Farm Management :Land

Week 5Agustina Shinta

Many types of land

The productive capacity of many types of land :- Land clearing- Drainage- Good conservation practices- Irrigation- The new and improved plant species- The use of limestone and fertilizer

Characteristic of land

Any piece of land larger than several acres will often contain two or more distinct soil types, each with its own set of characteristics.

-topography-different soil types-climatic features-The existence of natural hazard : such as

flooding, wind and water erosion, rock outcrops, worm (Prob,jombang,etc)

Plan land use

- Inventory- Potential livestock and crop enterprises- Yield- Fertility requirements- Conservation practicesAll of them are directly related to the nature of

the land resources available

Approximation the whole farm planning

• The standpoint of maximizing the return to the most fixed resource

• The fixed nature of land in the short run makes it the centre of most planning efforts

• It is the fixed resource which often determines the position and shape of the production possibility curves as well as playing a role in explaining the existence of the different types of enterprise relationships

The principle of comparative advantage can often be explained by regional differences in land productivity which determine land use.

However,The most profitable land use is also a function of

relative comodity prices and technology, which can change, bringing about changes in land use.

Production possibility curves for competitive enterprise

The third basic decision to be made by a farm or ranch manager are :

- what to produce or what combination of enterprises will maximize profit

- How much to produce- How to produce

• A PPC is also effective at illustrating opportunity cost. A choice must be made about the quantity of good X to produce and the quantity of good Y to produce. In this example if we want to make more of good Y, increasing production from 50 to 75 units, we must sacrifice 50 units of good X.

• In general, you can use PPC diagrams to help you answer many exam questions, not just direct questions about the PPC itself, for example they can be used to describe the economy during recessions or booms.

The most profitable combination of two competitive enterprises can be determined by comparing the substitution ratio and the price ratio.

Each substitution ratio is calculated from the equation :

SR = quantity of output lostquantity of output gained

Where the quantities gained and lost are the changes in production between two points on the PPC.

The price ratio is found from the equation :PR = unit price of the output being gained

unit price of the output being lost

Profit maximized by producing that enterprise combination where the substitution ratio is just equal to the price ratio.

Selecting a profit maximizing enterprise combination with land the fixed input

Combination number

corn wheat Subtitution ratio

Price ratio

1 0 6000 0.2 0.72 2000 5600 0.3 0.73 4000 5000 0.45 0.74 6000 4100 0.55 0.75 8000 3000 0.55 0.76 10000 1600 0.7 0.77 12000 0 0.8 0.7

• Decision rule of subst ratio = price ratio is short cut method for comparing the income gained from producing more of one enterprise versus the income lost from producing less of the other

• Whenever the price ratio is greater than the subst ratio, the additional income is greater than income lost and the subst will increase total income

• Profit will also increase as total cost is assumed to be constant for any enterprise combination

• When the enterprises have a constant subst ratio, the profit maximizing solution will be to produce all of one or all of the other enterprise and not a combination

• An increasing subst ratio will generally result in the production of a combination of the enterprises, with the combination depending on the current price ratio

• Any change in the price of the output that changes the price ratio will affect the profit maximizing enterprise combination when there is an increasing subst ratio

• As with input subst, it is the price ratio which is important and not just the price level

Hypothetical illustration of income flows over time with and without conservation

With conservation

I

No conservation

years

• A high opportunity cost of capitals , short planning horizons and limited capital combine to explain why many landowners are reluctant to adopt conservation practices with high capital requirements and long payoff periods

Land control : own or lease

Landownership has the following advantages :1. Security of tenure2. Loan collateral3. Mangement independence and freedom4. Hedge against infaltionThe disadvantages are :5. Cash flow6. Lower return on capital7. Lower working capital8. Size limits

Land leasing

Other advantages of leasing land are :1. More working capital2. Additional management3. More flexible size4. More flexible financial obligationsThese disadvantages are :5. Uncertainty6. Poor facilities7. Slow equity accumulation

Buying land

While income potential is an important determinat of land value, many other factors contibute to value.

The following are examples of some of these factors :1. soil, topography, climate2. Neighborhood3. Location4. Buildings and improvements5. Size6. Markets7. financing

Land appraisal

crop yieldgood soil

poor soil

input level

Present value

The concept of present value refers to the current value of a sum of money to be received in the future. PV are found using a process called discounting .

It is done because a sum to be received in the future is worth somewhat less now because of the time difference assuming a positive interest rate

The present value of a future sum depends on the interest rate and the length of before the payment is recieived.

Equation : look at my book