Agricultural Economics and Farm Management: Costs, Returns and Decisions
Agricultural Economics and Farm Management tests how a farm business is analysed: cost concepts, returns, benefit-cost ratio, farm records, tenure and marketing.
Cost and return concepts
- Fixed costs continue whether or not a crop is grown: land revenue, depreciation, permanent labour, interest on fixed capital.
- Variable costs change with the enterprise: seed, fertilizer, casual labour, irrigation, plant protection.
- Gross income = yield × price. Net income = gross income − total cost. Gross margin = gross income − variable cost. Benefit-cost ratio = gross income ÷ total cost.
Cropping and tenure decisions
Compare enterprises on gross margin per hectare, not gross income. Land tenure arrangements such as owner-cultivator, tenant and sharecropper change who bears cost and who takes risk. Farm records - physical, financial and supplementary - are the basis of any credit application.
Worked example
A farmer harvests 40 quintals of wheat per hectare and sells at Rs 2,200 per quintal. Gross income = 40 × 2,200 = Rs 88,000. Total cost of cultivation is Rs 60,000, of which Rs 48,000 is variable. Gross margin = 88,000 − 48,000 = Rs 40,000. Net income = 88,000 − 60,000 = Rs 28,000. Benefit-cost ratio = 88,000 ÷ 60,000 = 1.47, so every rupee spent returns about one rupee forty-seven paise.
Traps
- Reporting gross margin as profit; it excludes fixed costs.
- Mixing benefit-cost ratio with net profit in the same sentence.
- Treating family labour as free in a full-cost estimate when the question asks for total cost.