CHAPTER 1

INTRODUCTION TO FARM MANAGEMENT

1.1 Some Preliminary Concepts and Definitions

There are various expressions towards farm management. Some of the preliminary concepts
can be described as follows:

Farm: - it is the smallest unit of agriculture which may consist of one or more plots cultivated
by one farmer or group of farmers in common for growing crop and rising livestock
enterprises. It is both a producing and a consuming unit.

Family farm is also defined as a family holding of land depending on the local or existing
conditions and techniques of farming either to a plough unit or to a work unit for a certain
farming family size.

Agriculture is narrowly defined as the sum total of crop production and livestock rising on
individual farms. Hence, the agricultural production of a country is the overall contributions of
the individual farm units. Therefore, the growth of agriculture means the sum of the
improvements of millions of farm units. Thus, it is the macro-economic approach that
considers agriculture as a unit.

Farm firm is an enterprise of production activities by organizing various inputs for profit
maximization. Hence, it is a business unit of control over factors of production. On the other
hand, it is a household unit demanding maximum satisfaction of the farm family.

Management of a farm vs. Farm management: generally management of a farm aims at

maximizing production in the sphere of agronomy, where as farm management is concerned
with maximizing profit in the realm of agricultural economics.

Towards the definitions of farm management there are many kinds of interpretation to
explain the concept of the subject matter.

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 Farm management is a branch of economics (agricultural) that deals with the way how a
farmer attempts to accommodate scarcity to his/her needs. It is also a science that deals with
the proper combination and operation of production factors including land, labor and capital
and the choice of crop and livestock enterprises to bring about the maximum of continuous
returns to the most elementary operation units of farming.

Moreover, farm management is a subject which study about the application of agricultural
sciences, business and economic principles in farming in view of an individual farmer. The
principles may serve as a guideline for collecting and using required information for rational
decision making. They also provide a set of tools for the preparation of farm budget and
production programs.

Farm management can be defined as it is the sub-branch of agricultural economics which

deals with decision making on the organization and operation of a farm securing maximum
and continuous net income consistent with the welfare of farm family.

Thus, farm management can simply defined as a science which deals with judicious decisions
on the use of scarce farm resources by having alternative uses to obtain the maximum profit
and family satisfaction on a continuous basis from the farm as a whole.

1.2 Importance, Objectives and Scope of Farm Management

1.2.1 Why study farm management

i) Farm management is the most important science in developing countries as it deals with the
behavior of farming population. It examines the environmental conditions against which the
farmer takes decisions and the consequences.
ii) Most of the sciences are mainly interested in the physical aspect with less regard to the
economic returns of farming businesses. But farm management is the only discipline in which
farm and farm life are united together as a tree and its fruits. The farmer is essentially
interested in the income flow whereas the latter is closely associated with the farm family
satisfaction.

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iii) In the context of socio-economic changes, farm management has an inherent capacity of
developing strategic approaches to make the best use of scarce resources in such a way that
it can view the threats and problems that lie ahead as veiled opportunities for showing its
potential as one of the nation’s redeemer. Hence, there is a great bound to be aware and
understand the role of farm management in the nation’s economy.
iv) Furthermore, farm management investigations drives and give directions to farm business
improvement by providing useful information to planners, farmers and extension workers.
Particularly, farm management studies on specific farm projects, such as land reclamation,
settlement, irrigation and drainage, serves as an aid to formulate national polices.

1.2.2 Objectives of farm management

Looking at the farm structure as a whole, it is apparent that the objective has to do with two
aspects of the same farm as a producing unit and as a consuming unit along with the
harmonization of their behavior and goals. Broadly speaking, the objectives of farm
management are:
1. To study the existing resources (land, labor, capital and management) and
production patterns of the farm,
2. To perform the strategic task of identifying the deviation of the resources from
their optimum utilization.
3. To explain the means and the procedures of moving from the existing combination
of resources to their optimum use for project maximization.
4. 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.
5. To work out costs and returns on individual enterprises and on the farm as a whole.
1.2.3 Scope of farm management
The primary concern of farm management is the farm as a unit. It deals with the allocation of
resources at the level of an individual farm. It covers the whole aspects of individual farm
business which have bearing on the economic efficiency of the farm. In this regard it includes:
 The types of enterprises to be combined

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  The kinds of crops (livestock) and varieties to be grown
 The amount of fertilizer to be applied
 The implements to be used
 The way the farm functions are to be performed
 Investment decisions
 Appraisal of farm resources
 Farm planning and budgeting
 Farm prices, credit and profits
 Risk and uncertainty
 Planning the marketing of farm produces

Furthermore, the subject of farm management embraces:

Farm management research – to find out solutions of economic problems faced by the
farmers, it is greatly facilitated through recording of data related to the farm and it has to be
analyzed in view of that enables to identify causes of inefficient functioning of the farm.

Farm management extension – once the results of the study are known, they are to be made
available to the farmers. The farmers also have to be educated and trained in the application
or adoption of these results.
Farm management teaching – training in farm management science is essential for
agricultural graduates to understand farmers’ response to varying economic pressures and
stimuli. It also help the farmers to take the right decisions as to what to grow, how much to
grow, how to grow and where to sell and buy.

Research, training and extension together thus seek improving the ability of the farmers to
introduce desirable changes in the utilization of scarce resources at the farm with a view to
increase incomes and improve their standard of living.

1.3 Basic Farm Management Problems, Decisions and Characteristics

1.3.1 Farm management problems in developing countries

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Farm management problems may vary from place to place depending on the degree of
agricultural development and the availability of resources. The following are some of the most
common problems:
1. Small size of the farm business – obviously in Ethiopia, the average land size or holding
is fragmented and too small. Thus, excessive pressure of population creates
unfavorable man-land ratio in most parts of the country. This combined with excessive
family labor, which depends upon agriculture, and that has weakened the financial
position of the farmers and limited the scope for business expansion.
2. Farm as a household – in most parts of the country family farms perpetuate the
traditional combinations of crops and methods of cultivations. Thus, the equation
between agricultural labor and household labor becomes an identity. This makes
difficult for the farmer to introduce business content and incorporate new
management idea in his/her farm operations. Home management thus heavily gets
influenced by farm decisions.
3. Inadequate capital – capital shortage is usual feature of farming in developing
countries. Most often, peasant agriculture (i.e., mostly subsistent) is labor intensive
and characterized by serious deficiency of capital. Generally, small size of farms,
problems of tenureship and unremunerative prices have set the farmer under
perpetual poverty. New technologies demand higher inputs such as more fertilizers,
protection measures, irrigation and better seeds as well as investment in power and
machines. Therefore, small farm holders cannot meet the financial requirements from
their own funds. Hence, low cost, adequate and timely credit is their most pressing
need if they have to put their farms on growth paths.
4. Slow adoption of innovations – small farmers usually conservative and sometime
skeptical of new technologies or methods. The rate of adoption, however, depends on
the farmers’ willingness and ability to use the new information. Since established
attitudes and values do not change overnight, the extension take time to get the
research results commercially adopted and existed on the farms. It calls for training
and substantial financial requirements.

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 5. Inadequacy of input supplies – farmers may be willing to introduce change yet they
may face the difficulty in obtaining the required inputs of desired quality, in sufficient
quantity, and on time to sustain the introduced changes. Moreover, shortage of foreign
exchange in developing countries seriously limits importation of needed supplies and
materials. Domestic industries generally lack adequate raw materials, skills, capital or a
combination of these to manufacture the needed farm supplies.
6. Managerial skill ʹ it is also the most prominent and difficult problem of several small-
scale farmers for many years in developing countries. This is necessary for millions of
farmers who use the research results to develop progressive attitude and be
responsive to the technological changes through education.
7. Communication and markets ʹ these are also the other two important elements of
infrastructure necessary for introducing economic content in the farm organizations.
Lack of these elements set as a major bottleneck in the way of improving the
management of farms on business lines. Substantial investments, therefore, need to be
made on roads, marketing and other communication facilities.
1.3.2 Farm decision making

This section elaborates how farm management is applied in deciding on allocation of scare
resources in different alternative uses. Hence, farm management is concerned with the
allocation of limited resources among a number of alternative uses which require a manager
to make decisions. In farm business, goal attainment is confined within some limits set by the
amount of land, labor and capital available. These resources may change overtime, but they
are never available in infinite amounts. The expertise of the manager may be another limiting
resource. If the limited resource could only be used one way to produce one agricultural
product, the manager’s job would be much easier. Therefore, farm management seeks to
help the farmer in deciding on economic problems like:
 What to produce? (selection of profitable enterprises)
 How much to produce? (optimum enterprise mix and resource use level)
 How to produce? (selection of least cost production method)

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As a result, problems need to be recognized and defined in order to produce the most
acceptable results. Research has indicated that identifications of problems in the farm
business surprisingly difficult for farmers. Good managers will pin point more problems as a
result of systematic farm business analysis. The farm manager therefore needs to build up
plans of expected norms, which are basic in making decisions.

The process of making a decision can be formalized into a logical and orderly series of steps.
Important steps in farm decision making process are:
 Identifying and defining the problem,
 Collect relevant data, facts and information,
 Identify and analyze alternative solutions,
 Make the decision – select the best alternative,
 Implement the decision and
 Observe the results and bear responsibility of the outcomes.

Hence, farm management may in short be called a science of decision-making or science of

choice. That is, managing a farm is a continuous process of decision-making. The need for it
arises out of changes in the farm conditions as well as changes occurring outside of the farm,
and hence need of continuous adjustment of farm operations to the changes that become
inevitable. The principal changes frequently encountered by the farmers are fluctuations in
price, weather variations, and inventions in farming methods, changes in socio-economic
environment including changes in government policy and social responses and values.

1.3.3 Nature and characteristics of farm management science

It is basically both an applied and pure science. It is a pure science (theory) because it deals
with the collection, analysis and explanation of factors and the discovery of principles. It is an
applied science (technology) because the ascertainments and solutions of farm management
problems are within its scope. Furthermore, farm management science has many
distinguishing characteristics from other fields of agricultural economics.
1. Practical science

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  It is a practical science, because while dealing with the factors of other physical
and biological sciences,
 It aims at testing the applicability of those facts and findings and showing how
to put these results to use on a given farm situations.
 It gives the opportunity to a farmer to select a method which is more
practicable and economical to his particular farm situation by considering the
volume of work and financial implications.
2. Profitability oriented
 Farm management is interested in the issue of profitability of the farm.
 Physical sciences such as agronomy and plant breeding concern themselves
with sustaining the maximum yield per unit irrespective of the profitability
of inputs used.
 But the farm management specialist always considers the costs involved in
producing each unit of output in relation to returns and decides optimum
level of production. He has to consider all relevant factors such as financial
implications, transpirations, storage facilities and costs.
 Profitability is the major criterion in decision making process.
 Farm management is interested in optimum results (yields) which may not
necessarily coincide with the maximum production point.
 In brief when other sciences deals with physical efficiency, farm
management concerns with economic efficiency.
3. Integrating sciences in an interdisciplinary team
 The facts and findings of other sciences are coordinated for the solution of
various problems of individual farmers with the view to achieving desired
goals.
 It involves different persons from different disciplines to make decisions.
 It considers the findings of other sciences in reaching its own conclusions.
 Principles of farm management integrate results thrown out by physical
sciences under specific set of conditions.

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4. Broader field
 It uses more than are disciple to make decisions
 Farm management specialists have to know the broad principles of all other
concerned sciences in Addition to specialization in the business principles of
farm management.
 It has to gather knowledge from mans other sciences for making its own
deicing
5. Micro-approach
 It tracts every farm unit unique in available resources, problems and
potentialities
 It recognizes that no two farms are exactly identical with respect to soil,
other production resources, farmers’ managerial ability, etc.
 Each farm unit has to be, therefore, studied guided or planned individually
 The farm is treated as an operational unit and tailoring the
recommendations to fit into its resource position
6. Farm unit as a whole
 A farm as a whole is considered in farm management analysis to be the unit
for making decisions because the objective is to maximize the returns from
the whole farm instead of only improving the returns from a particular
enterprise or practice
 Farm management considers all possible aspects and enterprises for the
farm as a unit unlike dairy, horticulture which is concerned only with one
aspect of a farm.
 Exploiting the advantages of supplementary and complementarities with the
farm as whole on continuous basis.
 It is much more concerned with total crop productivity instead of one crop
productivity.
CHAPTER 2

9
 PRODUCTION RELATIONSHIPS
2.1 Concepts of Production Function

Products are the result of the use of resources or services of the available ones. E.g. milk, wheat,
maize, etc. Production is a process of transformation of certain resources or inputs like land, labor
(human, animal), seeds, fertilizers, irrigation tools and water in to products like wheat, milk and so
on.

2.1.1 Production function

 It is a technical and mathematical relationship describing the manner or extent to which a
particular product depends on the quantities of inputs(s) and service(s) used. i.e., the level
of output of a particular commodity depends up on the quantities of inputs used for its
production.
 This relationship between inputs and outputs can be characterized as a production
function. Simply, production function can be defined as the relationship between physical
inputs and output of a farm or a firm.

2.1.2 Types of production function

Production function is of two types, i.e., continuous function and discontinuous or discrete
function.
 Continuous production function
It can be explained by responses of yield to fertilizers or seeds where the doses or levels of
inputs can be spilt into small units. For instance, fertilizer can be applied to a hectare of land
in quantities ranging from a fraction of a gram or a kilogram up to hundreds of kilograms.
Labor is also quite divisible in terms of hour or time of accomplishment.
 Discontinuous or discrete production function
Such functions are also be obtained for inputs or work units that are used or done in whole
number such as one ploughing or a number of ploughing. In discrete functions, the alternative
decision points get limited; otherwise same method of analysis is followed in both continuous
and discrete production functions.
Transformation or production period
Time required for a resource to be completely transformed into a product is referred to as
transformation period or production period. All resources are not completely transformed in
a single year. Long-lived resources such as buildings, tractors etc may not be transformed into
product. This chapter deals with the analysis of certain fundamental relationships involved or
obtaining in the production of farm products. There are numerous relationships between

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 resources and farm products, both simple and complex. It is necessary for a student of farm
management to understand these relationships thoroughly.
Inputs: - are also called productive resources, and in economic termed as ‘factors of
ƉƌŽĚƵĐƚŝŽŶ͛͘ They are usually grouped in to four main categories such as land, labor, capital
and management (entrepreneurship). The result of combinations of inputs or the
transformation of inputs into a product is called output (yield).
1. Land - Consists of those gifts of nature which are not the result of human effort and it
includes soil types, water and climate. It is often made productive as a result of human
effort.
2. Labor - The term labor describes the effort of human beings that include hired, family
(farmers') labor. Labor is needed for every type of production. It can be more productive as
a result of time and effort devoted to training.
3. Capital - Capital presents all resources which are the result of past human effort. The
capital category includes a wide variety of items ranging from durable items such as
building, dams, roads, and machinery to stock of variable inputs like seed and fertilizer
which may be used in a single production season. Capital should not be confused with
money, i.e., money itself is not a productive resource. It only becomes productive when it
is used to buy physical items of capital.
4. Management (Entrepreneurship) - Management function is primarily a mental process of
each choice and action of the enterprises conditioned by the attitudes, values and goals of
the manager. Thus, formulation of goals is essential in effective management because they
give direction to the whole managerial process.
Characteristics of inputs
1. They are scarce or limited in supply
2. They have alternative uses
3. Technology has changed their productive capacity
Because of these characteristics, one who involved in agricultural production is urged to
answer the following question. (Basic economic question)
1. What to produce?
2. How much to produce?
3. How to produce or what method of production to use?

The following mathematical equations can present different forms of production functions.
For example, production function involving one variable input:
Y = f(X1/X2, X3 … Xn)
Where: - f stands for the phrase “functions of".
- the vertical bar “/” is used for separating variable inputs from the fixed inputs,
- Y denotes output per unit of time and

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 The Relationship between Product and Cost Curves
Suppose that we have one variable input X and price of X is Px. Hence, total variable cost is
the product of X and Px(i.e., TVC=XPx).

TVC XPx X  1  Q

AVC    Px   Px  , because average product of labor APx 
Q Q Q  APx  X
Px
 AVC  , This shows the inverse relationships between AP and AVC. As AP first
APx
increases, reaches a maximum and then declines, AVC first declines, reaches a minimum and
then rises. As AP measures the efficiency of the variable inputs, AVC provides the same
measure for cost function. When AVC is decreasing, the efficiency of the variable input is
increasing. When AVC is at its minimum, the efficiency of the variable input is at its maximum.
When AVC is increasing, the efficiency of the variable input is decreasing.
TVC PxX  X
Similarly, MC    Px . This is because price (Px) is assumed to be
Q Q Q
 1  Px Q
constant.  MC  Px  , because marginal product of X is MPx 
 MPx  MPx X
This also implies that MC and MP are inversely related. As MP first increases, reaches a
maximum and then declines, MC first decreases, reaches a minimum and then increases.

AP
and
MP
AP
MP
Input
0
MC
Cost AVC

0 Output

Relationship between Product and Cost Curves

The marginal product curve lies above the average product curve in the region, where the MC
lies below AVC. The marginal product curve lies below average product curve in the region,
where the AVC curve lies below the MC curve.
The Economic Optimum
If we use Total cost-Total revenue approach, the economic optimum of production is reached
when the difference between total cost and total revenue is maximum. I.e extra cost of one

34
 unit more output (MC) is equal to extra benefit (MR). provided that the farmer is not
operating on a large scale to influence market prices and the price received per unit is
constant and equal to MR. in this case, if the price of a commodity does not vary with quantity
sold ,total revenue increases with an increase in out put. Profits are at maximum when out
put is at a level where MC=MR. production of an additional unit is always profitable as long as
MC is less than MR because less is added to total cost than is added to total revenue.
Production of an additional unit is always unprofitable if MC is greater than MR, since more is
added to the total cost than is added to the total revenue. Therefore, there is a need to
decrease production to the point where MR=MC.
Example: Based on the following table, determine the profit maximizing out put and the
maximum profit if the cost per unit of input(X) is birr 5 and the price per unit of output(Y) is
birr 3.

X Y TFC TVC TC AFC AVC ATC MC TR MR 𝜋

0 0 20 0 20 - - - -- 0 - -20

1 2 20 5 25 10 2.5 12.5 2.5 6 3 -19

2 5 20 10 30 4 2 6 1.67 15 3 -15

3 9 20 15 35 2.22 1.67 3.89 1.25 27 3 -8

4 14 20 20 40 1.43 1.43 2.86 1 42 3 2

5 19 20 25 45 1.05 1.32 2.37 1 57 3 12

6 23 20 30 50 0.87 1.3 2.17 1.25 69 3 19

7 26 20 35 55 0.77 1.35 2.12 1.67 78 3 23

8 28 20 40 60 0.71 1.43 2.14 2.5 84 3 24

9 29 20 45 65 0.69 1.55 2.24 5 87 3 22

If the output is sold at constant price of birr 3 per unit, for the level of production up to 7
units, the fixed cost per unit exceeds the value of the product. In fact, a farmer will lose if he
produces an output less than about 14 units. The economic optimum occurs at an output
level of about 28 units, where MC=MR =PY. At this level the total profit become birr 24.
Three rules used for making production decision in the short run:

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1. When selling price (P1) is greater than ATC or TR>TC, profit can be made and is maximized
by producing where MR=MC.
2. When selling price (P2) is less than minimum ATC but is greater than minimum AVC or
TR>TVC but TR<TC, the income/revenue will not be sufficient to cover total cost. It covers
all variable costs with some left over to pay part of fixed costs. The loss can not be avoided
and will be somewhere between zero and TFC. Production will continue and the loss is
minimized by producing where MC=MR. The point where selling price is equal to the
minimum ATC is called break-even point (B).
3. When selling price (P3) is less than minimum AVC or TR<TVC, the income will not even
cover the variable costs. The loss can not be avoided and will be greater than TFC. The loss
is minimized by shutting down. This would minimize the loss at an amount to TFC. When
selling price is equal to minimum AVC, the loss is equal to TFC and the point is called as
shut down point (S).

Exercise: calculate TFC, TVC, ATC, AVC, AFC and MC functions for the following cost function.
TC=100+5Q-0.2Q2.
1. The Law of Equi-marginal Returns
When resources are limited, expansion of one enterprise generally requires an equivalent
contraction in another enterprise. The question here is which enterprise or combination of
enterprises will give the greatest income? Such an optimum choice of enterprises is made
based on the principle of equi-marginal returns. The equi-marginal returns principle provides
the guideline and the rules to ensure that the allocation is done in such a way that profit is
maximized from the use of any limited input.
The principle of equi-marginal returns states that profit from the available limited resources
can be maximized by using the resources in such a way that the marginal return (the marginal

36
value product) of the last unit of the resource used on each enterprise is equal. If the marginal
returns in different uses are unequal, it will clearly pay to transfer some of the resource from
the use where its marginal return is lowest to the use where is highest. This process continues
until marginal returns are equal in all alternative uses.
Example: Suppose a farmer has birr 5000, which can be invested to grow crops (wheat and
barely) and raise dairy or poultry. The farmer`s problem is to determine the amount of capital
that he should invest on each enterprise to get the highest profit.

Money spend MVP1000

(capital invested)
Wheat Barley Dairy Poultry

1000 1400 1150 1300 1450

1000 1300 1100 1200 1300

1000 1200 1000 1100 1100

1000 1200 900 900 1000

1000 1100 850 800 900

Total return from Birr 5000 6200 5000 5300 5750

Net return/Profit 1200 0 300 750

Average return 1.24 1 1.06 1.15

If the farmer follows the law of average returns, he will invest the whole capital for
production of wheat to get a gross return of birr 6200 and a maximum profit of birr 1200.
However, if the farmer follows the law of equi-marginal returns, where the marginal return in
each direction of his investment are equal, he can get a gross return of birr 6750 and a
maximum profit of birr 1750.
Therefore, the farmer should allocate birr 2000 for wheat production, birr 2000 for dairy and
birr 1000 for poultry production, which results the maximum profit of birr 1750. Any other
alternative schedule different from the principle will result increased income.
This principle dictates that the resource should be no where they bring the highest average
returns, but where they yield the highest marginal returns. The best combination of
enterprises is attained not when we select profitable enterprise but when we select the most
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profitable combination of enterprises. The Table below shows investment allocation on the
three enterprises.

Allocation Selected enterprises Added return

The 1st birr 1000 Dairy 14500

The 2nd birr 100 Wheat 1400
The 3rd ,4th & 5th birr 1000 Wheat ,Dairy & Poultry 1300 each
Total return from birr 5000 6750
Net profit 1750

The equi-marginal principle is sometimes referred to as the opportunity cost principle. The
opportunity cost indicates the return that can be achieved for the use of a resource in its most
profitable alternative use. In the event, a resource is allocated in sub optimal manner; the
opportunity cost will exceed the return achieved. For example, in the above table, if the
farmer allocates the available limited capital as 2000 to wheat production, birr 2000 for dairy
production and 1000 for barley production, the opportunity cost of the last 1000 is birr 1300
that could be obtained from using the money for poultry production. Thus, an allocation
based on the equi-marginal return principle has an opportunity cost concept.
2. The Principle of Comparative Advantage
Certain crops can be grown in only limited areas because of specific soil and climatic
requirements. This means, even those crops and livestock which can be raised over a broad
geographical area often have production concentrated in one region. For example, why Ada
district, East Shewa Zone of Oromia Region, farmers specialize in “teff” production while
Harerge farmers specialize in “chat” production?
There are two types of advantages in raising the farm products on the bases of maximum net
revenue per hectare. These are absolute advantage and comparative (relative) advantage.
Consider two regions of equal size, Region 1 and Region 2, both of which produce and
consume two agricultural products, maize and wheat.
A region is said to have an absolute advantage in the production of a commodity or a group of
commodities if it can produce them more efficiently than the other region. This means the
other region has an absolute disadvantage in the production of these products. However, if
there are differences in relative efficiencies of producing the different goods in the two

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