Douglas J. McConnell
John L. Dillon
Department of Agricultural and Resource Economics
University of New England
Armidale, New South Wales
Australia
FOOD AND AGRICULTURE ORGANIZATION OF THE UNITED NATIONS
Rome, 1997
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M-61
ISBN 92-5-104077-X
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© FAO 1997
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ACKNOWLEDGEMENTS AND DEDICATION
ABBREVIATIONS, ACRONYMS AND SYMBOLS USED
1. AGRICULTURAL AND FARM SYSTEMS - CONCEPTS AND DEFINITIONS
1.1 SYSTEM DEFINITION AND HIERARCHY
1.2 GENERAL SYSTEMS CLASSIFICATION1.2.1 Natural, social and artificial systems
1.2.2 Further sub-classification of systems1.3 AGRICULTURAL SYSTEMS CLASSIFICATION AND ORDER HIERARCHY
1.3.1 Nature of farm-level systems
1.3.2 Village-level farming systems1.4 STRUCTURAL ELEMENTS OF THE FARM-HOUSEHOLD SYSTEM
1.5 STRUCTURAL MODEL OF A FARM-HOUSEHOLD SYSTEM
1.6 REFERENCES
2. FARM MANAGEMENT AND FARM TYPES
2.1.1 Scope
2.1.2 Definition
2.1.3 Optimization
2.1.4 Objectives
2.1.5 Economics as the framework for farm-system analysis
2.1.6 Alternative bases for farm-system analysis
2.1.7 Farm management fields
2.1.8 Farm management modes
3. ELEMENTS OF FARM-HOUSEHOLD SYSTEMS: BOUNDARIES, HOUSEHOLD AND RESOURCES
3.2.1 Farm household as resource manager
3.2.2 Farm household as system beneficiary3.3.1 Farm resources from an accounting view
3.3.2 Farm resources from an operational view
3.3.3 Operational resource categories
3.3.4 Other relevant resource properties
3.3.5 Resource acquisition and generation
3.3.6 Relationships between resources, capital and costs
4. FURTHER FARM-HOUSEHOLD SYSTEM ELEMENTS: ENTERPRISES AND ACTIVITIES AND THEIR BUDGETING
4.1 ENTERPRISES VERSUS ACTIVITIES
4.2 ENTERPRISES4.2.1 Enterprise boundaries
4.2.2 Enterprise structural types4.3 ENTERPRISE AND ACTIVITY BUDGETS
4.3.1 Budget types and purpose
4.3.2 Budget standardization: units of measurement
4.3.3 Level of budget detail
4.3.4 Unit budgets
4.3.5 Extending budget scope: processing and marketing
4.3.6 Economic and financial budgets
4.3.7 Real and imputed input costs and output values
4.3.8 Budget-based measures of performance
4.3.9 Extension of enterprise or activity budgets to whole-farm budgets
4.3.10 Extension of whole-farm budgets to the household
4.3.11 Cost of production4.4.1 Types of resource-generating activities
4.4.2 Activity budgets in linear programming format4.5 FURTHER EXTENSIONS OF ENTERPRISE OR ACTIVITY BUDGETS
4.6 PARTIAL BUDGETING
4.7 CONDITIONAL OR PARAMETRIC BUDGETING4.7.1 Single-parameter extensions
4.7.2 Two- and three-parameter extensions4.8 DO'S AND DONT'S OF ENTERPRISE AND ACTIVITY BUDGETING
4.9 REFERENCES
5.1 PROCESSES: SYSTEMS OF ORDER LEVELS 1 AND 2
5.1.1 Definition and nature of processes
5.1.2 Number of relevant processes
5.1.3 Analytical problems presented by processes5.2 INTERRELATEDNESS OF SYSTEM COMPONENTS: STRUCTURAL COEFFICIENTS
5.2.1 Interrelatedness within an activity: internal structural coefficients
5.2.2 Structural coefficients as critical parameters
5.2.3 Interrelatedness among activities: external structural coefficients5.3 THE FARM SERVICE MATRIX: A SYSTEM OF ORDER LEVEL 9
5.3.1 General charges
5.3.2 Capital fixed costs
5.3.3 Relative importance of total farm fixed costs5.4 DETERMINATION OF CAPITAL FIXED COSTS
6. HOUSEHOLD GOALS, FARM PLANNING OBJECTIVES, SYSTEM PLANNING AND PERFORMANCE CRITERIA
6.1 PLANNING AND OPERATING OBJECTIVES
6.2 SYSTEM PROPERTIES AND PERFORMANCE CRITERIA6.2.1 Productivity
6.2.2 Profitability
6.2.3 Stability
6.2.4 Diversity
6.2.5 Flexibility
6.2.6 Time-dispersion
6.2.7 Sustainability
6.2.8 Complementarity and environmental compatibility
6.2.9 Summary
7. ECONOMIC EVALUATION OF FARM SYSTEMS: MEASURES FOR EVALUATION AND COMPARATIVE ANALYSIS
7.1 SCOPE AND PURPOSE OF EVALUATION
7.2 LIMITED EVALUATION7.2.1 Using data aggregated on a whole-farm basis
7.2.2 Using data on an activity-specific basis
7.2.3 Productivity of individual resources on a whole-farm basis
7.2.4 Productivity of individual resources on an activity basis
7.2.5 Total productivity measures7.3.1 Level I analysis - the whole farm
7.3.2 Level II analysis - the household
7.3.3 Level III analysis - the fixed-capital structure
7.3.4 Level IV analysis - the individual activities
7.3.5 Level V analysis - the underlying processes
7.3.6 Summary7.4.1 Data for the subject farm
7.4.2 Data for the comparative or standard farm7.5 DIFFICULTIES IN EVALUATION AND COMPARATIVE ANALYSIS
7.6 REFERENCES
8. OPTIMIZATION OF RESOURCE USE LEVELS: RESPONSE ANALYSIS
8.1 INPUT-OUTPUT OR RESPONSE RELATIONSHIPS
8.2 OPTIMIZATION OF A SINGLE-VARIABLE INPUT RESPONSE PROCESS8.2.1 Optimization by partial budgeting
8.2.2 Optimization by graphical methods
8.2.3 Optimization by using the response equation
8.2.4 Optimization by using the profit function
8.2.5 Maximum output vs optimal economic output
8.2.6 Constrained optimization8.3 OPTIMIZATION OF MULTI-VARIABLE INPUT RESPONSE PROCESSES
8.3.1 Optimization based on MVP = MC
8.3.2 Optimization by using the profit function8.4 DATA SOURCES FOR RESPONSE ANALYSIS
8.4.1 Using existing data
8.4.2 Data from on-farm experiments
8.4.3 Trials with 'permanent' or long-term crops
9. PLANNING WHOLE-FARM SYSTEMS: ALLOCATION BUDGETING, SIMPLIFIED PROGRAMMING AND LINEAR PROGRAMMING
9.1 TIME DIMENSION OF WHOLE-FARM PLANNING
9.2 GENERAL PLANNING OBJECTIVES AND PROCEDURES
9.3 PLANNING METHODS AND THEIR APPLICABILITY9.3.1 Types of farms and activities
9.3.2 Assumed optimality of plans
9.3.3 Specification of non-resource constraints9.4.1 Operating criteria for allocation budgeting
9.4.2 Allocation budgeting using GM per unit of land
9.4.3 Allocation budgeting using GM per unit of operating capital
9.4.4 Allocation budgeting using GM per family labour day9.5 SIMPLIFIED PROGRAMMING
9.6 LINEAR PROGRAMMING9.6.1 Linear programming of systems consisting of only final product-generating activities
9.6.2 Linear programming of Type 2 farms: systems with internally-generated resources
9.6.3 Linear programming of Type 1 farms: subsistence-oriented systems
9.6.4 Relevance of LP
10. PLANNING FARM SYSTEMS OVER TIME
10.1 TIME EFFECTS IN AGRICULTURAL PRODUCTION
10.2 OPTIMAL USE OF TIME
10.3 TIME CLASSIFICATION OF ACTIVITIES10.3.1 Short-term activities
10.3.2 Intermediate- and long-term activities10.4 BASIC INTEREST-RATE CONCEPTS AND PROCEDURES
10.4.1 Compounding or taking a present value forward through time
10.4.2 Discounting or bringing a future amount back to present value10.5 SUBJECTIVE (INTERNAL) AND OBJECTIVE (EXTERNAL) INTEREST RATES
10.5.1 Objective interest rates
10.5.2 Subjective interest rates10.6 EVALUATING FUTURE COSTS
10.7 EVALUATING FUTURE NET RETURNS
10.8 ANNUITIES: EVALUATING REGULAR COST AND RETURN STREAMS OVERTIME10.8.1 Terminal value of an annuity
10.8.2 Annuity equivalent to a future lump sum
10.8.3 Present value of an annuity10.9 PERPETUITIES: EVALUATING REGULAR COST AND RETURN STREAMS WITH AN INDEFINITE LONG LIFE
10.10 AMORTIZATION: LIQUIDATING A PRESENT VALUE OVER TIME
10.11 SUMMARY OF PROCEDURES FOR FINANCIAL EVALUATION OF LONG-TERM INVESTMENTS
10.12 EXAMPLE EVALUATION OF A PROPOSED LONG-TERM ACTIVITY
10.13 EVALUATION CRITERIA FOR LONG-TERM INVESTMENTS
10.14 DIFFICULTIES IN PLANNING FARM SYSTEMS OVER TIME
10.15 REFERENCES
11. PLANNING AND MANAGING FARM SYSTEMS UNDER UNCERTAINTY
11.1 UNCERTAINTY
11.2 RISK
11.3 SOURCES OF FARM-SYSTEM RISK
11.4 MANIFESTATION OF FARM-SYSTEM RISK
11.5 IMPACT OF FARM-SYSTEM RISK
11.6 FARMERS' RISK-MANAGEMENT STRATEGIES
11.7 FORMAL APPROACHES TO RISKY FARM DECISIONS
11.8 SENSITIVITY ANALYSIS
11.9 STOCHASTIC BUDGETING
11.10 SUBJECTIVE EXPECTED UTILITY11.10.1 Personal preference or utility
11.10.2 Utility function elicitation
11.10.3 Probability elicitation
11.10.4 Example of subjective expected utility analysis11.11 CERTAINTY EQUIVALENCE
11.12 DECISION TREES
11.13 STOCHASTIC DOMINANCE
11.14 RISK-ORIENTED MATHEMATICAL PROGRAMMING11.15.1 Steps in simulation modelling
11.15.2 Example of Monte Carlo simulation
11.15.3 Simulation flowcharts and computers
11.15.4 Other uses of Monte Carlo simulation11.16 DIFFICULTIES IN LONG-TERM FARM DECISION MAKING
11.17 REFERENCES
APPENDIX: MANAGEMENT, FARM MANAGEMENT AND FARM SYSTEMS
1.1 History of Management Thought
1.2 Definition of Management
1.3 Major Features of Management
1.4 Definition of Farm Management2. THE DISTINCTIVE FEATURES OF AGRICULTURE
2.1 Biological Effects
2.2 Time Effects
2.3 Resource-portfolio Effects
2.4 Small-farm Effects3. THE THEORY OF FARM MANAGEMENT
3.1 Farm-system Theory
3.2 Theory of Management by Objectives4. THE PRACTICE OF FARM MANAGEMENT
5. MAKING SMALL-FARM MANAGEMENT MORE EFFECTIVE
6. REFERENCES