Agricultural Economics and Farm Management: Costs and Decisions
Agricultural Economics and Farm Management tests whether you can plan, budget, record and judge a farm business: costs, gross margin, profit, cash flow, labour, land tenure, marketing and risk.
Core rules
- Factors of production: land, labour, capital and management.
- Fixed costs do not change with enterprise size (rent, insurance, permanent labour, depreciation); variable costs change with output (seed, fertiliser, casual labour, chemicals, transport).
- Gross margin = gross income − variable costs. It measures one enterprise, not the whole farm; fixed costs come off later to give profit.
- Profit = total income − total costs. Cash flow is the timing of money in and out, and poor timing can sink an otherwise profitable farm.
- Keep production, financial, labour and inventory records; they support decisions on which enterprise to expand.
- Land tenure in Botswana: tribal land held through the Land Board, freehold and leasehold. Tenure affects whether a farmer can borrow against land.
Worked example: gross margin
One hectare of maize yields 3.0 t at P2,800/t = P8,400 gross income. Variable costs are seed P350, fertiliser P1,600, casual labour P900 and transport P400 = P3,250. Gross margin = 8,400 − 3,250 = P5,150/ha. Compare this with a second enterprise on the same land and choose the higher gross margin per hectare, because land is the limiting resource.
Traps
- Subtracting fixed costs to get a gross margin.
- Calling gross income profit.
- Ignoring family labour and own seed as costs.
- Planning on a good-year yield only.