Summary Sheet – Helpful for Retention

For

Agriculture Economics

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 Important Points

1. This Summary Sheet shall only be used for Quick Revision after you have
read the Complete Notes

2. For Building Concepts along with examples/concept checks you should

rely only on Complete Notes

3. It would be useful to go through this Summary sheet just before the

exam or before any Mock Test

4. Questions in the exam are concept based and reading only summary
sheets shall not be sufficient to answer all the questions

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 Table of Contents
1 Factors of Production in Economics...................................................................................................... 6
2 Laws of Production ............................................................................................................................... 6
2.1 Law of Diminishing Returns .......................................................................................................... 6
2.1.1 STAGE I .................................................................................................................................. 7
2.1.2 STAGE II ................................................................................................................................. 7
2.1.3 STAGE III ................................................................................................................................ 7
3 Agriculture Finance Basics .................................................................................................................... 7
3.1 Classification of Agricultural credit based on Purpose ................................................................. 7
3.1.1 Development credit or Investment Credit ............................................................................ 7
3.1.2 Production credit .................................................................................................................. 7
3.1.3 Marketing credit ................................................................................................................... 7
3.1.4 Consumption credit............................................................................................................... 7
3.2 Classification of Agricultural credit based on Repayment Period................................................. 7
3.2.1 Short-Term Credit ................................................................................................................. 7
3.2.2 Medium-Term Credit ............................................................................................................ 8
3.2.3 Long-Term Credit .................................................................................................................. 8
3.3 Classification of Agricultural credit based on Security.................................................................. 8
3.3.1 Farm Mortgage Credit ........................................................................................................... 8
3.3.2 Collateral Credit or Chattel Credit......................................................................................... 8
3.3.3 Personal Credit ...................................................................................................................... 8
3.4 Classification of Agricultural credit based on Generation of Surplus Funds................................. 8
3.4.1 Self Liquidating Credit ........................................................................................................... 8
3.4.2 Non-Self-Liquidating Credit ................................................................................................... 8
3.5 Classification of Agricultural credit based on Creditor or Lender wise Credit .............................. 8
3.5.1 Non - Institutional Agencies .................................................................................................. 8
3.5.2 Institutional Agencies............................................................................................................ 9
3.6 Classification of Agricultural credit based on Number of Activities Served ................................. 9
3.7 Co-operative Credit Institutions.................................................................................................... 9
3.7.1 Primary Agricultural Credit Society (PACS) ........................................................................... 9
3.7.2 District Central Co-operative Banks (DCCBs) ........................................................................ 9

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 3.7.3 State Co-operative Bank (SCB) ............................................................................................ 10
3.7.4 Land Development Banks ................................................................................................... 10
3.8 Some other cooperative finance institutions ............................................................................. 10
3.8.1 Large-Sized Adivasi Multi-Purpose Co-operative Societies (LAMPS) .................................. 10
3.8.2 Farmers' Service Society (FSS)............................................................................................. 11
3.8.3 National Cooperative Development Corporation (NCDC) .................................................. 11
3.8.4 National Cooperative Union of India (NCUI) ....................................................................... 11
4 Agriculture Marketing Basics .............................................................................................................. 12
4.1 Types of Market .......................................................................................................................... 12
4.2 Market Structure – Meaning....................................................................................................... 13
4.3 Components of Market Structure ............................................................................................... 13
4.3.1 Concentration of Market Power ......................................................................................... 13
4.3.2 Degree of Product Differentiation ...................................................................................... 13
4.3.3 Conditions for entry of Firms in the Market ....................................................................... 13
4.3.4 Flow of Market Information................................................................................................ 14
4.3.5 Degree of Integration .......................................................................................................... 14
4.4 Marketing Functions and their Classification ............................................................................. 14
4.4.1 Kohls and Uhl have classified marketing functions as follows ............................................ 14
4.4.2 Huegy and Mitchell marketing functions classification ...................................................... 15
4.5 Producers Surplus ....................................................................................................................... 15
4.5.1 Marketable Surplus ............................................................................................................. 15
4.5.2 Marketed Surplus ................................................................................................................ 16
4.5.3 Relationship between marketed surplus and marketable surplus ..................................... 16
5 Basics of Farm Management............................................................................................................... 17
5.1 Classification of Farming Systems ............................................................................................... 17
5.2 Farm Planning ............................................................................................................................. 19
5.2.1 Objective of Farm Planning ................................................................................................. 19
5.2.2 Characteristics of a Good Farm Plan ................................................................................... 19
5.3 Farm Budgeting ........................................................................................................................... 20
5.3.1 Partial budgeting ................................................................................................................. 20
5.3.2 Enterprise budgeting........................................................................................................... 20

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 5.3.3 Cash flow budgeting............................................................................................................ 21
5.3.4 Complete Budgeting ........................................................................................................... 21
6 Terminology ........................................................................................................................................ 21
6.1 Net Capital Ratio ......................................................................................................................... 21
6.2 Current ratio................................................................................................................................ 22
6.3 Acid test ratio .............................................................................................................................. 22
6.4 Debt Equity ratio ......................................................................................................................... 22
6.5 Total Assets Turnover ratio ......................................................................................................... 22
6.6 Net Income to Total Assets Ratio................................................................................................ 22
6.7 Equity Value ratio ........................................................................................................................ 22
6.8 Crop Yield Index .......................................................................................................................... 23
6.9 System Index ............................................................................................................................... 23
6.10 Operating ratio ............................................................................................................................ 23
6.11 Fixed ratio ................................................................................................................................... 23
6.12 Gross Ratio .................................................................................................................................. 23

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 “The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb

1 Factors of Production in Economics

Sl no. Factor Description
1 Land Dr. Alfred Marshall defined land is meant no merely land in the strict sense of
the word, but whole of the materials and forces which nature gives freely for
man’s aid in land, water, in air and light and heat.
2 Labour Any type of work performed by a labourer with an intention to earn income.
3 Capital Capital has been as that part of person’s wealth, other than land, which yields an
income or which aids in the production of further wealth.
4 Enterprise It means to bring the factors i.e. land, labour and capital together to undertake
a business or production process.

2 Laws of Production

✓ Utility is a term used by economists to describe the measurement of "useful-ness" that a consumer
obtains from any good.
✓ Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a
good or service
✓ Keeping in mind the meaning of term utility in economic terms observe the table given a above, You
will find that as you keep on eating bread slices its utility meaning its usefulness to you goes on
decreasing and a time comes when it becomes negative.

Keeping in view the above context we will study most important law i.e., law of diminishing return in
Agriculture:

2.1 Law of Diminishing Returns

Alferd Marshall defines it as:

“An increase in the capital and labour applied in the cultivation of land causes in general a less than
proportionate increase in the amount of produce raised unless it happens to coincide with an
improvement in the arts of agriculture.”

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 Three Important phases in LDMR

2.1.1 STAGE I
Here each unit of input leads to Productive returns, the rate of return is increasing. For example, if you
apply more of fertilizer in the farm your production will increase with increasing rate.

2.1.2 STAGE II
Here are for each unit of input leads to productive return but at decreasing rate not increasing rate. For
each additional unit of fertilizer though productivity increases but at decreasing rate.

2.1.3 STAGE III

Here productivity do not increase at all, it starts decreasing and becomes negative at certain point of time.
A farmer should not operate in this zone. Adding excess fertilizer will only decrease the yield not increase
it.

3 Agriculture Finance Basics

Classification of Agricultural credit
✓ Agricultural credit can be classified based on purpose, time (repayment period), security, generation
of surplus funds, creditor and number of activities for which credit is provided.

3.1 Classification of Agricultural credit based on Purpose

Based on the purpose for which loan is granted, agricultural credit is categorized into:

3.1.1 Development credit or Investment Credit

This is provided for acquiring durable assets or for improving the existing assets.

3.1.2 Production credit

This is given for crop, production: Here, the loan amount is used for purchasing inputs and for paying
wages.

3.1.3 Marketing credit

It is essential to carry out the marketing functions and to get higher prices for the produce.

3.1.4 Consumption credit

It is the credit required by the farmer to meet his family expenses.

3.2 Classification of Agricultural credit based on Repayment Period

Based on the period for which the borrower require credit, it is divided into:

3.2.1 Short-Term Credit

It is given to farmers for periods ranging from 6 to 18 months and is primarily meant to meet cultivation
expenses viz., purchase of seed, fertilizer, pesticides and payment of wages to labourers. It serves as the
working capital to operate the farm efficiently and is expected to be repaid at the time of harvesting /
marketing of crops. It. should be repaid in one instalment.

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 3.2.2 Medium-Term Credit
Repayment is for the period of 2 to 5 years, It is for the purchase of pump-sets, farm machineries and
implements, bullocks, dairy animals and to carry out minor improvement in the farm. It can be repaid
either in half- yearly or annual installments.

3.2.3 Long-Term Credit

It is advanced for periods more than 5 years and extends even unto twenty-five years against mortgage
of immovable property for undertaking development works viz., sinking wells, purchase of tractor, and
ranking permanent improvements in the farm. It has to be repaid in half-yearly or annual instalments.

3.3 Classification of Agricultural credit based on Security

Credit is provided to farmers based on the security offered by them.

3.3.1 Farm Mortgage Credit

It is secured against mortgage of land.

3.3.2 Collateral Credit or Chattel Credit

It is given against the security of livestock, crop or warehouse receipt.

3.3.3 Personal Credit

It is given based on the character and repaying capacity of the person and not on any tangible assets. In
general, LT credit is usually advanced against security of land while MT and ST loans are sanctioned against
personal and. collateral security.

3.4 Classification of Agricultural credit based on Generation of Surplus Funds

Based on generation of surplus funds, credit can be classified as self-liquidating and non-self -liquidating
credit.

3.4.1 Self Liquidating Credit

In this case, loan amount gets absorbed in the production process-in one year or production period and
the additional income generated is sufficient to repay the entire loan amount.

3.4.2 Non-Self-Liquidating Credit

Here the resources acquired with the borrowed funds are not consumed in the production process during
the project period. The investment is spread over a period of several years. The additional income
generated in one year is not sufficient to repay the entire loan amount and hence the repayment is spread
over to number of years.

3.5 Classification of Agricultural credit based on Creditor or Lender wise Credit

Credit can be classified from the point of view of creditor.

3.5.1 Non - Institutional Agencies

They include money lenders, traders, commission agents, friends and relatives. This kind of loan is
generally exploitative.

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 3.5.2 Institutional Agencies
They include co-operative’s, commercial bank and regional rural bank.

3.6 Classification of Agricultural credit based on Number of Activities Served

Based on the number of activities for which amount the loan can be used, credit can be categorized into
a) single purpose loan and b) composite loan.

3.7 Co-operative Credit Institutions

The co-operative credit structure in India is characterized by two types of institutions: one, involved in
the dispensation of short and medium-term credit and the other in the provision of long term credit.
✓ The Primary Agricultural Credit Society (PACS) / Primary Agricultural Co-operative Bank (PACB) is the
foundation stone on which the whole co-operative credit structure is built up.
✓ These societies are federated to District Central Co-operative Bank (DCCB), generally at the district
level. The DCCBs are federated to State Co-operative Bank (SCB) which is an apex institution at the
state level having close link with the RBI and NABARD.
✓ Long term credit is provided by Land Development Banks (LDBs).
✓ The State / Central Land Development Bank (now renamed as State Co-operative Agricultural Rural
Development Banks (SCARDBs) is the apex institution which operates through Primary Land
Development Banks (PLDBs) (now renamed as Primary Co-operative Agricultural Rural Development
Banks (PCARDBs) at district / taluk / block level in some states or through its own branches where
PCARDBs do not exist.

3.7.1 Primary Agricultural Credit Society (PACS)

✓ The formation of these societies dates back to 1904 when the first Co-operative Credit Societies Act
was passed.
✓ The objective was to provide cheap credit to the farmers in order to relieve them from the clutches
of money lenders.
✓ Many PACS also undertake multiple activities like sale of fertilizers and other agricultural inputs and
several act as distributors of ration items under the Public Distribution System (PDS).
✓ The main functions of the PACS are:
• to promote economic interests of the members in accordance with the co-operative principles;
• to provide short and medium-term loans;
• to promote savings habit among members;
• to supply agricultural inputs like fertilizers, seeds, insecticides and implements;
• to provide marketing facilities for the sale of agricultural produces; and
• to supply domestic products requirements such as sugar, kerosene, etc.

3.7.2 District Central Co-operative Banks (DCCBs)

✓ CCB / DCCBs form an important link between PACS and SCBs.
✓ The main functions of the DCCBs are
• to meet the credit requirements of member societies;

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 • to perform banking business; to act as balancing centres for the PACS by diverting the surplus
funds of some societies to those which face shortage of funds;
• to guide and supervise the PACS; and
• to undertake non-credit activities.

3.7.3 State Co-operative Bank (SCB)

✓ It is the apex institution at the state level which links widely scattered PACS with the money market,
Reserve Bank of India and the Cooperative movement.
✓ The main objective of the bank is to link the widely scattered PACS with the money market and the
RBI and to co-ordinate the work of CCB / DCCBs.
✓ The main Functions of SCBs are:
• to act as bankers' bank to DCCBs and to supervise, control and guide them;
• to mobilize financial resources needed by the PACS and deploy them properly among the various
sectors of the movement;
• to co-ordinate the various development agencies and he1p the government in drawing plans for
co-operative development and their implementation;
• to formulate and execute uniform credit policies for co-operative movement;

3.7.4 Land Development Banks

✓ The advent of new innovations in agricultural technology, increasing demand for food with population
explosion, profitability in commercial agriculture, attractive price for exportable agricultural
commodities, etc., made the farmers to realize that agriculture could also be taken up as an industry
by effecting improvement on land for increasing its production potential through more capital
investment, which led to the raising demand for long term credit.
✓ Farmers required larger amount to acquire durable farm assets such as machineries and livestock and
undertake permanent land improvements, construction of wells, buildings, erection of pump – sets,
redemption of old debts, etc.
✓ Since the amount is large, it is difficult for them to repay the loan amount in lump sum. The amount
has to be repaid in installments and distributed to a longer period of even 20 years.

3.8 Some other cooperative finance institutions

3.8.1 Large-Sized Adivasi Multi-Purpose Co-operative Societies (LAMPS)

✓ LAMPS have been set up on the recommendations of the study team (Committee on Cooperative
Structure in Tribal Areas) under the Chairmanship of Shri. Bawa appointed by the government of India
in 1971.
✓ These societies operate mainly in hill and tribal areas.
✓ The main objectives of LAMPS are:
• to provide all types of credit, including those for meeting social obligations and consumer
requisites under single roof;
• to provide technical guidance in the intensification and modernization of agriculture;
• to supply of inputs and essential commodities; and

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 • to arrange for the marketing of agricultural and minor forest products besides the products of the
subsidiary occupations of the tribals.

3.8.2 Farmers' Service Society (FSS)

✓ By early 1970s, it was found that the multi-purpose PACS had not succeeded much in diversifying their
operations, especially commodity marketing and processing, in reaching the weaker sections and in
becoming viable.
✓ They mostly under the control of the better-off sections of the society and the small and marginal
farmers were not able to get access to the society or its services.
✓ The societies were not able to provide a variety of services like funding infrastructural development
such as godowns and agro-service centre as well as providing finances for processing industries in
their localities other than credit, and supply of inputs.
✓ Hence, based on the recommendation of National Commission on Agriculture, the scheme of setting
up FSS to cater to the credit and non-credit needs of farmers at a single point was launched in 1973.
✓ A Group constituted by the Union Cabinet in July 1974 under the leadership of T.A. Pai recommended
the organization of FSS to meet the credit needs of rural area.
✓ The study Team head by T.A.Pai recommended the setting up of 'Farmers Service Co-operatives'. FSS
has been evolved to change the power structure in favour of weaker sections in rural areas and at the
same time it will strengthen the co-operative movement through adoption of commercial banking
principles in the management of its finances.

3.8.3 National Cooperative Development Corporation (NCDC)

✓ The National Cooperative Development Corporation (NCDC) was established by an Act of Parliament
in 1963 as a statutory Corporation under the Ministry of Agriculture.
✓ The main objectives of NCDC:
• Planning, promoting and financing programmes for production, processing, marketing, storage,
export and import of agricultural produce, food stuffs, certain other notified commodities e.g.
fertilizers, insecticides, agricultural machinery, lac, soap, kerosene oil, textile, rubber etc., supply
of consumer goods and collection, processing, marketing, storage and export of minor forest
produce through cooperatives, besides income generating stream of activities such as poultry,
dairy, fishery, sericulture, handloom etc

3.8.4 National Cooperative Union of India (NCUI)

✓ The National Cooperative Union of India (NCUI), the apex organization of the Indian Cooperative
Movement, can trace back its origin in 1929 when All India Provincial Cooperative Institutes’
Association came into being with Shri Lallubhai Samal Das Mehta as its first President.
✓ Having been reorganized as Indian Cooperative Union, it was renamed later as All India Cooperative
Union in 1954 and re-christened as National Cooperative Union of India in 1961.

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 4 Agriculture Marketing Basics

4.1 Types of Market

On the basis of location Village markets
Primary markets
Secondary wholesale markets
Terminal markets
Sea-board markets

On the basis of area or coverage Local/village markets

Regional markets
National markets
World/international markets

On the basis of time span Short period markets

Periodic markets
Long period markets
Secular markets

On the basis of volume of transactions Wholesale markets

Retail markets

On the basis of nature of transactions Spot/cash markets

Forward markets

On the basis of number of commodities transacted General markets

Special markets

On the basis of degree of competition Perfect markets

Monopoly markets
Duopoly markets
Oligopoly markets
Monopolistic competitive markets

On the basis of nature of commodities Commodity markets

Capital markets

On the basis of stage of marketing Producing markets

Consuming markets

On the basis of extent of public intervention Regulated markets

Un-regulated markets

On the basis of type of population served Urban markets

Rural markets

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 On the basis of market functionaries and accrual of Farmers markets
marketing margins Co-operative markets
General markets

4.2 Market Structure – Meaning

✓ The term structure refers to something that has organization and dimension – shape, size and
design; and which is evolved for the purpose of performing a function.
✓ A function modifies the structure, and the nature of the existing structure limits the performance of
functions.
✓ By the term market structure, we refer to the size and design of the market. It also includes the
manner of the operation of the market.
Some of the expressions describing the market structure are
✓ Market structure refers to those organizational characteristics of a market which influence the nature
of competition and pricing, and affect the conduct of business firms
✓ Market structure refers to those characteristics of the market which affect the traders' behaviour and
their performances.
✓ Market structure is the formal organization of the functional activity of a marketing institution.
✓ An understanding and knowledge of the market structure is essential for identifying the imperfections
in the performance of a market.

4.3 Components of Market Structure

The components of the market structure, which together determine the conduct and performance of the
market, are

4.3.1 Concentration of Market Power

✓ The concentration of market power is an important element determining the nature of competition
and consequently of market conduct and performance.
✓ This is measured by the number and size of firms existing in the market.
✓ The extent of concentration represents the control of an individual firm or a group of firms over the
buying and selling of the produce.
✓ A high degree of market concentration restricts the movement of goods between buyers and sellers
at fair and competitive prices and creates an oligopoly or oligopsony situation in the market.

4.3.2 Degree of Product Differentiation

✓ Homogeneous or other nature of the product affects the market structure. If products are
homogeneous, the price variations in the market will not be wide.
✓ When products are heterogeneous, firms have the tendency to charge different prices for their
products.
✓ Everyone tries to prove that his product is superior to the products of others.

4.3.3 Conditions for entry of Firms in the Market

✓ Another dimension of the market structure is the restriction, if any, on the entry of firms in the market.

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 ✓ Sometimes, a few big firms do not allow new firms to enter the market or make their entry difficult
by their dominance in the market.
✓ There may also be some government restrictions on the entry of firms.

4.3.4 Flow of Market Information

✓ A well-organized market intelligence information system helps all the buyers and sellers to freely
interact with one another in arriving at prices and striking deals.

4.3.5 Degree of Integration

✓ The behaviour of an integrated market will be different from that of a market where there is no or
less integration either among the firms or of their activities.
✓ Firms plan their strategies in respect of the methods to be employed in determining prices, increasing
sales, coordinating with competing firms and adopting predatory practices against rivals or potential
entrants.
✓ The structural characteristics of the market govern the behaviour of the firms in planning strategies
for their selling and buying operations.

4.4 Marketing Functions and their Classification

The marketing functions may be classified in various ways. For example, Thomsen has classified the
marketing functions into three broad groups. These are:

Primary Functions ✓ Assembling or Procurement

✓ Processing
✓ Dispersion or Distribution

Secondary Functions ✓ Packing or Packaging

✓ Transportation
✓ Grading, Standardization and Quality Control Storage and
Warehousing
✓ Determination or Discovery of Prices
✓ Risk Taking
✓ Financing
✓ Buying and Selling
✓ Demand Creation
✓ Dissemination of Market Information

Tertiary Functions ✓ Banking

✓ Insurance
✓ Communications – Posts & Telecommunication
✓ Supply of Energy – Electricity

4.4.1 Kohls and Uhl have classified marketing functions as follows

Physical Functions ✓ Storage and Warehousing
✓ Grading
✓ Processing

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 ✓ Transportation

Exchange Functions ✓ Buying

✓ Selling

Facilitative Functions ✓ Standardization of Grades

✓ Financing
✓ Risk Taking
✓ Dissemination of Market Information

4.4.2 Huegy and Mitchell marketing functions classification

Physical Movement Functions ✓ Storage
✓ Packing
✓ Transportation
✓ Grading
✓ Distribution

Ownership Movement Functions ✓ Determining Need

✓ Creating Demand
✓ Finding Buyers and Sellers
✓ Negotiation of Price
✓ Rendering Advice
✓ Transferring the Title to Goods

Market Management Functions ✓ Formulating Policies

✓ Financing Providing Organization
✓ Supervision
✓ Accounting
✓ Securing Information

4.5 Producers Surplus

✓ In any developing economy, the producer's surplus of agricultural product plays a significant role.
This is the quantity which is actually made available to the non-producing population of the country.
✓ The producer's surplus is the quantity of produce which is, or can be, made available by the farmers
to the non-farm population.
✓ The producer's surplus is of two types:

4.5.1 Marketable Surplus

✓ The marketable surplus is that quantity of the produce which can be made available to the non-farm
population of the country. It is a theoretical concept of surplus.
✓ The marketable surplus is the residual left with the producer-farmer after meeting his requirements
for family consumption, farm needs for seeds and feed for cattle, payment to labour in kind, payment

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 to artisans – carpenter, blacksmith, potter and mechanic – payment to landlord as rent, and social
and religious payments in kind.
✓ This may be expressed as follows:

MS = P – C

Where

MS = Marketable surplus

P = Total production, and

C = Total requirements (family consumption, farm needs, payment to labour, artisans, landlord and
payments for social and religious work).

4.5.2 Marketed Surplus

✓ Marketed surplus is that quantity of the produce which the producer-farmer actually sells in the
market, irrespective of his requirements for family consumption, farm needs and other payments.
✓ The marketed surplus may be more, less or equal to the marketable surplus.
✓ Whether the marketed surplus increases with the increase in production has been under continual
theoretical scrutiny.
✓ It has been argued that poor and subsistence farmers sell that part of the produce which is necessary
to enable them to meet their cash obligations.
✓ This results in distress sale on some farms. In such a situation, any increase in the production of
marginal and small farms should first result in increased on-farm consumption.

4.5.3 Relationship between marketed surplus and marketable surplus

The marketed surplus may be more, less or equal to the marketable surplus, depending upon the
condition of the farmer and type of the crop.
The relationship between the two terms may be stated as follows:
✓ The marketed surplus is more than the marketable surplus when the farmer retains a smaller quantity
of the crop than his actual requirements for family and farm needs.
✓ This is true especially for small and marginal farmers, whose need for cash is more pressing and
immediate. This situation of selling more than the marketable surplus is termed as distress or forced
sale.
✓ Such farmers generally buy the produce from the market in a later period to meet their family and/or
farm requirements.
✓ The quantity of distress sale increases with the fall in the price of the product.
✓ A lower price means that a larger quantity will be sold to meet some fixed cash requirements.

The marketed surplus is less than the marketable surplus when the farmer retains some of the surplus
produce.
This situation holds true under the following conditions:

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 ✓ Large farmers generally sell less than the marketable surplus because of their better retention
capacity. They retain extra produce in the hope that they would get a higher price in the later period.
Sometimes, farmers retain the produce even up to the next production season.
✓ Farmers may substitute one crop for another crop either for family consumption purpose or for
feeding their livestock because of the variation in prices. With the fall in the price of the crop relative
to a competing crop, the farmers may consume more of the first and less of the second crop.

The marketed surplus may be equal to the marketable surplus when the farmer neither retains more
nor less than his requirement. This holds true for perishable commodities and of the average farmer

5 Basics of Farm Management

✓ Farm management is of the recent origin.
✓ The term “Farm Management” conveys different meanings by different people.
✓ Some take it to be another name of production economics or agricultural economics, while others
consider farm management as nothing more than the farmer’s art of carrying out the daily work of
supervision of farm
✓ The farm management study is undertaken with the following objectives:
• To study the input output relationship in agriculture and determine the relative efficiency of
various factor combinations.
• To determine the most profitable crop production and livestock raising methods.
• To study the cost per hectare and per quintal.
• To evaluate the farm resources arid land use.
• To study the comparative economics of different enterprises.
• To determine the relation of size of farm to land utilization, cropping pattern, capital investment
and labour employment.
• To study the impact of technological changes on farm business.
• To find out ways and means for increasing the efficiency of farm business through better input-
output relationship and proper allocation of resources among different uses.

5.1 Classification of Farming Systems

✓ Many farms have a general similarity in size, products sold, and methods followed is called a type of
farming or when farms are quite similar in kind and production of the crops and livestock that are
produced and methods and practices used in production, the group is called as type of farming.
✓ On the basis of the share of gross income received from different sources and comparative advantage,
the farming systems may be classified as follows:

Classification of Farming Systems:

A) According to the Size of the Farm:

a) Collective farming.

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 b) cultivation farming: i) small scale farming ii) large scale farming.

B) According to the Proportion of Land, Labour and Capital Investment:

a) Intensive cultivation.

b) Extensive cultivation.

C) According to the Value of Products or Income or on the basis of Comparative Advantages:

i) Specialized farming

ii) Diversified farming

iii) Mixed farming

iv) Ranching

v) Dry farming

D) According to the Water Supply:

i) Rained farming

ii) Irrigated farming

E) According to: Rotation

I) Type of Rotation:

a) ley system:

i) unregulated ley farming

ii) regulated ley system

b) Field system

c) Perennial crop system

II) Intensity of the Rotation:

a) Shifting cultivation.

b) Ley or fallow farming.

c) Permanent cultivation.

d) Multiple cropping.

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 F) Classification According to Degree of Commercialization:

a) Commercialized farming.

b) Partly commercialized farming.

c) Subsistence farming.

G) Classification According to Degree of Nomadic:

a) Total nomadic.

b) Semi nomadic.

c) Partial nomadic.

d) Transhumant.

e) Stationary animal husbandry.

H) Classification According to Cropping and Animal Activities:

I) Classification According to Implements Used for Cultivation:

a) Spade farming.

b) Hoe farming.

c) Mechanized or tractor farming.

5.2 Farm Planning

✓ Farm planning is a process to allocate the scare resources of the farm to organize the farm
production in such a way as to increase the resource use efficiency and the income of the farmer.
✓ A farm plan is a programme of total farm activities of a farmer drawn out in advance. An optimum
farm plan will satisfy all the resource constraints at the farm level and yield the maximum profit.

5.2.1 Objective of Farm Planning

✓ The immediate objective of farm planning is to maximize the annual net income sustained over a
long period of time.
✓ The maximization of net income through improved resource use planning.
✓ The ultimate objective of farm planning is improvement in the Standard of living of the farmer.

5.2.2 Characteristics of a Good Farm Plan

A good farm plan generally should have the following characteristics:
✓ An element of flexibility in a farm plan is essential to account for changes in the environment around
the farm.
✓ A farm plan should maximize the resource use efficiency at the farm.

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 ✓ It should provide for the attainment of the objectives of profit maximization through optimum
resource use and balanced combination of farm enterprises.
✓ Risk and uncertainty can be accounted for in a good farm plan.
✓ The plan helps in timely acquisition and repayment of farm credit.

5.3 Farm Budgeting

Budgeting is a method of analyzing plans for the use of agricultural resources at the command of the
decision maker. Farm plan is a programme of the total farm activity of a farmer drawn up in advance.
Farm plan serves as the basis of farm budgeting. Therefore farm plan can be prepared without a budget
but budgeting is not possible without farm plan.

Types of farm budgeting: There are four types (methods) of farm budgeting.

a) Partial budgeting b) Complete budgeting c) Enterprise budgeting d) Cash flow budgeting

5.3.1 Partial budgeting

✓ It refers to estimating costs and returns and net income of a particular enterprise. It refers to
estimating the returns for a part of the business i.e. one or few activities for example
✓ To estimate additional cost and returns from growing one hectare of hybrid Jowar in place of local
Jowar.
✓ To estimate additional cost and returns by adopting foliar application of chemical fertilizers instead
of soil application.
✓ All the changes in farm plan that can be appropriately adapted with the help of a partial budget can
be grouped into three types.
✓ They are as given below:

5.3.1.1 Enterprise substitution

✓ This indicates a complete or partial substitution of one enterprise for another. E.g. substituting one
acre of paddy for one acre of sugarcane.

5.3.1.2 Input substitution

✓ Changes involving the substitution of one input for another or the total amount of input to be used
are easily analyzed with a partial budget. E.g. substituting machinery for labour.

5.3.1.3 Size or scale of operation

✓ Included in this category would be changes in total size of the farm business or in the size of a single
enterprise. E.g. Buying or renting additional land or machinery.

5.3.2 Enterprise budgeting

✓ Enterprise is defined as a single crop or livestock commodity. Most farms consist of a combination of
several enterprises.
✓ An enterprise budget is an estimate of all income and expenses associated with a specific enterprise
and an estimate of its profitability.

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 ✓ An enterprise budget lists down all the expected output, both in physical as well as value terms, for
a unit of a particular activity (i.e., per hectare, per animal or per 100 birds) on the farm.

5.3.3 Cash flow budgeting

✓ A cash flow budget is a summary of the cash inflows and outflows for a business over a given time
period.
✓ As a forward planning tool, its primary purpose is to estimate future borrowing needs and the loan
repayment capacity of the business. Cash flow budgeting is to assess the whole farm plan.
✓ Cash Flow Statement: It summarizes the magnitude of cash inflows and outflows over a period of
time. 2) Importance of cash flow Statement: It helps to assess: i) whether cash would be available in
correct quantity at right time; ii) whether the surplus could be profitably diverted and iii) timing and
magnitude of borrowings required.
✓ The cash flow statement may be constructed over annually, quarterly, monthly and weekly
depending upon the nature of business.
✓ Cash inflows represent the amount of cash received during the particular time period. It includes: a)
the beginning cash balance, b) receipts through sales of farm and non-farm assets and c) receipts of
short term (operating), intermediate and long term loans.
✓ Cash Outflows represents the expenses incurred in a given period of time. It includes: a) Cash
expenses (variable cash expenses, fixed cash expenses, non-farm investment, and personal
expenses), b) Repayment on operating (crop) loans and c) repayment on intermediate and longterm
loans.

5.3.4 Complete Budgeting

✓ It is also called as total budgeting. It 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.
✓ Complete and partial budgeting are mutually complementary, i.e., the partial budgeting should be
used at various stages of complete budgeting in order to decide the changes to be effected in the
farm organization.
✓ The process of complete budgeting involves: i) appraisal of existing farm resources, their uses and
efficiency, ii) appraisal of alternatives or opportunities or various production activities that can be
included and their resource requirements and iii) preparing and evaluating the alternative plans for
their feasibility and profitability.

6 Terminology

6.1 Net Capital Ratio

✓ This is a measure of degree of financial safety over a period of time by comparing the present
position of the business with that on some previous date.
✓ Higher the ratio, safer will be the position of the farmer.

NCR = Total Assets/Total liabilities

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 6.2 Current ratio
✓ It measures the ability of the farm to meet its current liabilities.
✓ Higher the current ratio, the greater the short term solvency

CR = Current Assets/Current liabilities

6.3 Acid test ratio

✓ Quick assets are defined as current assets excluding inventories.
✓ Acid test ratio is also known as quick ratio, which is a stringent measure of liquidity.
✓ It is based on those current assets, which are highly liquid, i.e., inventories are excluded from
current assets, as they are the least liquid component of current assets.

ATR = Quick Assets/Current liabilities

6.4 Debt Equity ratio

✓ Lower the debt, the higher degree of protection enjoyed by the creditors. The lower this ratio, the
more desirable it is. It is also known as Debt to Net Worth ratio.
✓ The net worth indicates the solvency of the business. But this is the ultimate solvency rather than
intermediate solvency.
✓ Ultimate solvency is meant that total resources are equal to or greater than total liability, in case the
entire business is closed out and all the liabilities are met with. Net worth is greater than zero,
when business is solvent.
✓ When total liabilities are not covered by total resources, the business is insolvent or bankrupt.
✓ The intermediate solvency is meant the relationship between current liabilities and liquid assets,
which can be used to clear them off, if demanded.

DER = Debt (Total liabilities)/Owner’s equity or networth

6.5 Total Assets Turnover ratio

✓ This measures how efficiently assets are employed over all. It is similar to output-capital ratio used
in economic analysis.
✓ The higher their ratio, the greater the turn -over of assets.

TATR = Net sales/Total Assets

6.6 Net Income to Total Assets Ratio

✓ It also measures how efficiently the capital is employed.
✓ The higher this ratio, the more sound the capital use on the farm.

NITAR = Net income/Total Assets

6.7 Equity Value ratio

✓ Higher the ratio, better will be the financial position of the farm business.

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 EVR = Networth/Total Assets

6.8 Crop Yield Index

✓ It is a measure by which the yields of all crops on a given farm are compared with the average yields
of these crops in the locality.
✓ The yield index is a convenient measure because it represents a combined index of yields of all the
crops on a farm.
✓ A figure greater than 100 indicates that the farm in question is more efficient than an average farm
in the area.

6.9 System Index

✓ This index is used for determining the rationality by which various enterprises on a certain farm are
combined.
✓ It is obtained by expressing the potential net income per hectare on a farm as a percentage of the
average standard net income per hectare in the area.
✓ If the system index is more than 100, it indicates a higher level of efficiency in combining
enterprises on the farm in comparison to that by an average farm in the area and vice versa.
✓ However, major difficulty may be encountered in calculating this index, when the selected farm
grows crops which are not usually grown in the locality

6.10 Operating ratio

✓ It represents the proportion absorbed by operating expenses out of the gross income.
OR = Total operating expenses/Gross income

6.11 Fixed ratio

✓ This is calculated by dividing the total fixed costs by the gross income.

6.12 Gross Ratio

✓ This ratio expresses the percentage of gross income absorbed by the total costs
GR = Total expenses/Gross Income

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