.
The distinction between data and information are:
 Data: can be defined as an un-organized collection of facts from various
sources.
 Information: can be defined as the final product obtained from
analyzing data in such a way that useful conclusions and results are
obtained.
Gathering data and facts and transferring them into information is a never
ending task. Gathering data has a cost in terms of both time and money.
3. Identify and analyze alternative solutions: Once the relevant
information is available; the manager can begin listing alternatives, which
are potential solutions to the problems. The technique of brainstorming
can be used and list any idea which comes to mind. Each alternative
should be analyzed in a logical and organized manner to ensure accuracy

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Lecture Notes on Farm Management (AgEc3121)

and to prevent something from being overlooked. Good judgment and

practical experience may have to substitute for expensive information.
4. Make the decision –select the best alternative: Selecting or
choosing the best solution / the best alternative to a problem is not
always easy, nor is the best solution always obvious. Till to get the best
solution, it may need to go back, redefine the problem, and go through
the decision making process again.
5. Implement the decision: Selecting the best alternative will not give the
desired results unless the decision is correctly and promptly implemented.
Resources may need to be acquired and organized, which requires some
physical actions to be taken. To do or not to do may be an alternative
and potential solution to a problem, but should be done after enough
analysis to be sure that this is the correct decision.
6. Evaluate the results and bear responsibility for the outcome:
Responsibility for the outcome of the decision rests with decision maker. It
is difficult for the managers to avoid decision-making; it follows that they
must bear the responsibility. Not every decision will be a perfect one.
Careful observation, gathering additional data and information as well as
analysis can help to modify and improve the future decisions, and allow
corrections to be made.
A simplified flow chart shows the sequence of events in the decision making
process.
Acquire data → Process data into information → Make a choice or decision →
to maximize profit.

Decision Making Environment in Farm Management

The decision making environment in farm management is unique. While
making decisions there are important aspects in which the farm manger has
little or no control over the environment in general.

a. The physical and natural laws of nature make the decision making
environment very difficult.

Example: 1, livestock production

Consider gestation period which is nine month

Feed intake – biological limit -Feed – 4 kg and water 25 liters/ day

2, crop production: biological limits. But through research it may be possible

to somehow reduce the growing period of plants/ crops.

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Lecture Notes on Farm Management (AgEc3121)

Example: wheat production can be reduced from 120 day to 100 days
through research.

b. Farm management always associated with risks and uncertainty.

Factors like weather, diseases, insects etc do affect a particular business.
Even lower prices for agricultural produce will also affect the farm
business. This associated with farm management.
Let’s consider the comparison between agricultural products and
industrial products

N agricultural products industrial products

o
1 Depend on environment Not too much
2 Easily perishable Not perishable
3 Bulky Not
4 Inelastic in demand elastic in demand
5 Low price Normal price

Because of agricultural output are bulky Agricultural output prices are low.
Agriculture deals with production of food and raw materials. As standard of
living improve and income increases, the demand for agricultural products
will increase less rapidly than that for industrial products. Hence, farm
products have Inelastic demand.

1.5 Some Farm Management Problems under Ethiopian Condition

Farm management problems vary from area to area and within the same
area from one household to the other because of the difference in climate,
soil type, resource, culture etc. But generally, in Ethiopia the most common
farm management problems includes;
1. Small size of the farm: In Ethiopia the average farm size holding is
less than 3 hectare and this is fragmented.
2. Farming activities are mostly subsistence and family oriented. That
is, production is mainly for consumption and it is traditional. So that, it is
difficult to introduce modern business concepts and management ideas.
3. Underemployment of rural labor: the small sizeness of the farm,
large family size, seasonal nature of production and the lack of rural
industries leads to laziness and unemployment in the rural labor force.
4. Inadequacy of capital: farmers usually have very low marketable
surplus. As well as, farmers have difficulty on getting financial

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Lecture Notes on Farm Management (AgEc3121)

requirement for the reason that the financial institutions are not willing
to lend money for small farmers.
5. slow adoption of technologies:
6. Inadequacy of input supply: there is unavailability of input
- on proper quality
- on sufficient quantity
- at time and place
7. lack of managerial skill

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