Concepts and economic principles of farm management - Aquaculture

Concepts and economic principles of farm management

The term ‘farm management’ is used by different people to convey different concepts. Aquaculturists often tend to consider it as the overall technical operation of the farm and supervision of day-to-day activities. Good farm management expertise is often considered to be the same as practical experience in the application of aquaculture technologies in the field. Proper and timely maintenance of the farm and its installations, successful methods of brood stock manipulation, breeding, seed production, stocking, feeding, disease and pest control, proper water management, including the maintenance of water quality, protection of the stock from poaching, harvesting and marketing are the major elements of this concept of management.

The science of farm management, which is relatively new and developed in agriculture and animal production, is based on the concept of a farm as a business and consists of the application of scientific laws and principles to the conduct of farm activities. Originating in production or agricultural economics, it is now accepted as multidisciplinary science (Dillon and Hardaker, 1984). Yang (1965) defined it as ‘a science which deals with the proper combination and operation of production factors, including land, labour and capital, and the choice of crop and livestock enterprises to bring about a maximum and continuous return to the most elementary operation units of farming’. He considered it a pure science because it deals with the collection, analysis and explanation of facts and the discovery of principles; and at the same time an applied science because the ascertainment and solution of farm problems are within its scope.

Farm management involves a continuous process of economizing and therefore the relevant basic theory of farm management is economics. However, it has to draw heavily on biology, technology, meteorology, sociology, psychology and related disciplines to optimize the use of scarce resources. While scientific research to develop technologies is performed in laboratories and experimental stations, farm management research is done in the field by collecting and analysing information from individual farms, to discover or verify successful farming practices under specified circumstances. Its aim is to plan optimum farm organization and management practices for higher production efficiency and maximum farm earnings. Although field experimentation can be a useful means of generating the necessary information, cost considerations often militate against its use in developing farm management methods. Experiments have admittedly the advantage of elucidating clearly input/output relationships, by varying the level of selected inputs. By replication and statistical methods, the reliability of the results and significance of the differences can be measured. However, it usually fails to discover the interactive effects between factors. Because of this, many of the data required for management research are obtained through farm management surveys, financial bookkeeping and the study of farm practices, including costs, use of land, water, labour and other material requirements. The results of management research can be used by farm managers in planning their activities or by governments in formulating farm policies.

The main elements of the economic principles considered in agricultural farm management are comparative advantage, diminishing returns, substitution, cost analysis, opportunity cost, enterprise choice and goal trade-off.

Comparative advantage relates to the determination of the most economically suitable crops for a farm or area, from among the different crops that could be grown there. Since the comparative advantage can change as a result of changes in technology, input and transportation costs, farm product prices, etc., it will be necessary to evaluate the advantages on a continuing basis.

The principle of diminishing physical and economic returns determines the best level for any production practice. It helps in considering the level of output produced from a set of fixed resources, taking into account the variable factors. Diminishing economic returns appear when diminishing physical returns are converted into value, generally measured in money terms. For example, in considering the use of weedicides in a farm, the farmer has to balance the money cost involved against the expected money value of the increased yield, or losses prevented, in order to decide whether it pays from the financial standpoint. It may be that he should use the weedicide up to the point where the last unit of application is expected to pay for itself.

The principle of substitution refers to the selection by the farmer of the most economical method, measured in the most appropriate terms (e.g. physical labour, time or money) to suit his conditions. For example, the farmer has the option to use manual labour, mechanical equipment or chemical means to control weeds in his fish pond. He has to decide which of the methods he should use, taking into account the performance and cost of each. In substituting one method for another, he has to ensure that the saving is greater than the cost of the technique added. This principle is of special importance when decisions have to be made on the adoption of new practices.

The principles of cost analysis have been dealt. Even though the farmer may have some control over the costs of production on his farm, he has little control over the prices he receives for his produce. It is obvious that, under normal circumstances, a farmer must reduce his costs per unit of output if he is to increase his net farm income. While the fixed costs remain the same regardless of how much he produces, variable costs change as the size of operation changes. The classification of a particular cost as fixed or variable depends partly on the nature and timing of the management decision considered. For example, land rent becomes a variable cost in relation to a decision to lease more land; but for land already leased and being used, the rent is a fixed cost.

The importance of opportunity cost in farm planning and decision-making are indicated. This concept relates to the cost of any choice in relation to the value of the best alternative foregone. For example, if a farmer can earn a profit of $1500 from a farm growing milkfish and $3000 by growing shrimps, the opportunity cost of growing milkfish is $3000. If he persists in growing milkfish he should recognize that he is earning $1500 less profit than he could have earned. Although for certain reasons he may continue with milkfish, the general principle is that the land, water, labour and capital should be used where they will add most to the income. The income may be measured directly as money, or in some broader terms such as satisfaction or utility.

Enterprise choice is made by a farmer, making allowances for the relationship with other activities or enterprises on his farm. Enterprises can be supplementary or complementary, as in aquaculture integrated with crop and animal farming. As far as operation of his farm is concerned, the overall goal of the farmer is to make the most efficient use of whatever resources he has.

All the considerations summarized above relate largely to internal allocation of resources to enterprises and activities that will maximize the net return. The principle of goal trade-off implies the existence of multiple goals which will often compete with one another, such as cash income, utilization of unproductive land, export earnings, etc. The farm may be managed to achieve that mix of goal attainments which gives the farmer the best level of overall satisfaction across his multiple goals. There may have to be some trade-off, ensuring that the gain in satisfaction from the relatively more important goal is greater than the decreased satisfaction incurred on the other goals.

Application of the above economic principles in farm management is very much influenced by two factors that are somewhat unique to the farming of animals and plants, whether aquatic or terrestrial. One is the varying degree of uncertainty under which annual operations have to be planned. The uncertainty may refer  to the climate that will prevail, natural disasters that can occur, incidence of pests and diseases, the performance of new technologies adopted, the prices and competition that may be faced in the markets and the political environment in which the enterprises have to operate. Decisions are made under such uncertainties and therefore call for the exercise of personal judgement by the manager about the risks that he faces in the application of the various economic principles. Conclusions based on historic data can be of only partial assistance and decisions have to be on the basis of estimated future possible yields, costs, prices and technology. The other important factor is the orientation of the farm: whether it is completely market-oriented and operating commercially in a money economy, or whether it is subsistence or semi-subsistence farming. A good majority of small-scale farmers, and almost all large-scale farmers, have contact with markets through which they receive money as total or partial income.

It may appear that the economic theories mentioned above do not apply to small-scale farmers who operate outside the cash economy. But in point of fact, they are very pertinent to their operations and can be used to assess the gains and losses, irrespective of whether money value or some other measure (such as utility or satisfaction) is used. When applicable, money is a very convenient measure, as it enables comparisons between farms and the aggregation of individual farm performance to regional and national aggregates. When gains and losses involve both cash and non-cash elements, the trade-off or exchange rates between them will be specific to each farm. So it has to be recognized that money is a compromise measure. While it may be the best basis for analysis, it is less than an adequate approximation, depending on the extent to which trading guides are available on the money value of non-cash gains and losses.