AGRI 4411 Farm Management Chapter 2

Farm ManagementAGRI 4411

Chapter 2Management and Decision Making

Chapter Outline

Functions of ManagementStrategic Farm ManagementTactical Decision MakingCharacteristics of DecisionsThe Decision-Making Environment in

Agriculture

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Chapter Objectives1. To understand the functions of

management2. To present the steps in developing a

strategic management plan for a farm or ranch

3. To identify common goals of farm and ranch managers, and to explain the steps in the decision-making process

4. To explain the steps in decision making

5. To describe some unique characteristics of the decision-making environment for agriculture

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Table 2-1Comparison of Low- and High-Profit Farms in Iowa

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Item Highest Third Lowest Third   (Average) (Average)

Value of farm production $584,618 $220,433

Net farm income $171,054 $24,519

Return on assets 13.9% 0.7%

Crop acres farmed 537 365

Machinery value $148,212 $102,565

Months of labor utilized 18 11

Source: 2005 Iowa Farm Costs and Returns, Iowa State University Extension, Iowa State University, Ames, Iowa

Objective 1:To understand the functions of management

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Functions of Management

PlanningImplementationControlAdjustment

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Planning

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Planning means choosing a course of action

To plan, a manager must

1. establish goals,

2. identify resources, and

3. Identify all possible alternatives

Implementation

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Once a plan is developed, it must be implemented, or set in motion.

To implement, the manager must:

1. acquire the resources needed for the plan and oversee the process.

2. Coordinating, staffing, purchasing, and supervising all fit under this function.

Control

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Control is the “feedback” function.

To control, the manager must:

1. monitor results,

2. record information,

3. compare results to a standard, and

4. take corrective action as needed.

Adjustment

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If outcomes are not meeting the manager’s objectives, adjustments need to be made.

This may involve:

1. Fine-tuning the technology being used or

2. Changing enterprises

3. Collecting more detailed cost data to identify specific problems

Figure 2-1Management flow chart based on three functions of management

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PlanningPlanning

ImplementationImplementation

Control Control

AdjustmentAdjustmentNew

Information

Objective 2To present the steps in developing a strategic management plan for a farm or ranch

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Strategic Farm Management

Strategic management consists of charting the overall long-term course of the business

Tactical management consists of taking short-run actions that keep the business moving along that course until the destination is reached

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Steps in Strategic Management1. Define the mission of the business2. Formulate the goals for the farm and

family3. Assess the resources available to the

business (internal scanning)4. Survey the world surrounding the

business (external scanning)5. Identify and select appropriate

strategies that will reach goals6. Implement and refine the selected

strategies

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Defining the Mission of the Business The mission statement is a short

description of why a business exists. It may include:

Business accomplishments One component of the overall family

mission if it is a family-owned and operated business

Should emphasize the special talents and concerns of each farm business and its managers

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Sample Farm Mission Statement“Our mission is to produce safe and nutritious milk at a reasonable costs, to maintain and enhance the quality of the natural resources under our control and to contribute toward making our community a satisfying place toe live.”

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Objective 3To identify common goals of farm and ranch managers, and to explain the steps in the decision-making process.

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Table 2-2 Common Values Among Farmers and Ranchers

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Do you agree or disagree?1. A farm is a good place to raise a family.

2. A farm or ranch should be run as a business.

3. It is acceptable for farmers to borrow money.

4. A farmer should have at least two weeks of vacation.

5. It is better to be self-employed than to work for someone else.

6. It is acceptable for a farmer to also work off the farm.

7. It is more enjoyable to work alone than with other people.

8. Farmers should strive to conserve soil and keep water and air resources clean.

9. A family farm should be passed on to the next generation.

10. All family members should be involved in the operation.

Goals

Goals should be written Everyone and see, agree and review them at a

later date Goals should be specific

To own 240 acres of class I farm land in Jefferson County versus “to own land”

Goals should be measurable If measurable each year the manager can gauge

progress toward the goal Goals should have a timetable

To own 240 acres ….. In five years

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Possible GoalsSurvive, stay in businessMaximize profitsMaintain or increase standard of livingIncrease equity, accumulate assetsReduce debt, become free of debtMaintain stable incomePass farm to next generationIncrease free timeIncrease farm size (“growth”)Maintain or improve environmental

qualityOwn or manage my own business

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Assessing Resources Physical resources: land, buildings,

fences, breeding livestock, machinery and equipment, established perennial crops

Human resources: skills of the operator and other employees, likes and dislikes of individuals

Financial resources: cash, other capital and available credit

An honest and thorough assessment of these resources called internal scanning will help in choosing realistic strategies and achieving business goals

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Surveying the Business Environment

Called “External scanning” The major types of livestock and crops produced

haven’t changed much, but their characteristics are changing

Changing consumer taste –”leaner meats” Expanded international markets – “high protein

grains” Changes in governmental regulations New production practices that lower costs per unit Price of key inputs such as fuel and fertilizer Lowering international trade barriers A change may provide an opportunity or a threat

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Identifying and Selecting Strategies Low -volume high-value producer High-volume, low-value producer Specialty service provider Part-time operator Form Strategic Alliances

Feeder pig producer Custom hog finisher Cooperatives

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Identifying and Selecting Strategies

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Use of land resources for pasture Cow/calf production Grazing stocker steers Sheep production Goat production

Some businesses have more potential routes for reaching their goals than others because resources are more flexible.

As the number of alternative uses for resources increases, so does the complexity of the manager’s decisions.

Implementing and Refining

Manager must formulate action steps to implement the plan

A formal business plan may be developed to present to potential lenders or partners

Concrete, short-term objectives need to be set so that progress toward long-term goals can be measured

Manager must decide which information to collect to evaluate the success or failure of the plan

Strategic management is an ongoing activity

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Tactical Managemento Once an overall strategy for the farm

has been developed the manager can make tactical decisions. For example:

o Where to market crops

o What rations to feed livestock

o Choosing what seed to use

o When to trade machinery

o Whom to hire

o Which field to till on a given day

o Which telephone service to buy

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Tactical Decision Making Steps

1. Identify and define the problem or opportunity

2. Identify alternative solutions

3. Collect data and information

4. Analyze the alternatives and choose one

5. Implement the decision

6. Monitor and evaluate results

7. Accept responsibility for the decision

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Characteristics of Decisions

Importance Number of dollars involved, size of potential

gain or lost Frequency

One in a lifetime choosing a vocation, or buying a farm or daily, setting breeding schedules, scheduling field work activities

Imminence Quickly or below a deadline - grain prices

moving up and down rapidly Revocability

Reversible or mot reversible -constructing building or irrigation well

Number of alternatives “yes or no”, or “either, or”

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The Decision-Making EnvironmentFixed supply of land: Land base is

essentially fixed, making decisions about land use, sale, or acquisition critical

Biological processes and weather: Laws of nature place limits on manager’s decisions

Small size: Often one person serves as management and labor

Perfect competition: Producers are price takers

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Summary

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• Good management means the difference between earning a profit or suffering a loss.

• The overall direction is defined through strategic planning.

• The strategic plan is carried out via a number of tactical decisions.

• Agricultural managers operate in an environment that differs from that of most other businesses.