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2. The whole farm approach = looking at the whole business system analysing the
whole system
People or Human (starting point of any analysis)
- The farm family
- The goals of the owners, their skills, interests and stage of life
- The labour force
Technical: determines what is possible (technology probably 75% of the story)
E.g. Composition of pastures
Economic: monetary values are placed on as many benefits and costs as can be
done
Finance: identity the type and amount of the liabilities om the business
sources of borrowings (non-equity capital e.g. bank leasing).
Risk: What if analysis One possible future (e.g. in the next 12 months); what if
something happened and the consequences
- Sources of risk
Beyond the farm gate markets: inflation; exchange rates, interest rates;
technological change; unstable and declining prices; government policies
4. The whole farm approach budgeted advice (if not, doesn’t have any value)
All different systems are interconnected
AGRI30033 – Farm Management Economics Monday 9/3/2020
The basic arithmetic of profit budget (perspective is for the coming production …)
Gross income (cash income from production sold and value of production not
yet sold) – variable costs = farm gross margin
Comparing different activities within different livestock (and number of livestock)
Farm gross margin – overhead costs = operating profit (return to total capital)
Operating profit – interest (return to debtors capital) = net profit (return to own
capital)
Net profit -
To survive over time = making sufficient cash to pay the bills and service the
debts
Cash flow budget (liquidity of the budget)
To survive over time = building wealth so that the owners have choices in the
future
Learning outcomes:
Animal production
Risk introduction
Business health check for a livestock farm business
ANIMAL PRODUCTION
Purchases Closing
number
AGRI30033 – Farm Management Economics Monday 9/3/2020
Trading profit = B - A
Exercise
Purchase Ewes
s = 500 $180 $90,000 Deaths Ewes - -
= 60
Rams
= 18 $2,000 $36,000
Closing Ewes $464,000
number = $160
2900
Rams $61,500
= 60 $1,025
Gross income
Wool income
Trading profit
AGRI30033 – Farm Management Economics Monday 9/3/2020
Introduction to risk
Sources of risk
To understand risk in farm systems and to manage it, it is useful to distinguish two types of
risk (because consequences are different due to management):
Business rick (prices, costs & yields)
Financial risk (debt: equity)
- Added risk associated with borrowing (since we’re using non equity of the
business, taking out & committing the financial commitment to repay the
interest & debt).
- Snowball effect if not using debt capital well: Debt remain the same and assets
decline
Business risk: volatility of operating profit before meeting financial obligations (CV 43%)
Volatility around the operating profit & principal and interests
Risk: Price, diseases, personal risk (owner of the business), institutional risk (e.g.
government policy changes, etc.)
It is also about the phenomenon that if business have a certain amount of debt and use the
debt capital such that the return on total capital exceeds the cost of the debt, then the
owner’s equity grows at a faster rate than would have been the case if the business had a
lesser amount of debt.
Financial risk
…
AGRI30033 – Farm Management Economics Monday 9/3/2020
Risk
When business risk and financial risk combine, they magnify potential losses in farmers’
equity capital and net income and create inefficiencies in resource use by hampering
business planning.
Risk thinking
2 levels:
Analysing risk to inform decisions
Managing risk in farm systems
- Managing risk doesn’t mean minimizing risk
- …
Analysing risk
1. Identify an event that could be possible source of risk
2. Identify the possible outcome that can occur drom the event, such as various
weather conditions or prices, and their probabilities
3. Quantify