Financial management and large-scale operation
The financial tools a farmer can use to analyze, plan, and control his business include financial statements, profit and loss statements, and cash-flow statements. A financial statement tells the amount of money invested in farm assets, outstanding debts, the owner’s equity in the business, and the degree to which the farm is liquid and solvent. Liquidity is the ability to meet financial obligations on time, whereas solvency is the ability to pay all debts if the business is forced to discontinue. A profit and loss statement shows sources and amounts of income and operating expenses. Comparison of profit and loss statements over a period of years tells which resources have been most profitable and whether there has been an advance or decline in net income. A cash-flow statement shows the sources and uses of funds at given periods during the year. Such a statement provides a useful check on the accuracy of the farm’s other business records.
For the traditional farmer, land and labour (his own and that of his family) are the major resources. Under favourable conditions, the farmer has changed his role from labourer to operator-manager; much larger farm units with high capital investments have resulted. Such conditions include the existence of a considerable body of applicable scientific knowledge, an opportunity for greater efficiency from large-scale operations, the existence of good markets and transportation, the opportunity to routinize and centrally direct farm work, and an absence of community antagonism to large-scale agriculture.
The trend to the substitution of capital for labour is especially noticeable in the United States, for example, where capital accounts for a steadily increasing proportion of farm inputs. In the United States in 1940, capital comprised 29 percent of farm inputs, labour 54 percent, and land 17 percent; by 1976 capital accounted for 62 percent of farm inputs, labour 16 percent, and land 22 percent. Capital typically replaces labour when large machines do the work of several men using smaller implements; when chemicals replace the scythe and hoe for weed control; when milking parlours, pipelines, and bulk tanks replace handmilking operations; when a mechanized installation replaces the fork and bushel basket in dairy, beef, or hog feeding; when automated sprinklers bring irrigation water to crops; when cisterns and lagoons handle animal waste; when combines and forced-air crop drying speed the harvesting of small grain; and in similar substitutions.
The technical knowledge that a modern large-scale farm manager must possess is frequently held to be far greater than that required of most businessmen with equal investment; the capital required to operate such a farm is beyond the reach of many. In consequence, financial-management techniques resembling those of industry are often employed. Capital is imported from the outside; production is scheduled to meet quantity, grade, and timing requirements; and labour is given specific tasks, as in a factory.
Recognizing the economic benefits of large-scale agriculture, many underdeveloped countries have attempted to create conditions for its existence. National governments, often with outside help, have financed large-scale development programs, involving irrigation or improvement of huge acreages by means of dams, drainage facilities, and canals, and these have revolutionized the lives of many traditional farm managers within the space of a few years. Improvements in crops and livestock, marketing techniques and organization, and transport and power have in some cases increased agricultural productivity and income several times over. Since capital and management have been in the hands of government, the traditional farm manager has, however, often lost some of his independence, and not all such programs have succeeded. Poor planning and management by government authorities and resistance from the farmers themselves have led to some expensive failures.
Reducing market risks
The marketplace for agricultural commodities is exceptionally risky for three important reasons. First, no single farm producer can place or withhold enough of a single item on the market to affect the market price; second, the quantity of a commodity taken off the market does not increase in proportion to price declines; third, the farm manager cannot respond to falling prices by quickly switching production from an unprofitable item to a profitable one. To reduce his risks and safeguard profits, the farm manager may specialize or diversify depending on conditions; he may also use the futures market (see below).
A specialized farm manager concentrates his effort on the production of one item such as wheat, cotton, milk, eggs, or fruit. By such specialization he can realize the benefits of large-scale production and can make the most money from an enterprise in which he is highly skilled. On the other hand, the specialist is vulnerable to sudden changes in the market, to plant and animal diseases, and to soil exhaustion resulting from cultivation of a single crop.
Diversification—the spreading of one’s talents over more than one farming enterprise—may be accomplished horizontally or vertically. Horizontal diversification means the production of more than one item for sale. In vertical diversification, the farm manager handles raw products after harvest by processing, packaging, transporting, or even selling at retail. A poultry farmer who produces eggs and washes, candles, grades, packages, and markets them at retail is said to be vertically diversified. He has taken on some of the jobs that could have been performed elsewhere, and as a result he generally receives a better return for his efforts.
Programs of agricultural diversification have been carried out by some developing countries, with the government acting as a kind of national farm manager. Upon achieving independence, nations such as Ghana and Nigeria, in West Africa, found their economies highly dependent upon a single raw agricultural export (cocoa for Ghana; palm oil for Nigeria). Sharply falling prices for these commodities or epidemics of plant disease were seen to have disastrous effect on national prosperity. Erosion problems also caused concern. The governments responded by horizontally diversifying into other profitable crops and vertically diversifying in the establishment of industries to process these commodities or turn them into manufactured goods before export.
A capable farm manager may use the futures market to try to minimize his risks. In the futures market, the farm manager contracts with a buyer to deliver a given quantity of some commodity at a specified date in the future for an agreed price. The buyer is often a speculator who hopes that prices will rise, enabling him to sell the commodity or the contract at a profit. Futures markets enable the farm manager to establish in advance a price for a crop or earn payment for holding a crop in storage. Futures markets also permit some farmers to speculate on a price increase without storing a crop, establish in advance the price of livestock feed intended for later use, and establish an advance price for livestock.
Special concerns of scale
Farm management specifics vary all over the world; it is possible here to cite only some of the most typical practices in several leading agricultural countries.
Large-farm management
Research has shown that large farms produce more efficiently than small farms. In sugarcane production, for example, the most efficient farm may include many thousands of acres or hectares. Yet, a well-managed dairy farm might achieve greatest efficiency with two men and fewer than 100 cows. In the future, as technology advances, the farms that are managed most efficiently will probably be larger than the most efficient farms at present.
Large farms can reduce costs by claiming volume discounts on their purchases. They can negotiate prices on fertilizer, seed, crop chemicals, petroleum products, machinery, and repair services. Large operators also have an advantage in selling their products. Managers of large corn farms, for example, can contract directly with a large processor for an entire year’s production of given quantity and quality for a specific date in the future, thus commanding a higher price. The middleman is eliminated, and production, handling, and processing can be prescheduled for greater efficiency. Large farms also have a smaller investment in machinery and buildings per crop acre.
United States
The increase in the capital requirements of United States farms has already been described above. These changes in American agriculture are, to a large degree, the result of a revolution in financial management. Up to about 1930, little outside capital was needed to finance farming operations. Today, capital investment has vastly increased; farmers obtain their production goods and services—land, machines, breeding stock, seed, fertilizer, and other necessities—in a variety of ways.
Renting land is one way. In contrast to earlier days when land ownership was considered the ideal, renting land is now a widely accepted management practice. Large acreages of corn land in the Corn Belt, wheat land in the Great Plains, and cotton land in California and Arizona are operated by renters. Renting land enables farmers to operate on a much larger scale than would be possible under ownership. Specialized rice growers in the Sacramento Valley of California, who own tractors, tillage tools, and harvesters, receive rice-acreage allotments from the federal government. Such growers own no land, renting it instead from owners who have no rice allotment. Growers prepare the ground, irrigate it with water supplied by the landowner, and contract for application of seed and fertilizer. When the crop is ripe, the growers harvest the rice with their own combines and haul it to a warehouse for drying and storage. In upland areas of the valley, other growers raise tomatoes under contract from a canner, renting their land from a general crop farmer.
Farmers who do not wish to tie up capital in high-priced farm machinery can contract for harvesting of such crops as wheat, corn, grain sorghum, and barley. An airplane operator may seed, fertilize, and apply weed spray for a rice grower. Vegetables, fruit, and nuts may be picked under contract by shipper-packers whose crews move from farm to farm. Similar operations in livestock include sheepshearing, dehorning, branding, and artificial insemination.
Rental of machinery is another management device farmers use to obtain the services of equipment too expensive to be owned individually. Rental of livestock also is receiving attention. In the northeastern United States dairy farmers lease cows. The owner of the cows may be a contracting firm, a local bank, or an individual investor for whom the bank serves as agent. The scheme is useful both to older farmers who wish to retire but want to retain their interest in dairying and to young dairy farmers who want to expand but have limited capital.
Soviet Union
Following the Bolshevik Revolution of 1917, large landholdings were expropriated by the state and the land was distributed among the peasants. In 1928 collectivization of Soviet agriculture was initiated on a large scale; a three-part structure composed of state farms (sovkhoz), collective farms (kolkhoz), and private plots emerged. The state farms were owned, managed, and operated by the state. Workers on state farms were salaried employees of the state; farm managers were state appointees. During the 1960s and ’70s state farms increased sharply in numbers. Much of the increase was the result of new state farms being established in the virgin land areas and the consolidation of smaller collective farms into state farms.
The collective farm leased land from the state and was worked by members of the collective under an elected committee that, as the management unit, had the responsibility of organizing land, labour, and capital in accordance with production requirements. For years, payment to collective members consisted of their share of the collective’s produce or income from its sale. Each individual’s share was determined by a workday unit that took into account the time spent performing a job and the level of skill required for the job. In the last few decades prior to the dissolution of the Soviet Union (in 1991), most collective farms had shifted to a monthly wage similar to that used by state farms.
Private plots up to two acres (0.8 hectare) in size and operated by individual workers occupied less than 3 percent of the planted area in the Soviet Union but produced nearly half the potatoes, 40 percent of the eggs, 20 percent of the meat, and 13 percent of the vegetables.
Though the Soviet farm manager’s role did not include primary decision making, there was a trend from the 1960s toward more management autonomy in farm production. The Soviet government promoted greater efficiency in agriculture by increasing the level of inputs and by improving incentives to farm labourers. These measures included financial concessions to farmers and expanded use of fertilizers, pesticides, irrigation, and drainage. The Soviet farm manager performed additional functions that in other countries are carried out by government and welfare officials, such as providing roads, recreation, education, health care, and welfare to members of the collective.
Israel
A unique feature of the management of agriculture in Israel is its cooperative settlements, which evolved as a result of the needs encountered by immigrants who were new both to their surroundings and to farming as a profession.
The two basic types of cooperative settlement are the moshav and kibbutz. A moshav is a village containing up to 150 farm family units and supported by a strong multipurpose cooperative organization. Each family is an economic and social unit, living in its own house and managing and working its own fields. Although each farm family is independent, its social and economic security is ensured by the cooperative structure of the village, whose organization markets the produce, purchases the farm and household equipment, and provides the farmer with credit and other services.
A kibbutz, numbering from 60 to 2,000 members, is a true collective based on common ownership of resources and on pooling of labour and income; it functions as a single democratic unit. Under the supervision of a manager, each member performs an assigned task but receives no salary or wages, because all the members’ needs are provided by the kibbutz.
Israel’s agriculture is highly organized into farm societies. One society, the Farmer’s Federation, has a membership of 7,000 citrus growers. There are plantation development companies and associations of wine, fruit, milk, and cotton producers.
Australia
A significant characteristic of farm management in Australia is the emphasis on production for export markets. Since the production of fine wool is the most important rural industry, grazing of sheep is a leading enterprise. Production of wheat, meat, dairy products, and fruit for export also figures large in the nation’s agricultural economy. Australian export production is highly organized through statutory marketing authorities. Ten such authorities supervise the marketing of wheat, dairy products, meat, eggs, canned fruits, dried fruits, apples and pears, wine, honey, and wool.
Getting started in almost any farming venture in Australia requires substantial amounts of capital.