Farm Management: For Educational Purposes Only Charanya Arora B.B.A. Semester V

Farm Management
B.B.A. Semester V For educational purposes only Charanya Arora

Farm Management
Rational Resource Allocation
Farm Ability Farm

Resources Objectives
Land Increased net
Labour Farmer farm income
Farmland Increased
Building Return on
Working capital Awareness Investment
Farm equipment

Farm Management Defined
 Farm Management is that branch of agricultural economics

which deals with the business principles and practices of
farming with an object of obtaining the maximum possible
return from the farm as a unit under a sound farming
programme
 Farm Management is a branch of agricultural economics
which deals with wealth earning and wealth spending
activities of a farmer in relation to the organization and
operation of the individual farm unit including some or all
the functions of marketing for securing the maximum
possible net income consistent with the maintenance of soil
fertility
 Farm management is the science which deals with the
analysis of the farming resources, alternatives, choices &
opportunities within the framework of resource restrictions
& social & personal constraints of farming business

Features of Farm Management
 Farm management deals with the organisation & operation

of a farm with the objective of maximizing profits from the
farm business on a continuing basis
 The farmer needs to adjust his farm organisation from year
to year to keep abreast of changes in methods, price
variability & resources available to him
 Farm Management takes into account the goals and
objectives of the individual farmer other than income
maximisation
 Farm management is a decision-making science, and is
applicable to non crop farms as well eg: Dairy farms,
poultry farms etc.
 With land as a scarce resource, efforts are made to
intensify its use for maximising profits through multiple
cropping. During a given period, the relative profitability of
different crop rotations is evaluated & finally selected for
adoption

Basic Farming Business Decisions
 What to produce or what combination of different

enterprises to follow?
 How much to produce and what is the most
profitable level of production?
 What should be the size of an individual
enterprise, which, in turn, will determine the best
overall size of the farm business?
 What methods of production (production
practices or what type of quality of inputs and
their combination) should be used?
 What and where to market?

Basic Economic Principles of Farm
Management
 Principles of variables proportions or laws of returns
• Diminishing returns
• Constant returns
• Increasing returns
 Principles of substitution between inputs (Least cost
combination)
 Principles of comparative advantage and absolute
advantage
 Principles of equimarginal returns
 Principles of opportunity cost
 Principles of enterprise combination
 Cost principles

Law of Diminishing Returns
 Level of agricultural production goes on increasing in initial stages

with increase in quantity of variable resources applied to a fixed
resource, then it remains somewhat constant for some time and
than it declines
 If increasing amounts of one input is added to a production
process, while all other inputs are held constant, the amount of
output added per unit of variable input will eventually start
declining
 This means a situation an increase in the capital and labour
applied to the cultivation of land causes in general a less than
proportionate increase in the amount of produce raised
 Three conditions which may delay the operation of the law in
agriculture
• Improvement in technology
• Improvement in managerial ability
• Residual effect of previous doses

 This principle should therefore, be helpful in

making decisions such as
 The level to which yield/ha. Milk/Cow etc. should
be pushed to secure maximum profit.
 The size of the farm one should operate with
given resources of capital, labour and
management

Marginal cost and Marginal Returns
Analysis
 Total Product (TP) :- The amount of product which results
from different quantities of variable inputs is called the
total product
 Average Product (AP) :- The term AP refers to the average
productivity of a resource. It is ratio of total product (TP)
to the quantity of inputs used to producing that amount of
product.
AP (x)= Y
Where, Y = Product & X = Input
 Marginal Product (MP) refers to the quantity when
additional (Marginal) unit of factor – input adds to the total
product. The MP at any level of the variable input can be
approximated by the addition to total output

Marginal cost and Marginal Returns
Analysis
Fertilizer Yield of Total cost Marginal Marginal Marginal Total Profit Rs.
Unit/Acre Paddy @ Rs 30/- cost (Rs.) Product Returns Returns @
N. (50 (Qtls) unit (T.C.) (M.C. Qtls. (Rs.) Rs. 50 Qtl.
Rs/can) (T.P.) (M.P.) (M.R.) (T.R.)
0 2 0 0 0 0 100 100
1 6 30 30 4 200 300 270
2 9 60 30 3 150 450 390
3 10.5 90 30 1.5 75 525 435
4 11.5 120 30 1 50 575 455
5 12 150 30 0.5 25 600 450
6 11.5 180 30 (0.5) (25) 575 395
7 10.5 210 30 (1) (75) 525 315

 Relationship between Total and Marginal Products

• So long as MP moves upward or increases, the TP increases at
increasing rate
• When the MP remains constant, the TP increases at constant
rate
• When the MP starts declining, the TP will be increasing at
decreasing rate
• At the point the MP becomes Zero the TP will be at maximum
 Relationship between Marginal Product and Average Product
• When the MP keeps increasing, the AP also keeps increasing
• As soon as Marginal Product goes below the AP, the AP starts
decreasing
• When AP does not change with additional inputs used, the
amount of product added by marginal or additional units of
input is equal to AP

 Marginal Product and Average Product

• When MP > AP AP is increasing
• When MP < AP AP is decreasing
• When MP = AP, AP is at a maximum
 Elasticity of Production :- The elasticity of production refers
to the percentage change in output in response to the
percentage change in input
 Relationship between Total and Marginal Products: The
marginal product (MP) is a measure of rate of change.
• When TP is increasing, the MP will be positive.
• When the TP remains constant, the MP will be zero.
• If the TP decreasing, the MP will be negative

Law of Equimarginal Returns
 Useful in a limited resource situation, where the farmer

must plan and use the available resources in such a way
that each and every unit of limited land, labour and capital
will produce the maximum returns
 This principle says that returns from a limited resource will
be maximized, if each unit of limited resource is used,
where it will add the maximum return
 The farmer must use each acre of land, each day of labour,
and rupee of the capital in those enterprises, where they
add maximum to the net returns
 In other words, this principle states that resources should
be used, where they bring not the greatest average
returns, but the greatest marginal returns
 The adoption of specialized and diversified farming depends
to a certain extent on the principle of equimarginal returns

Marginal Returns to Capital on Three
Crop Enterprises
Amount of Capital Used Marginal Returns (Rs.)
Rs.
Groundnut Jowar Paddy
1000 1300 1400 1500

2000 1300 1200 1250
3000 1200 1100 1100
4000 1200 900 1000
5000 1100 800 900
Total Returns from Rs. 5000 6100 5400 5750
Net Profit 1100 400 750
Average Returns Per rupee 1.22 1.08 1.15

invested

Marginal Returns Comparison
Amount Crop Enterprises Added Returns
First Rs. 1000/- Paddy 1500
Second Rs.1000/- Jowar 1400
Third Rs. 1000/- Groundnut 1300
Fourth Rs. 1000/- Groundnut 1300
Fifth Rs. 1000/- Paddy 1250
Total Returns from Rs. 5000/- 6750/-
Net Profit 1750/-

Law of Substitution or Least Cost
Combination
 When two competing resources for practices can
be used to produce a given output, farmer has to
decide, whether to use one resource for the other
or combination of the two e.g. A farmer may
have to decide whether to grow local variety or
high yield variety of crop, whether to apply
chemical fertilizer or organic fertilisers to produce
a given output of a crop
 In this case the farmer would select the least cost
resource or practice, or least cost combination of
resources and practices

Combination
 If the quantity of output is constant, it is
economic to substitute one factor of production
for the another factor of production, if the cost of
first is less than the cost of second
 While minimizing the cost, the farmer may face
two situations :
• Two major resources or practices which substitute
for each other without changing the output level
• Many possible combinations of two resources or
Practices which substitute at diminishing rate

Combination
Perfect Substitutes
Sr.No. Particulars Yield level / acre Cost Rs.

1 Bullock power threshing 10.00 50.00
2 Mechanical Power Threshing 10.00 45.00
From the above table, it is seen that mechanical power threshing costs Rs. 5/-
less than the bullock power threshing. So, farmer should substitute
mechanical power threshing for bullock power threshing.
Substitutes at a Diminishing Rate

When large number of combinations of two resources or practices are possible,
the farmer should select the combination which will cost least
If two factors or resources are considered for a given output, the least cost
combination will be such, where their price ratio is inversely equal to their
marginal rate of substitution

4 Steps to Find the Least Cost
Combination
 Calculate the added quantities of Berseem and replaced
quantities of Concentrates and consider the two successive
levels of each
 Compute the marginal rate of substitution (M.R.S.) by
dividing the number of units of replaced resources by the
number of units of added resources by the following
formula.
M.R.S. of X1, & X2 = No. of units of replaced
resources/No. of added resources
 Compute the price ratio as follows
P.R.= Cost per Unit of added resource/ Cost Per Unit of
Replaced Resource
 For determining the least cost combination, field out the
point where marginal substitution ratio and price ratio are
equal. At the point the combination is least cost
combination

Principles of Comparative Advantage
 There are two types of advantages which help to

determine crop pattern
• Absolute advantage
• Comparative or relative advantage
 The principle of comparative advantage directs
that the farm should select those drops and
livestock enterprises in the production of which
available resource have the greatest relative and
not absolute advantage

Opportunity Cost Principles
 Opportunity cost is the value of the next best alternative

foregone- the value of the product that was not produced,
because resources were used for a different product
 The value of one enterprise sacrificed is the cost of
producing another enterprise
 Example : If a cultivator has Rs. 800/- for investment in
the farm business, he will make a choice from various
alternative uses of this money
1. Purchase of buffalo giving net returns Rs.
80/- i.e. 10% returns on the funds invested.
2. Purchases of a water lift on 5 acres farm
net returns Rs. 100/- (12.5% returns on investment).
3. Invest on a bullock cart for transporting his
produce to the market, thereby increasing share in
the consumers rupee net return of Rs., 60/-
(7.5% returns)

Principle Of Combining Enterprises
 Whether a farmer should combine one enterprise

with another enterprise or replace one enterprise
with another, depends partly on the inter
relationships, between different enterprises and
the prices of products and inputs
 Types of Enterprise Relationships
• Independent Enterprises
• Competitive Enterprises
• Supplementary Enterprises
• Complementary Enterprises
• Joint Enterprises

Independent, Joint and Competitive
Enterprises
 Independent Enterprises: Independent enterprises are those
which have no direct bearing on each other, an increase in the
level of one neither helps nor hinders the level of other
 Joint Enterprises: Joint produces are those which are produced
together. The quantity of one product produced decides the
quantity of the other product.
 Competitive Enterprises: Competitive enterprises are those which
compete for use of the farmers limited resources. Use of resource
to produce more of one necessitates a sacrifice in the quantity of
other product
• Three things determine the exact combination of the product
which would be most profitable
• The rate at which one enterprise substitutes for the other
• Prices of the products
• The cost of producing the product

Supplementary and Complementary
Enterprises
 Supplementary Enterprises do not compete with
each other but add to the total income
 Complementary enterprises are those which add
to the product of each other
• Two products are complementary when the transfer
of a variable input from the production of one
product to the production of the other results in an
increase in the production of both products

Types of Farming
 Specialized Farming: An specialized farm is one on which

50% or more receipts are derived from one source
 Advances of Specialized Farming
• Better Use of Land: It is more profitable to grow a crop
on a land best suited to it e.g. Jute cultivation on
Swampy land in West Bengal
• Better Marketing: Specialization allows better
assembling, grading, processing, storing, transporting,
and financing of the produce
• Better Management: When there are fewer enterprises
on the farm, they are liable to be less neglected and
sources of wastage can easily be detected
• Costly And Efficient Machinery Can Be Kept : A wheat
harvester or a mechanized thresher can be maintained
in a highly specialized wheat farm
• Efficiency And Skills Are Increased

Types of Farming
 Disadvantages of Specialized Farming

• There is greater risk – Failure of crops and market
together may ruin the farmer
• Productive resources – land, labour and capital are
not fully utilized
• Fertility of soil cannot be properly maintained for
lack of suitable rotations
• By-products of the farm cannot be fully utilized for
lack of sufficient livestock on the farm
• Farm returns in cash are not generally received
more than once a year
• General knowledge of farm enterprises becomes
limited

Types of Farming
 Diversified or General Farming: A farm on which no single

product or source of income equals or exceeds 50% of the
total receipt is called a Diversified or General farm
 Advantages of General Farming:
• Better use of land, labour and capital: Better use of land
through adoption of crop rotations, steady employment
of farm and family labour and more profitable use of
equipment are obtained through diversified farming
• Business risk is reduced due to a crop failure or
unfavourable market prices
• Regular and quicker returns are obtained from various
enterprises

Types of Farming
• Disadvantages of Diversified Farming

• Marketing is insufficient, unless the producers arrange for
sale of their produce on co-operative basis
• Because of varied jobs in diversified farming a farmer can
effectively supervise only limited number of workers
• Equipment interoperability may not be smooth
 Mixed Farming
• Mixed farming is a type of farming under which crop
production is combined with livestock raising
• In mixed farming at least 10% of its gross income must
be contributed by livestock activities, the upper limit
being 45%

Types of Farming
• Advantages of Mixed Farming

• Cattle provide draught animals for crop production
and rural transport.
• Mixed farming helps in maintaining soil fertility
• It tends to give a balanced labour load throughout
the year for the farmer and his family
• It enables effective use of farm by-products
• It provides greater changes for intensive cultivation
• It offers the highest returns on farm business
 Ranching: A ranch differs from other type of crop
and livestock farming in that the livestock graze
on natural vegetation. Ranchers have no land of
their own and make use of public grazing land

Types of Farming
 Dry Farming: Refers to a type of farming that depends upon

conservation of soil moisture
• Timely preparation of the land to a condition in which, it is best
able to receive and conserve the available moisture
• Timely and proper interculturing during growth period of the
crop
• Improving the water holding capacity of the soil by the
profitable application of organic manures
• Use of such implements as are capable or rapidly breaking of
the surface of the soil immediately after harvest as the
optimum condition of the field for tillage operation is of a very
short duration
• Bonding of fields – sloppy places should be bunded into small
level fields
• Use of small seed rate per hectare
• Mixed cropping

System of Farming
 “System of Farming” refers to the method of

agriculture and the type of land ownership
• Co-operative Farming
• Collective Farming
• Capitalistic Farming
• State Farming
• Peasant Farming

Co-Operative Farming
 Co-Operative Farming is a farming system in which land is jointly
cultivated, and members pool their labour and resources
 Need for Co-operative Farming
• To increase agricultural Production and make the country self-
sufficient: Owing to the low yield per acre, small and scattered
holdings & inability of farmers to adopt mechanized farming, co-
operative farming would seen to be an effective means for
increasing production
• To enable a farmer to get a fair price for their produce
• It will enable a considerable increase in the marketable surplus
and thus help capital formation in the individual sector
• Efficient and economic management
• It would enable introduction of better techniques in Agriculture,
land improvements and progressive agriculture in a planned manner
• Savings made under this could be used to introduce better farming
techniques, long term improvements and effective planning
• The objectives of the liquidation of landlords zamindars and the
consequent emergence of many peasant proprietors can be
achieved by way of co-operative farming

Types of Co-operative Farming
 Joint farming societies

 Collective farming societies.
 Co-operative better farming societies
 Co-operative Tenant farming societies

• Land is pooled and cultivated jointly and the
produce is raised collectively and also disposed
collectively
• the individual ownership of land is retained even
though land is jointly cultivated

Co-operative Joint Farming Society

• Each member gets wages for his daily labour
irrespective of the nature of work
• A member receives a return for ownership of land
pooled by him according to its fertility, location and
production capacity
• A part of the net profit is utilized for the payment
of bonus to the members, and a substantial portion
of it is paid on the basis of work done by them

Co-operative Collective Farming
Society
 This type of society has all features of a joint cooperative
farming society, except that in the former the land belongs
to the society as freehold or leasehold, while in latter the
land is hold by the members as owner or tenants.
 Land is pooled and cultivated jointly and the produce is
raised collectively and distributed among the workers in
proportion to labour and other resources contributed by
them
 Each member receive wages for the work done by him
 Net profits are divided in collective farming society

Co-operative Tenant Farming Society
 The society holds land in freehold or leasehold

 The entire land is divided into smaller plots and each is
leased a tenant cultivator, who is a member
 Each member cultivates the land given to him and is
entitled to get the produce of his land but has to pay a
stipulated rent to the society
 The society undertakes supply of credit, seeds, manures,
implements etc., but it is not compulsory for members to
avail of these facilities
 After meeting all expenses and providing for resources the
profits of the society are usually distributed among the
members in proportion to the rent paid by them

Co-operative Better Farming Society
 Such societies are organized with a view to

introduce improved method of agriculture
 In this farm the agricultural land is not pooled,
but each member owns his land and cultivates it
independently
 He agrees to follow a plan of cultivation laid down
by the society
 The society provides credit, marketing, land
development, irrigation, joint harvesting and
different resources to the members

Forms of Co-Operative Farming
Type of Co-operation Type of Type of
Farming Ownership Operation
Co-operative better farming Individual Individual
Co-operative joint farming Individual Collective
Co-operative tenant farming Collective Individual
Co-operative collective farming Collective Collective

Collective Farming
 In collective farming, the members of collective surrender the

land, livestock and input stock to the society
 The collectives cannot refuse to admit other members having the
required qualification
 Members are governed by a management committee elected by
themselves
 The committee directs farm management in the matter of
allocation of work, distribution of income and marketing surpluses
and ensures that members work efficiently
 Payment of workers is in terms of ‘work day units’ -standard
quota for each kind of farm operation is fixed in relation to one
working day
 The amount of work done by each farmer in a day is calculated
accordingly, both in respect of quality and quantity
 The unskilled worker has to put in more hours than the skilled one
to fill his quota of work day

Capitalistic Farming
 Factory owners have their own farms

 improved methods of agriculture are followed and
the application of capital input is high
 The workers on these farms can get better
wages, better housing facilities and other social
services
 However, the same challenges associated with
industries will prevail in this system

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Farm Management

B.B.A. Semester V For educational purposes only Charanya Arora

Rational Resource Allocation

Farm Ability Farm

B.B.A. Semester V For educational purposes only Charanya Arora

 Farm Management is that branch of agricultural economics

B.B.A. Semester V For educational purposes only Charanya Arora

 Farm management deals with the organisation & operation

B.B.A. Semester V For educational purposes only Charanya Arora

 What to produce or what combination of different

B.B.A. Semester V For educational purposes only Charanya Arora

B.B.A. Semester V For educational purposes only Charanya Arora

 Level of agricultural production goes on increasing in initial stages

B.B.A. Semester V For educational purposes only Charanya Arora

 This principle should therefore, be helpful in

B.B.A. Semester V For educational purposes only Charanya Arora

B.B.A. Semester V For educational purposes only Charanya Arora

1 6 30 30 4 200 300 270

2 9 60 30 3 150 450 390

3 10.5 90 30 1.5 75 525 435

4 11.5 120 30 1 50 575 455

5 12 150 30 0.5 25 600 450

6 11.5 180 30 (0.5) (25) 575 395

7 10.5 210 30 (1) (75) 525 315

B.B.A. Semester V For educational purposes only Charanya Arora

 Relationship between Total and Marginal Products

B.B.A. Semester V For educational purposes only Charanya Arora

 Marginal Product and Average Product

B.B.A. Semester V For educational purposes only Charanya Arora

 Useful in a limited resource situation, where the farmer

B.B.A. Semester V For educational purposes only Charanya Arora

1000 1300 1400 1500

Net Profit 1100 400 750

Average Returns Per rupee 1.22 1.08 1.15

B.B.A. Semester V For educational purposes only Charanya Arora

First Rs. 1000/- Paddy 1500

Second Rs.1000/- Jowar 1400

Third Rs. 1000/- Groundnut 1300

Fourth Rs. 1000/- Groundnut 1300

Fifth Rs. 1000/- Paddy 1250

Total Returns from Rs. 5000/- 6750/-

Net Profit 1750/-

B.B.A. Semester V For educational purposes only Charanya Arora

B.B.A. Semester V For educational purposes only Charanya Arora

B.B.A. Semester V For educational purposes only Charanya Arora

Sr.No. Particulars Yield level / acre Cost Rs.

Substitutes at a Diminishing Rate

B.B.A. Semester V For educational purposes only Charanya Arora

B.B.A. Semester V For educational purposes only Charanya Arora

 There are two types of advantages which help to

B.B.A. Semester V For educational purposes only Charanya Arora

 Opportunity cost is the value of the next best alternative

B.B.A. Semester V For educational purposes only Charanya Arora

 Whether a farmer should combine one enterprise

B.B.A. Semester V For educational purposes only Charanya Arora

B.B.A. Semester V For educational purposes only Charanya Arora

B.B.A. Semester V For educational purposes only Charanya Arora

 Specialized Farming: An specialized farm is one on which

B.B.A. Semester V For educational purposes only Charanya Arora

 Disadvantages of Specialized Farming

B.B.A. Semester V For educational purposes only Charanya Arora

 Diversified or General Farming: A farm on which no single