AGI CLTUvI L LXPFDMLN T STATIUN AUBURNUNIVERSIT R. DENNIS ROUSE, DIRECTOR AUBURN, ALABAMA BULLETIN 518 MAY 19~80 MANAGERI ABILITY AND ITS EFFECT ON CONTENTS Page INTRODUCTION ......................................... RESEARCH OBJECTIVES ................................... 3 4 CHARACTERIZATION OF INITIAL FARM SITUATIONS AND MANAGEMENT LEVELS ................................. 5 Beginning Farmer Characteristics ....................... Established Farmer Characteristics ...................... Management Level Characteristics ...................... DEVELOPMENT OF ENTERPRISE BUDGETS .................. 5 6 7 11 11 13 MODEL SPECIFICATION .................................. RESULTS ............................................... Beginning Farm Situations ............................. Established Situations ............................... SUMMARY ............................................... 13 19 24 26 28 29 CONCLUSIONS ............................ REFERENCES ............................................ APPENDIX .............................................. FIRST PRINTING 3M, MAY 1980 ............... Information contained herein is available to all without regard to race, color, sex, or national origin. MANAGERIAL ABILITY and its effect on FARM GROWTH1 2 J. K. MORROW II, W. E. HARDY JR., and S. C. BELL INTRODUCTION IN AMERICAN AGRICULTURE over the past few years have resulted in more efficient production of food and fiber. Research and extension efforts by the land-grant college system and by agribusiness firms have provided a steady stream of technological improvements which enabled American farmers to become world leaders in agricultural production. These high levels of productivity were made possible through the use of such things as improved seed, herbicides, insecticides, and more efficient farm machinery. Significant increases in the farmer's costs of production and use of credit have come with this additional output. Technological advancements, increased credit utilization, and competition for labor from other industries amplified the need for farmers to improve their managerial capabilities. Many farmers who lack adequate managerial capabilities are gradually being forced out of farming by their inability to cope with increasing costs and decreasing profit margins. Over the 10-year period from 1968 to 1977, the number of farms in the United States declined by an average of 1.1 percent annually, with a sub'Research on which this report is based was supported by Federal and State research funds under Hatch Project Alabama-412. 2 Former Graduate Research Assistant, Associate Professor, and Professor, respectively, Department of Agricultural Economics and Rural Sociology. CHANES 4 ALABAMA AGRICULTURAL EXPERIMENT STATION sequent decline in the farm population of 2.7 percent annually. While the U.S. population continued to increase during this period, farm population has decreased to the point where only 3.8 percent of the total U.S. population is now engaged in farming. These trends have resulted in an increase in average U.S. farm size from 363 to 393 acres (11). The shift to larger farm units and increased mechanization has offset decreases in available labor and increased the need for greater emphasis on good farm management practices. Tolley projected that the entry of young farmers with more managerial capabilities into farming will result in an increase in efficiency and income level of farmers (10). Per capita farm income relative to nonfarm income was 53.9 percent in 1960, 74 percent in 1970, and by 1975 this ratio had grown to 88 percent (11), as young farmers with more abilities in farm business management entered farming. Emphasis on management in agriculture is expected to increase as farmers seek to increase farm income and profits through improved decision making. The current agricultural situation indicates a shift toward more intensively managed farms. The impact of this continued pattern on the lower level manager's existence is unknown. By studying the firm growth behavior of various management levels, some indication of the future financial position of these farmers can be determined. Such work has been completed by other researchers (1, 3, 4, 5, 7, 8); however, none relates directly to Alabama. The research results presented in this report relate to farming situations typically found in north Alabama. RESEARCH OBJECTIVES The primary objective of this study was to determine the impact of managerial ability on the growth of the farm firm. Within the framework of this objective, specific objectives were as follows: (1) Define and determine the characteristics of four managerial levels exhibited by farmers in Alabama. (2) Select the optimum combination of enterprises for each management level over a 5-year period for an existing operation and a prospective farmer. (3) Compare the growth potential for managers with varying managerial abilities for an existing operation and prospective or beginning farm situation. MANAGERIAL ABILITY AND FARM GROWTH 5 CHARACTERIZATION OF INITIAL FARM SITUATIONS AND MANAGEMENT LEVELS A hypothetical farm operation based on enterprises common to north Alabama farms was assumed. Enterprises considered were: cotton, corn, soybeans, soybeans and wheat in a doublecropping system, silage, stockers produced on silage, stockers produced on winter grazing, complete confinement farrow to finish hog operation, and drylot market hog production. Guidelines for recommended management practices as established by the Agricultural Experiment Station and Cooperative Extension Service of Auburn University served as the basis for input level use. Beginning Farmer Characteristics Problems associated with the entry of new farmers into agriculture have received attention in recent years (2, 6). Increasing credit requirements necessary to provide investment capital have prevented many prospective farmers from entering the industry. In fact, many prospective farmers realize that without inheriting a family farm operation, entering a farm operation through marriage, or receiving financial support from family or individuals, it is almost impossible to get started. Certain assumptions were made relating to all managerial levels for the beginning farmer. It was assumed that $50,000 in investment capital would be available to the beginning farmer and would be the maximum available for investment in machinery and equipment, buildings, and livestock operations. Borrowing for land was assumed to be unlimited. In addition, it was assumed that all beginning farmers could secure an operating capital line of credit in the amount of $50,000 from a bank or other lending institution. An amount of $5,000 was assumed available for investment in the farm from personal funds. This level of personal investment was assumed appropriate, especially for young prospective farmers. Investments in all assets including land after the first year were possible based on borrowing at 75 percent of the equity value in assets. Equity created by loan payments was included in this borrowing capacity. Beginning farmers were assumed to be able to rent land for all enterprises. This allowed for row crop operation prior to the purchase of land. A further assumption for beginning farmers al- 6 ALABAMA AGRICULTURAL EXPERIMENT STATION lowed for custom harvesting of a maximum of 200 acres of grain and soybeans and 100 acres of cotton. Established Farmer Characteristics In contrast to the beginning farmer situation, established farmers face problems concerning continued growth of the farm firm or, for many farmers, continued operation of the firm. Certain assumptions were made relating to all managerial levels for established farmers. Differences in assumptions made for beginning and established situations are presented in table 1. Investment and operating capital were assumed to have an upper limit of $500,000 each for established situation farmers. A borrowing capacity limitation of 75 percent of the equity value of the farm assets was included for the established situation. Equity created by loan payment was added to the borrowing capacity. Land was also subjected to the 75 percent borrowing capacity constraint. Established farmers were assumed to own 200 acres of land and have $10,000 cash for investment from personal funds. It was further assumed that the land was inherited or had been owned for a sufficient time to have no outstanding debt involved. The established manager was assumed to own farm machinery sufficient to provide 1,000 tractor hours, 300 combine hours, and 100 cotton picker hours. Also, it was assumed that $50,000 was owed on this machinery, with three annual payments remaining. Di, TABLE 1. DIFFERENCES IN ASSUMPTIONS FOR BEGINNING AND ESTABLISHED FARM SITUATIONS Farm characteristic Personal investment ............ Operating capital borrowing limit............. Investment capital borrowing limit ............ Land owned initially ......... Machinery owned initially ...... Beginning $ 5,000 $50,000 Esta blished $10,000 $500,000 $500,000 200 acres tractors providing 1,000 hours annually, combine providing 300 hours annually, and cotton picker providing 100 hours annually and $50,000 none none Custom harvesting (maximum allowed) ......... Initial debt................. 200 acres grain 100 acres cotton 1978 and 1979 0 in none $50,000 investment capital; land was assumed debt free. MANAGERIAL ABILITY AND FARM GROWTH 7 Management Level Characteristics Efforts to distinguish the various characteristics of management levels present significant difficulties in quantifying the intangible aspects of management. The existence of managers with varying abilities has been recognized for some time as farmers have exhibited the expected results associated with various management levels. Several factors are typically associated with the attainment of higher level managerial capabilities, such as increased yields of crops and livestock, more efficient input utilization, recognition of the need for assistance in areas of weakness, concentration on farm records and business organization, and increased efforts to improve marketing ability. All of these traits are possessed by top level managers, whereas lower levels of capability are delineated according to the lack of concentration or existence of one or more of these characteristics. Four management levels of Alabama farmers were established based on variations in productivity and input utilization: superior, improved, average, and below average. Beginning and established farm situations for all management levels were assumed to consider the same enterprises and investment alternatives, with the principal difference being variations in productivity and thus lower costs per unit produced for higher management levels. Hypothesized yield variations were based on such factors as timeliness of planting, timeliness and optimal use of herbicides and insecticides, timeliness of cultivation and other TABLE 2. ENTERPRISE YIELD PROJECTIONS FOR FOUR SPECIFIED MANAGEMENT LEVELS Enterprise Below average Average 480 24 20 32 56 11.2 63,000 12,600 330,084 291,060 Improved 600 30 25 40 70 14 70,000 14,000 366,760 323,400 Superior 720 36 30 48 84 16.8 77,000 15,400 403,436 355,740 360 Cotton, lb./acre ............... 18 Soybeans', bu./acre............... 2 15 So beans , bu./acre............ 24 bleat, bu./acre ............... 42 Corn, bu./acre ................ 8.4 Silage, tons/acre............... .56,000 Stockers3,J lb./unit ............. 4 11,200 Stockers , lb./unit ............. 293,408 Hogs5 , lb./unit ................ 258,720 Hogs", lb./unit ................ 'Single-cropped soybeans. 2Double-cropped soybeans. 3Stockers produced on silage. 4 Stockers produced on winter grazing. 'Farrow to finish hog unit of 100 sows. "Market hog unit of 1,500 head. 8 ALABAMA AGRICULTURAL EXPERIMENT STATION field activities, knowledgeable use of all inputs, improved record-keeping and analysis, and efficiency in managing labor and directing the operation. Costs of production were assumed to be the same for all levels except the superior managerial level. For this level, costs exceeded the other levels by 10 percent. The superior manager was assumed to be involved more in intensive management activities and less in labor activities. Crop yields were varied in 20-percent increments and livestock yields in 10-percent increments from the improved managerial level, which was selected as the base level. This level represents approximately 20 percent higher yields for crops than the State average and is based on recommended practices and optimal input use. Livestock yields were varied in 10-percent increments due to less expected variability on Alabama farms. Crop and livestock yields for all managerial levels are presented in table 2. It was assumed for all levels in both beginning and established situations that the drylot market hog enterprise (buying feeder pigs) would have an upper limit of four units or 6,000 head per year. This level represents a unit requiring approximately one fulltime man's labor. Further assumptions affecting all managerial levels for the beginning and established farm situations were an 8.8-percent annual increase in costs, both variable and fixed. This rate reflects the average annual change in the Index of Prices Paid for production items, interest, taxes, and wage rates from 1965 to 1976. Crop and livestock prices were increased by 7.3 percent annually, reflecting the average annual percentage increase in the Index of Prices Received for all farm products over the same period. Land appreciation was projected at an annual rate of 11.2 percent, based on the average annual increase in land prices in Alabama from 1968 to 1977. Superior Managerial Level The farmer possessing superior managerial abilities best exemplifies the desired traits of the successful modern farm businessman. Through intensive management of the farm, the superior manager was assumed to achieve crop yields 20 percent above the improved managerial level and livestock yields 10 percent greater than the improved managerial level. Variations of 20 percent for crops and 10 percent for livestock reflect the productivity available with present technology, optimal input use, and intensive management. The superior manager's absence from di- MANAGERIAL ABILITY AND FARM GROWTH 9 rect personal labor involvement would cause an increase in costs since additional labor with some managerial abilities would be required to supervise the daily enterpriseactivities. However, his increased productivity would result in lower costs per unit of product from each enterprise. The superior manager was assumed to havebeen trained in farm business management and to have a continuing education approach toward improving his business. His abilities would enable him to manage an unlimited labor supply, and size of enterprise was not constrained by any limits on the activity levels. The beginning superior manager was constrained in the growth model only by the imposed constraint of $50,000 operating capital, $50,000 investment capital, and his personal salary of $15,000 per year. A further constraint of $5,000 personal cash to invest in the first year by the beginning manager restricted the early growth of the farm firm. The established superior manager was restricted by his personal salary allowance of $15,000 annually and the personal investment limit of $10,000 in the first year. Improved Managerial Level Characteristics of the improved managerial level were based on the recommended management practices for this level in budgets established by the Agricultural Experiment Station and Cooperative Extension Service of Auburn University. Improved management implies optimum input utilization with intensive management of enterprises. The improved management level farmer was assumed to have some direct involvement in the labor activities of the various enterprises. Total costs per unit of enterprise were the same as those of average and below average levels. The improved managerial level farmer was assumed to have training in farm management and to have improved his managerial capabilities through continued development. With these managerial abilities, the improved managerial level farmer was assumed to have the ability to manage a labor force of three fulltime men plus seasonal labor available in the period of wheat harvest and soybean planting for the double-cropping system. Labor availability for all levels is presented in appendix table 1 for six labor periods. This labor availability and the personal salary of $12,000 per year represent the constraints common to only the 10 ALABAMA AGRICULTURAL EXPERIMENT STATION improved managerial level for the beginning farm situation. In addition to these constraints, the established farmer operating at this management level was also subjected to the constraints common to all farmers in the established farm situation. Average Managerial Level The average managerial level was characterized by crop yields 20 percent less and livestock yields 10 percent less than the improved managerial level. Failure by farmers in this management level to provide timely planting dates, herbicide applications, and field operations was recognized as a major shortcoming in management. These yields represent close approximations of the Alabama average yields for these enterprises. The general assumptions and constraints for all levels of beginning farm situations were assumed for the average level, with additional constraints on labor and personal salary. Lack of managerial ability was assumed to limit his management of labor to two full-time hired men in addition to himself. The personal salary constraint for this level was $9,000 per year based on the expected earning potential of this managerial level in alternative occupations. A further constraint was imposed on the complete confinement farrow to finish hog enterprise, limiting to a maximum of 50 sows. In addition to these constraints, the established farmer with average managerial abilities was subjected to the constraints common to all farmers in the established farm situation. Below Average Managerial Level The yield characteristics assumed for the below average managerial level represent the extreme situation resulting from inefficient input utilization and failure to provide timely use of inputs or operations involved in production of the enterprise. Crop yields were assumed 40 percent less than the improved managerial level, which served as the base level for the entire study. Livestock yields were assumed 20 percent less than the improved managerial level. Farmers in this management level were assumed to have no formal farm management training. Their efforts were assumed to be directed entirely toward the daily operation of the farm, with direct involvement in the labor activities associated with the MANAGERIAL ABILITY AND FARM GROWTH 11 various enterprises. The lack of managerial ability was assumed to result in the extremely low yields associated with this level. The general assumptions and constraints for all levels of beginning farm situations were assumed for the below average level, with additional constraints on labor and personal salary. The below average manager was assumed to have managerial abilities sufficient only to manage one full-time hired man in addition to himself. The personal salary constraint imposed on this management level was $6,000 per year. A further constraint limited the below average manager to a maximum of 50 sows in the complete confinement farrow to finish hog enterprise. This enterprise would be constrained also at this management level by the reduced labor availability. Additional constraints were assumed for the established farm situation at this management level common to those of all other levels for established farm situations. DEVELOPMENT OF ENTERPRISE BUDGETS Enterprise budgets were developed for the productive enterprises and supporting enterprise activities to project the estimated costs and returns associated with each enterprise. As previously stated, total variable costs per unit of enterprise were inflated in successive years by 8.8 percent, while receipts were inflated by 7.3 percent. Costs per productive unit were assumed equal for all management levels except the superior level whose costs were assumed 10 percent greater than the other levels. These costs are presented for the various enterprises in appendix table 2. Returns or prices per unit of product were assumed equal for all management levels. Budgets developed for north Alabama farms by Auburn University- based on the use of recommended management practices - provided guidelines for the development of the improved managerial level budgets. These budgets also served as the basis for development of budgets for other managerial levels. The budgets developed for the improved managerial level are presented in appendix tables 3-15. Other levels are not presented due to the volume of material involved. MODEL SPECIFICATION A multiperiod linear programming model was developed to stimulate the growth of a farm firm over a 5-year period. It was 12 ALABAMA AGRICULTURAL EXPERIMENT STATION adapted for use with the four management levels assumed in the study for both the beginning and established farmer situations. The model satisfied the assumptions of linear programming and also the assumptions made with respect to management levels. It was also developed consistent with the microeconomic theory of the firm. The model included activities or enterprises common to north Alabama farms. Within the matrix, all enterprises were divided into production activities and selling activities. The production for a given enterprise was transferred to the selling activity through a transfer row. This allowed, for example, corn to be produced and sold or fed to stockers in the stocker-silage enterprise or fed to hogs in the farrow to finish or market hog enterprise. Also, corn could be purchased to meet all or part of the feed requirements. Acquisition of operating capital was based on the quarterly operating capital requirements of the various activities. In year one, the manager's personal cash investment could be transferred within the model to operating capital or investment capital for the various investment alternatives. Cash generated by selling activities was available to meet operating capital requirements in the respective period or to pay back operating capital borrowed in the preceding period, or it was transferred to future periods for use as operating capital. Operating capital borrowed in periods with deficit operating capital balances was specified within the model to be repaid within the following three quarters. Interest was charged on the unpaid balance at an annual rate of 9 percent. Inclusion of these activities provided the model with a built-in cash flow system. Expenditures for the production activities resulted in removal of cash from the system, while receipts from the selling activities resulted in cash acquisitions when activated by an optimal solution. Deficit cash needs in any period resulted in the borrowing of cash for operating capital. Repayment of the loan plus interest occurred upon receipt of sufficient cash flow into the system through selling activities. An optimal solution based on this multiperiod matrix indicated the optimum combination of enterprises and the operating capital requirements for these enterprises. The limit imposed on borrowing capacity for operating capital served as a constraint on the selection of the optimum enterprise combinations. Investment capital for machinery, buildings, breeding stock for the farrow to finish hog enterprise, and land could be ac- MANAGERIAL ABILITY AND FARM GROWTH 13 quired from earnings, borrowing within specified constraints, or from personal cash for investment. Acquisition of farm machinery, buildings, and land within any year of the plan resulted in availability of these resources in subsequent years of the multiperiod model. Investment capital borrowed for farm machinery was required to be paid back in 4 years. The machinery was assumed to have a useful life of 7 years. Investment capital borrowed for building for the complete confinement farrow to finish hog enterprise had a repayment period of 10 years. Borrowing for breeding stock for the hog enterprise had a repayment period of 2 years. Land purchases made possible by borrowing of investment capital were amortized over a 30-year mortgage term. The interest rate charged on operating capital and all investment alternatives except land was 9 percent annually on the unpaid balance. The interest rate on land purchases was 8.25 percent annually. The initial purchase of breeding stock for the hog enterprise resulted in continuous availability of breeding stock through replacement gilts raised within the enterprise. This hog enterprise provided for a 2-year cycle of sows with 50 percent of the sows replaced each year. The initial purchase of boars provided for initial boar requirements, with annual replacement of boars charged to the enterprise as a variable cost. RESULTS The growth study covered the 5-year period from 1978 to 1982. The multiperiod linear programming matrix was modified to obtain solutions for both the beginning and established farm situations at all management levels. The objective for each analysis was to maximize net income over the period. Beginning Farm Situations Below Average Managerial Level The below average manager was unable to establish a farm operation, even under the assumption of perfect certainty regarding prices and yields made in development of this model. It was determined that over $100,000 would be required to begin operation, in addition to the capital provided in the model. 14 ALABAMA AGRICULTURAL EXPERIMENT STATION Poor crop yields and low livestock productivity associated with this level made it impossible for this manager to meet the constraint of $6,000 annually for family living expenses. Average Managerial Level A similar situation resulted for the beginning farmer with average managerial ability. The inability of this level to satisfy the $9,000 family living expense constraint, while satisfying the other constraints of the model, resulted in termination of the search for an optimal mix of crop and livestock enterprises. Improved Managerial Level The beginning farmer with improved managerial capabilities was able to establish a profitable farm operation, the first management level to achieve this success. Annual and total net income for this level are presented in table 3. Net income values presented represent net income above family living expenses and all costs, including interest and loan repayments. The improved manager achieved a consistent positive growth pattern; however, net income in the fifth year was less than in the fourth year. This reduction resulted from the consistent increase in production costs at a greater rate than receipts. Also, the labor constraint prevented the improved manager from offsetting cost increases with TABLE 3. COMPARISON OF ANNUAL AND TOTAL NET INCOME' BY MANAGEMENT LEVEL FOR BEGINNING FARM SITUATIONS, 1978-82 Management level 1978 1979 Net income, by year 1980 1981 1982 Total Below average 2 TERMINATED Average........ TERMINATED Improved ...... $28,444 $ 67,107 $ 86,184 $105,217 $100,853 $ 387,805 Superior ....... 54,694 149,587 249,789 302,145 347,840 1,104,056 'Net income is the net income above family living expenses and all costs, including interest and loan repayments. 2 Level was unable to begin operation. TABLE 4. COMPARISON OF NET WORTH BY MANAGEMENT LEVEL FOR BEGINNING FARM SITUATIONS, 1978-82 Management level 1978 Below average' ..... Average' ........... Improved .......... Superior ........... TERMINATED TERMINATED $ 3,854 30,515 Net worth, by year 1979 1980 1981 1982 $ 71,429 149,939 $ 98,597 409,928 $155,891 616,549 $157,648 881,890 'Level was unable to begin operation. MANAGERIAL ABILITY AND FARM GROWTH 15 increased production. Total net income for the 5-year period was $387,805 for the improved managerial level. Net worth increased significantly after the first year, reaching $157,648 in the final year of the period, table 4. After land was purchased, net worth increased with the aid of appreciation in land values. Farm growth for this level occurred with the enterprises in solution at the specified levels in table 5. The $5,000 personal cash was used to meet operating capital requirements in the first year. Activity levels for hired labor (number of full-time men) and market hogs (number of 1,500-head units produced) represent upper limits during 1980-1982 on labor and 1978-1981 on market hogs. The market hog activity provided the necessary cash flow in 1978 to satisfy all the constraints of the model and provided internally generated capital for both operating and investment capital needs in the following year. Over the planning horizon, stockers were gradually phased out and the single-cropped soybean acreage was reduced as the soybean and wheat doublecropped acreage increased. Cotton entered the optimal solution in years 1981 and 1982. The results indicated a trend toward utilization of livestock activities with low investment capital requirements to generate internal funds for investment. These funds were used first to increase crop production on the crops requiring the least invest- TABLE 5. OPTIMAL ENTERPRISE SELECTION FOR THE IMPROVED MANAGERIAL LEVEL IN THE BEGINNING FARM SITUATION, 1978-82 Enterprise Cotton, acres ..................... Soybeans', acres.................. Soybeans2, acres ................... Wheat, acres ...................... Market hogs, units ................ Buy corn, bushels ................. Stockers 3, units4 .................. Winter grazing. ., acres. ............. . . Hired labor 5 . . . . . . . . . . . . . . . . Seasonal labor, hours ............. Rent land, acres .................. Buy land, acres.................... Buy tractor6 . . . . . . . . . . . . . . . . . . . . . Buy combine..................... Buy cotton picker ................ 1978 1979 1980 1981 269 417 291 291 4 56,424 .5 9 3 608 654 250 1 1 1982 468 265 272 272 3.9 54,973 3 664 186 495 1 1 4 56,424 1 434 707 140 147 140 147 4 4 56,424 56,424 3.8 7.2 61 116 2 3 138 78 539 780 35 38 1 1 1 'Single-cropped. 2 Double-cropped with wheat. 3 Stockers on winter grazing (20 steers per unit). 4 Winter grazing for stockers (0.8 acre per head). 5 6 Full-time hired men. Tractor supplying 750 hours use annually. 16 ALABAMA AGRICULTURAL EXPERIMENT STATION ment capital, soybeans and soybeans and wheat double-cropped. Cotton production was then possible when the cash flow from the row crops and the declining livestock activity levels provided sufficient capital for investment and available labor for production. The transfer of internally generated cash to investment indicated this progression. Transfers were made at the ends of the respective years to the beginning of the following year as follows: 1978-$28,444; 1979-$31,961; 1980-$86,184; and 1981$105,217. Land purchases were made in 1979 and 1980 of 35 and 38 acres, respectively. Larger land purchases, 250 and 495 acres, were made after cotton was integrated into the operation. Additional land was rented on a cash rent basis at $35 per acre for the various row crop activities. The level of rented acreage peaked in 1980 at 780 acres prior to the introduction of cotton into the operation. The results indicated therefore that the profitability of cotton was high and made possible larger land purchases than were possible prior to its utilization in the operation. However, the high operating capital and investment capital requirements prevented its entry into the solution at an earlier date. In addition to land purchases, the improved manager purchased the following machinery with borrowed and internally generated investment capital: one tractor in each year except 1978 for a total of four, one combine in 1979, and cotton pickers in both 1981 and 1982. The number of tractors exceeded the number of full-time workers; however, seasonal labor was utilized at the period of heaviest machinery requirement and used when wheat was harvested and soybeans planted. Hired labor provided a major constraint to the improved manager in the latter years of the model. Hired labor was bounded at an upper limit of three full-time men in addition to the operator, with seasonal labor also available in the period of wheat harvest and soybean planting for the double-cropping activity. Relaxation of this labor constraint would result in an increase in the activity levels in the last 2 years. Superior Managerial Level The beginning situation for the superior managerial level provided insight into the situation occurring when the manager is not directly involved in the daily labor activities of the various enterprises. Annual and total net income for the superior managerial MANAGERIAL ABILITY AND FARM GROWTH TABLE 6. OPTIMAL SOLUTION FOR THE SUPERIOR MANAGERIAL LEVEL IN THE BEGINNING FARM SITUATION, 1978-82 17 Enterprise Cotton, acres ..................... Soybeans', acres .................. Soybeans 2, acres .................. Wheat, acres ..................... Corn3 , acres ...................... Market hogs, units ................ Buy corn, bushels ................. Farrow-finish hogs, units .......... Stockers4 , units ................... 5 Winter grazing , acres ............. Stockers 6, units ................... 7 ....................... Silage , acres Hired labor 8, men ................ Seasonal labor, hours ............. Rent land, acres .......... Buy land, acres................... . .. . . . . . . .. . . . . . . . . ... Buy tractor Buy combine..................... Buy cotton picker ............... Custom combine, hours ........... Custom cotton picker, hours....... 1978 100 1979 1,100 1980 1,313 678 678 4 56,424 1981 545 112 1,342 1,342 4 56,424 1982 1,091 97 812 812 4 79,424 1 24 24 85 4 49,322 3.7 59 1 25 209 1 40 110 4 62,619 9.6 141 6 1,057 183 1 1 30 6 1,258 1,313 497 2 2 9 1,709 634 687 3 2 9 1,440 634 2 2 'Single-cropped. 2Double-cropped with wheat. for the market hog activity. 4 Stockers on winter grazing (20 steers per unit). 5Winter grazing for stockers (0.8 acre per steer). 6 Stockers on silage (100 steers per unit). 7 Corn silage for the associated stocker activity. 8 Full-time hired men. 'Tractor supplying 750 hours use annually. 'Produced level are presented in table 3. Net income was defined as the income above family living expenses and all farm business expenses, including interest and loan repayments. Positive net income values were attained in all years with cumulative net income also increasing consistently over the 5-year period. The superior manager increased production to overcome the costprice squeeze simulated by the 1.5 percent increase in production costs over enterprise product receipt prices each year. Total net income for the 5-year period was $1,104,056 for the superior managerial level. Net worth increased from $30,515 in 1978 to $881,890 in 1982. Larger increases occurred after land was purchased and its value had appreciated. Borrowed capital was utilized extensively to supplement internally generated capital, as had been the case with the improved management level. The optimal solution for the superior managerial level is presented in table 6. The superior manager required $1,750 of capital to begin operation in the optimal solution, in addition to the 18 ALABAMA AGRICULTURAL EXPERIMENT STATION $5,000 personal cash. This cash could be acquired in a real situation by reducing the family living expenses by this amount in the first year or by borrowing funds in excess of those specified in the model. This option was not permitted with other managerial levels since amounts required would not reasonably be available. In 1978, the superior manager was directly involved and only one full-time hired man was utilized. After the first year, however, additional men were hired until a maximum of nine men were hired in years 1981 and 1982. The optimal enterprise selection progressed toward a labor and capital intensive operation. Extensive capital requirements resulted in the maximum utilization of the drylot market hog enterprise in all years. Corn requirements were met entirely from bought corn for this enterprise in all years except 1978 when 85 acres of corn were produced. Also, stockers on grazing were produced only in 1978. These results also indicated the trend toward shifting to more capital intensive enterprises as soon as the cash for operating and investment capital could be generated internally. Limited capital available from borrowing was the reason for this trend. The superior manager produced 100 acres of cotton in 1978, the maximum level possible when utilizing custom cotton harvesting. Cotton was not in the optimal solution again until 1981 when capital was available for the purchase of cotton pickers. Row crops dominated the solution in 1979, with production of 1,100 acres of single-cropped soybeans and 141 acres of corn silage for the stockers on silage enterprise. After 1979, the only livestock enterprise in solution was the market hog activity until 1982 when the shift toward capital intensive activities was fully realized. The farrow to finish hog enterprise was activated at one unit in 1982 and was part of a solution which included 1,091 acres of cotton and 812 acres of soybeans and wheat double-cropped. Land purchases for this managerial level began in 1979 and were made in each of the remaining years until the 2,000-acre maximum was attained. Additional land was rented each year on a cash rent basis to satisfy the land requirements until 1982, when all land requirements were met by the accumulated land purchased over the 5-year period. Years 1981 and 1982 had the highest acreage purchased and, as was the case with the improved level, cotton was part of the optimal solution in those years. Relaxation of the maximum land constraint would result in continued land purchases by the superior manager. MANAGERIAL ABILITY AND FARM GROWTH 19 The superior manager had significant investment in machinery over the 5-year period. In 1979, only one tractor was purchased and all crops were custom harvested. However, eight tractors, three combines, and four cotton pickers were purchased in the remaining 4 years. In addition to these capital investments, the farrow to finish hog enterprise required the purchase of one unit of breeding stock (100 sows and 4 boars) and buildings for this enterprise, at a cost of $95,285 in 1982. The superior manager would be expected to continue this growth pattern as his constantly increasing net worth would provide borrowing capacity to supplement the internally generated funds for investment. Growth would ultimately be based on the individual preferences of this manager with respect to other goals he might have for himself and his family. Established Situations Below Average Managerial Level The below average managerial level was unable to survive in the established situation due to the low productivity associated with this level. Even with land and machinery available initially, the capital requirements exceeded the $10,000 initial capital availability. Average Managerial Level The average manager in the established situation was able to continue the farm operation and experience growth. This was in contrast to the beginning situation where the average level farmer was unable to establish an operation. The assets held by established farmers and the $10,000 personal cash for investment in the TABLE 7. COMPARISON OF ANNUAL AND TOTAL NET INCOME' BY MANAGEMENT LEVEL FOR ESTABLISHED FARM SITUATIONS, 1978-82 Management Net income, by year level Below average Average ......... Improved ...... Superior ....... 2 1978 1979 1980 1981 1982 Total TERMINATED $ 19,212 $ 21,503 $ 23,335 $ 38,981 $ 34,722 $ 137,754 69,669 66,864 70,215 80,559 74,404 361,711 126,047 241,991 234,309 269,948 331,328 1,203,622 'Net income is the net income above family living expenses and all costs, including interest and loan repayments. 2 Level was unable to continue operation profitably. 20 ALABAMA AGRICULTURAL EXPERIMENT STATION firm made possible the survival of this level. Therefore, the continued existence of farmers at this level would be expected if conditions continue as projected in the model. The growth pattern, as measured by net income, is presented in table 7. Net income was defined for managerial levels in the established situation as income above family living expenses and all costs, including interest and loan repayment. Over the 5-year period, the average manager had total net returns of $137,754 and his net worth increased from $160,253 to $441,133, table 8. In contrast to the beginning situation, established farmers had a base operation to provide a higher initial net worth. This provided a stronger net worth growth pattern. TABLE 8. COMPARISON OF NET WORTH BY MANAGEMENT LEVEL FOR ESTABLISHED FARM SITUATIONS, 1978-82 Management level 1978 Below average' ..... Average............ Improved .......... Superior .......... TERMINATED $160,253 168,419 168,418 'Level was unable to begin operation. Net worth, by year 1979 1980 $202,303 211,665 325,399 $222,477 262,867 679,069 1981 $308,858 316,001 1,134,641 1982 $441,133 644,183 1,778,053 The optimal solution for the average managerial level, table 9, presents a stable situation after the first year when the average manager utilized his personal funds for operating capital and produced only row crops. In the remaining 4 years, cotton, soybeans, and soybeans and wheat double-cropped maintained almost constant levels of production. Stockers on grazing were in the solution in only the second and third years of the planning horizon and were at six units in both years. Land was purchased at an increasing rate beginning in 1979. In the period 1979-1982, 481 acres were purchased to supplement the 200 acres assumed to be owned in the initial year of the plan. Over this same period, the acres of land rented declined steadily due to the land purchases and the stable levels of activities in solution. This pattern of continued land purchases and reduction in rented land would be expected to continue until the farm owned all the land necessary for production if projected economic conditions persisted in future years. The labor constraint presented the most severe restriction on the growth of the average managerial level firm. The maximum labor of two full-time men was hired in all years except the first. MANAGERIAL ABILITY AND FARM GROWTH TABLE 9. OPTIMAL SOLUTION FOR THE AVERAGE MANAGERIAL LEVEL IN THE ESTABLISHED FARM SITUATION, 1978-82 21 Enterprise Cotton, acres...................... Soybeans', acres.................. 2 Soybeans , acres.................. Wheat, acres ..................... Stockers3 , units .................. Winter grazing4 , acres............. Hired labor5 , men ................ Seasonal labor, hours ............. Rent land, acres .................. Buy land 6, acres. ................... Buy tractor7 . . . . . . . . . . . . . . . . . . . . 1978 72 122 306 306 1 398 300 1979 91 721 139 139 6 97 2 178 695 57 1 1980 91 721 139 139 6 97 2 178 594 101 1981 91 724 138 138 2 160 472 124 1982 91 724 138 138 2 160 273 199 'Single-cropped. 2 Double-cropped with wheat. 3 Stockers on winter grazing (20 steers per unit). 4 Winter grazing for stockers (0.8 acre per steer). 5 Full-time hired men. 6200 acres were initially owned by established farmers. 7 Tractor supplying 750 hours use annually. Relaxation of this constraint would probably have an impact on the optimal selection of enterprises for this managerial level. However, this level was originally assumed to lack sufficient managerial ability to manage labor at a higher level than two fulltime men. Improved Managerial Level The improved managerial level for the established farm situation followed a trend similar to that of the average managerial level. Annual and total net income for the improved level are presented in table 7. The improved manager had a total income over the planning period of $361,711. Net worth increased to $644,183 in the fifth year, table 8. Table 10 presents the optimal solution for the 5-year period that resulted in the growth in net income for the improved management level. The first year of the planning period was utilized as a year of building cash reserves for investment in future years. The improved manager divided his personal cash investment in the farm between operating and investment capital at $3,250 and $6,750, respectively. The optimal solution calls for the utilization of market hogs and stockers on grazing to generate a strong cash flow with low investment capital requirements in 1978. After the first year, livestock activities were not included in the optimal solution. 22 ALABAMA AGRICULTURAL EXPERIMENT STATION TABLE 10. OPTIMAL SOLUTION FOR THE IMPROVED MANAGERIAL LEVEL IN THE ESTABLISHED FARM SITUATION, 1978-82 Enterprise I 1978 91 169 169 1979 623 467 322 322 1980 623 467 322 322 1981 623 467 322 322 1982 623 467 322 322 Cotton, acres ..................... Soybeans', acres.................. 2 Soybeans , acres .................. eat, acres ..................... 457 Corn, acres ...................... 3 3.6 Market hogs , units ............... 19,284 Buy corn, bushels ................. 4 7.4 . Stockers , units ................... . 118 Winter grazing, acres ............. s .3 Hired labor , men ................. 521 Seasonal labor, hours .............. 516 Rent land, acres ................... Buy lands, acres. .................... . . . . . . . . . . . . . . . . . 7 . .. 1 Buy tractor Buy combine..................... Buy cotton picker ................ 'Single-cropped. 'Double-cropped with wheat. 31,500 head per unit. 4 grazing (20 steers per unit). Stocker 5Full-time hired men. 6200 acres owned initially. 7 Tractor supplying 750 hours use annually. 3 874 1,204 8 4 1 2 3 874 887 317 3 874 503 384 3 874 14 489 The remaining 4 years of the planning period were very stable, with cotton, single-cropped soybeans, and double-cropped soybeans and wheat in the optimal solution at a constant level. During this period, labor was utilized at the maximum allowable level, three full-time men. Relaxation of this constraint would change the optimal solution and growth pattern for this level. However, the original assumption placed this labor constraint on the improved level to permit study of the growth pattern of an efficient farm firm where the manager is still involved in the daily activities of the farm. The trend of consistently increasing land purchases was evidenced for the improved level beginning in the second year of the plan. As land purchases increased, the level of utilization of rented land declined. At the end of the period, the improved manager owned a total of 1,398 acres, including 1,198 acres purchased and the 200 acres assumed owned initially. Investment in machinery was completed by the improved manager in the second year of the plan. One tractor was purchased the first year, followed by four tractors, one combine, and two cotton pickers in the second year. Additional machinery was not necessary because the activity levels for the row crop enterprises were constant for the remainder of the planning period. MANAGERIAL ABILITY AND FARM GROWTH 23 The stability of the improved managerial level indicated the potential for a more stable agricultural sector through the adoption of improved management practices by farmers. It further indicated the potential results available for "family farms." The constraints on this level could be satisfied when sound financial management and farm management are implemented on such operations. Superior Managerial Level The optimal solution for the superior managerial level, table 11, presented a diversified farming operation with a high level of capital and labor utilization. Total net income for the superior managerial level, presented in table 7, indicated rapid growth when measured in terms of net income. Over the 5-year period, total net income of $1,203,622 was realized. Net worth had also increased rapidly, to the final value of $1,778,053, table 8. The superior manager utilized the first year of the period to create internally generated capital for investment in the capital intensive activities of the future periods. In the second through the fifth years, row crop activities stabilized at the maximum TABLE 11. OPTIMAL SOLUTION FOR THE SUPERIOR MANAGERIAL LEVEL IN THE ESTABLISHED FARM SITUATION, 1978-82 Enterprise 1978 1979 1980 1,455 91 455 455 1981 1,455 91 455 455 1982 1,455 91 455 455 Cotton, acres ..................... 29 1,302 Soybeans', acres.................. 335 395 2 Soybeans , acres.................. 109 302 Wheat, acres ..................... 109 302 Corn, acres ...................... 447 Farrow-finish hogs3 , units ......... 4, Market hogs units ............... 4 4 Buy corn, bushels ................. 18,913 56,424 5 Stockers , units ................... 13.2 17.8 Winter grazing, acres ............. . 211 286 6 Hired labor , men ................ 4 8 266 Seasonal labor, hours ............. 246 Rent land, acres .................. 719 1,800 Buy land 7, 8 . . . . .................... . . acres . . . . . . . . . . . . . . Buy tractor 1 8 .... Buy combine.............. 5 Buy cotton picker ................ 'Single-cropped. 2 Double-cropped with wheat. 3100 sows per unit. 41,500 head per unit. 5 Stockers on winter grazing (20 steers per unit). 6 Full-time hired men. 7200 acres owned initially. 8 Tractor supplying 750 hours use annually. 2 2 4 4 4 56,424 102,424 102,424 19.9 23.9 23.9 318 382 382 9 13 13 262 742 36 1,058 706 36 1 24 ALABAMA AGRICULTURAL EXPERIMENT STATION acreage allowable in the model. Within this 2,000-acre maximum, the superior manager established a stable row crop system with cotton as the leading crop. After cotton reached its maximum level, land purchases were initiated to supplement the 200 acres owned and supply the entire 2,000 acres in the fifth year from land owned by the farm. After the major land purchase in 1980 of 1,058 acres, capital became available within the operation to initiate a 200-sow farrow to finish hog operation. It continued in the solution at this level in the fifth year. The absence of a constraint on labor allowed for continuation and expansion of the livestock activities in the optimal solution. This is contrary to the trend established by previous levels, but was expected when labor was not constrained within the model. The superior manager utilized a maximum labor force of 13 men in 1981 and 1982 with no seasonal labor hired. Relaxation of the constraint on maximum acreage available would result in additional requirements for hired labor. Capital investments in machinery were completed in 1980, the third year of the plan, with purchases over this period of 10 tractors and 5 cotton pickers. Investment capital in the last 2 years was utilized by the farrow to finish hog operation which required $209,672. These requirements were supplied entirely by internally generated funds of investment capital. SUMMARY The primary objective of this study was to determine the impact of managerial ability on farm firm growth. Within this objective, four managerial levels - below average, average, improved, and superior-were characterized. Multiperiod linear programming models were developed to simulate beginning and established farm situations for each management level. Optimal solutions were obtained for each of these management levels, and comparisons were made with respect to the enterprise combinations and growth potential for each respective level in both beginning and established situations. Enterprise budgets were developed for cotton, corn, single-cropped soybeans, doublecropped soybeans and wheat, market hogs, farrow to finish hogs, and stockers on winter grazing and silage, winter grazing, and silage, enterprises common to north Alabama farms. Enterprise budgets were based on improved management practices recommended by Auburn University for north Ala- MANAGERIAL ABILITY AND FARM GROWTH 25 bama. Varying managerial capabilities were accounted for by assumed variations in yields. The improved managerial level served as the base level. Yields for average and below average management in comparison with improved management were, respectively, 20 percent and 40 percent less for crops and 20 and 10 percent less for livestock. Variations in yield provided different levels of productivity and lower costs per unit of product for the higher managerial levels. The superior managerial level was assumed to exceed improved level crop yields by 20 percent and livestock yields by 10 percent. However, the superior manager was assumed to experience 10 percent greater costs than the other three levels due to less direct involvement in daily work activities with the various enterprises and therefore greater labor costs. His increased productivity enabled him to offset this situation. Optimal solutions for the beginning farmer situation were as expected. The below average and average levels were unable to succeed in establishing a farm business. Low productivity accompanied by limited credit availability prevented these levels from generating the necessary cash flow to meet the ever increasing capital needs as the 5-year period progressed. The improved and superior levels obtained successful operations through increased efficiency and productivity. Net income increased in all years for the superior level; however, the improved level had a decline in the fifth year. This decline resulted because increased productivity and efficiency of the improved level returned less than was lost from higher cost increases in relation to product prices. The superior level, however, through the implementation of a farrow to finish hog operation, overcame the pressure of this cost-price squeeze. This was possible because of unlimited labor available to this level. Both managerial levels had accumulated a high level of outstanding debt created mainly by their purchases of land. The introduction of cotton into the optimal solution was constrained in early years for both levels by the high investment capital requirements for a cotton picker. Thus, livestock and row crop enterprises requiring less investment capital were utilized until sufficient internal funds or borrowing capacity was available. The advent of cotton in the latter periods resulted in large land purchases and expansion of other capital intensive enterprises. Livestock enterprises declined as cotton was integrated into the optimal solution. 26 ALABAMA AGRICULTURAL EXPERIMENT STATION Optimal solutions for the established situation indicated that only the below average farmer would not succeed in maintaining a farm operation under the constraints imposed on this situation. The remaining three levels established stable operations after the first year, with row crops dominating the optimal solution. The only exception was the superior level, which expanded livestock enterprises throughout the period while continuing to operate a stable row crop operation. The absence of a labor constraint made this possible. All levels bought land, primarily utilizing internally generated capital for this and other investment alternatives. This was in contrast to the beginning situation in which heavy use of borrowed funds was necessary to initiate investment in land and machinery. CONCLUSIONS Certain conclusions were reached with respect to the impact of managerial ability on firm growth. In both situations, managers with below average managerial ability cannot succeed even under a situation of perfect certainty as assumed in these models. Without previous establishment in farming or inheritance of a farm, the average level cannot maintain a profitable operation due to low productivity and high capital requirements. The improved managerial level provided a basis for support of "family farm" operations because constraints imposed on this level could be successfully dealt with by farmers with improved managerial abilities. The superior manager represented the potential available when farming is subjected to management techniques similar to other businesses whereby the superior manager is a fulltime manager and supervises the farm through hired supervisors and laborers. The primary deterrent to extensive development of farms managed by superior managers is the intensive use of capital under a situation of uncertainty with a high level of risk. The net income potential of both beginning and established situations was similar, which was not expected. However, the beginning situation farmers utilized extensive borrowed capital for machinery and land purchases and were under'heavy debt loads, as opposed to the established situations where most investments for machinery were made with internally generated capital. Borrowed capital was utilized to supplement internally generated capital for land purchases by the established situation managers. MANAGERIAL ABILITY AND FARM GROWTH MANAGERIAL ABILITY AND FARM GROWTH 27 2 Thus, the net worth of the established situation managers was far superior to that of the beginning situation. Managerial ability had a significant impact on the establishment and continued operation of farm firms. The degree of emphasis on managerial training and expertise must increase to meet the ever increasing complexities of American agriculture. If farmers are to succeed in establishing successful growth patterns, attention must be given to recognizing areas of weakness in farm management and strengthening these areas. Young farmers should concern themselves with adequately preparing for the future when sound farm business management will become increasingly necessary for success. Continued research on the influence of managerial ability on firm growth will be necessary. Future models of firm growth could be improved to more accurately simulate the risks and uncertainties that exist in the real world. In addition, activities to allow for investment of farm profits in alternative investments, such as demand savings accounts and certificates, would provide the manager with alternatives for internally generated funds, thus forcing investments in the farm to yield returns competitive with nonfarm investment opportunities. Also, the multiperiod model could be improved by relaxing the assumption of perfect certainty through the inclusion of stochastic variables to allow for good and bad crop yields and random variation in prices. 28 ALABAMA AGRICULTURAL EXPERIMENT STATION REFERENCES (1) BARRY, PETER J. (2) (3) 1977. Theory and Method in Firm Growth Research, Economic Growth of the Agricultural Firm. Washington Agr. Exp. Sta. Tech. Bull. 86. BOEHLJE, M. D. 1972. The Entry-Growth-Exit Process in Agriculture. Sou. J. of Agr. Econ. Vol. 4, pp. 461-473. CIIIEN, Y. I.ANI) G. L. BRAIDF()RD. 1976. A Sequential Model of the Farm (4) HUMBRED, (5) (6) (7) (8) Firm Growth Process. Amer. J. of Agr. Econ. Vol. 58, pp. 456-465. DAVID R. 1971. Actual Versus Potential Growth of a Farm Firm: An Ex Post Analysis. Sou. J. of Agr. Econ. Vol. 3, pp. 129-135. IRWIN, GEORGE D. 1968. A Comparative Review of Some Firm Growth Models. Agr. Econ. Res. Vol. 20, pp. 82-100. MINNICK, D. L. 1975. Financial Alternatives and Minimum Resource Requirements for Low Resource Beginning Farmers in Oklahoma. M.S. Thesis. Okla. State Univ. PATRICK, G. F. AND L. M. EISGRUBER. 1968. The Impact of Managerial Ability and Capital Structure on Growth of the Farm Firm. Amer. J. of Agr. Econ. Vol. 50, pp. 491-506. REID, D. W., W. N. MUSSER, AND N. R. MARTIN, JR. 1978. Income Tax As- pects of Liquidation in Multiperiod Linear Growth Models. Sou. J. of Agr. Econ. Vol. 10, pp. 29-34. (9) SADAN, E. 1970. The Investment Behavior of a Farm Firm Operating Under Risk. Amer. J. of Agr. Econ. Vol. 52, pp. 455-505. (10) TOLLEY, G. S. 1970. Management Entry into U.S. Agriculture. Amer. J. of Agr. Econ. Vol. 52, pp. 485-493. (11) (12) UNITED STATES DEPARTMENT OF AGRICULTURE. 1977. Agricultural Statistics 1977. U.S. Govt. Prin. Ser., Washington, D.C. WALKER, O. L., M. L. HARDIN, H. P. MAPP, JR., AND C. E. ROUSH. 1979. Firm Growth and Estate Transfer in an Uncertain Environment. Sou. J. of Agr. Econ. Vol. 11, pp. 33-44. MANAGERIAL ABILITY AND FARM GROWTH 29 APPENDIX APPENDIX TABLE 1. LABOR AVAILABILITY BY MANAGEMENT LEVEL FOR SIX LABOR PERIODS Period 1...... 2...... 3...... 4. ... 5...... 6...... Dates Dec. 1Feb. 11Apr. 1May 1 July 1Sept. 1 Feb. 10 Mar. 31 Apr. 30 June 30 Aug. 31 Nov. 30 Below average'1 976 664 409 824 834 1,233 Average 2 1,438 979 603 1,214 1,229 1,817 Improved 3 1,900 1,294 797 1,604 1,624 2,401 Superior unlimited unlimited unlimited unlimited unlimited unlimited 'Operator and one full-time hired man. 2 Operator and two full-time hired men. 3 Operator and three full-time hired men. 4 Labor assumed available for all enterprises in the plan. APPENDIX TABLE 2. PROJECTED RECEIPTS AND VARIABLE INPUT COSTS USED IN THE INITIAL YEAR OF THE MULTIPERIOD MODEL Receipts, by management level Improved level Superior level Cotton, pound ...................... Soybeans 2, bushel ................... Wheat, bushel ....................... Corn, bushel ........................ Stockers3 , pound ....................... Market hogs4, pound ................. Dollars Dollars 0.52 5.50 3.00 2.10 40 .40 .36 .36 Variable costs, by management level Improved level Dollars 177.23 46.80 50.15 45.66 58.71 23,191.12 4,857.03 53,364.69 70,149.36 2.50 Superior level Dollars 194.95 51.48 55.17 50.23 64.58 25,510.23 5,342.73 58,701.06 77,164.30 2.50 Cotton, acre ........................ Soybeans5 , acre ..................... Soybeans 6 , acre ..................... Wheat, acre......................... Corn, acre .......................... Stockers7 , unit....................... Stockers8, unit........................ . Farrow-finish hogs9 , unit ............. 0 Market hogs' , unit .................. Buy corn", bushel ................... Receipts and variable costs were the same for the improved, below average, and average levels. 2 Receipt price was the same for single and double-cropping enterprises. 3 Receipt price was the same for both stocker enterprises. 4 Receipt price was the same for both hog enterprises. 5 Single-cropping enterprise. 6 Double-cropping enterprise. 7 Produced on silage (100 steers per unit). 8 Produced on winter grazing (20 steers per unit). 9 Corn fed not included (100 sows per unit). '0 Corn fed not included (1,500 head per unit). "Corn price was same for all levels due to assumed constant purchase price paid of 40 cents over the prevailing selling price for corn. 30 30 ALABAMA AGRICULTURAL EXPERIMENT STATION APPENDIX TABLE 3. COTTON, ESTIMATED COSTS AND RETURNS PER ACRE;' IMPROVED MANACERIAL ABILITY, 1978 Item Cross receipts Cotton lint................ Cotton seed................ TOTAL..................... Unit lb. ton Price or cost/unit 0.52 100.00 Quantity 600.00 .50 Value or cost 312.00 50.00 362.00 5.61 18.75 13.65 3.00 10.88 6.00 46.06 1.50 2.02 17.60 4.75 129.82 4.00 31.50 16.66 52.16 181.98 180.02 42.55 17.63 60.18 13.95 3.27 17.22 259.38 102.62 Variable costs Preharvest Seed..................... Fertilizer'................. Ammonium nitrate.......... Lime..................... Herbicide................. Fungicide................. Insecticide................. Cotton scouting............ Machinery................. Tractors.................. Interest on operating capital.... Subtotal, preharvest....... Harvest costs Defoliant.................. Ginning................... Machinery ................. Subtotal, barvest ........... TOTAL VARIABLE COSTS ... Income above variable costs .. Fixed costs Macbinery .................... Tractors..................... TOTAL FIXED COSTS. ......... cwt. cwt. cwt. 33.00 7.50 ton acre acre acre acre acre acre dol. acre bale acre 6.50 12.00 10.88 6.00 3.29 1.50 2.02 17.60 .09 4.00 26.25 16.66 .17 2.50 2.10 .25 1.00 1.00 14.00 1.00 1.00 1.00 52.76 1.00 1.20 1.00 acre acre 42.55 17.63 1.00 1.00 Labor costs Preharvest labor (tractor & machinery)............... Harvest labor (tractor & macbinery)............... TOTAL LABOR COSTS ......... TOTAL COSTS I............... hour hour 2.50 2.50 5.58 1.31 Net returns to land and management................ 'Fertilizer rates used (90-60-60). L MANAGERIAL ABILITY AND FARM GROWTH 31 APPENDIX TABLE 4. SOYBEANS, ESTIMATED COSTS AND RETURNS PER ACRE, IMPROVED MANAGERIAL ABILITY, 1978 Item Gross receipts Soybeans.................. TOTAL.................. Variable costs Preharvest Seed..................... Fertilizer'................ Lime..................... Herbicide................. Insecticide................. Machinery ................. Tractors.................. Interest on operating capital.... Subtotal, preharvest....... Harvest costs Machinery................. Subtotal, harvest.......... TOTAL VARIABLE COSTS ... Unit bu. Price or cost/unit 5.50 Quantity 30.00 Value or cost 165.00 165.00 8.60 12.24 3.00 8.86 6.71 .87 3.81 1.92 46.01 bu. cwt. ton acre acre acre acre dol. acre 8.60 6.12 12.00 8.86 6.71 3.81 .87 .09 1.00 2.00 .25 1.00 1.00 1.00 1.00 21.29 1.00 2.72 Income above variable costs .. Fixed costs Machinery.................. Tractors................... TOTAL FIXED COSTS........... 2.72 2.72 48.73 116.27 19.74 acre acre 19.74 4.04 1.00 1.00 4.04 23.78 2.99 .77 3.76 76.28 88.72 Labor costs Preharvest labor (tractor & machinery)............... Harvest labor (tractor & machinery)............... TOTAL LABOR COSTS........... TOTAL COSTS................. hour hour 2.50 2.50 1.20 .31 Net returns to land and management................ ~ct 'Fertilizer rates used (0-40-4). 32 32 ALABAMA AGRICULTURAL EXPERIMENT STATION APPENDIX TABLE 5. SOYBEANS (FOLLOWING WHEAT), ESTIMATED COSTS MANAGERIAL ABILITY, 1978 AND RETURNS PER ACRE, IMPROVED Unit bu. Item Cross receipts Soybeans.................. TOTAL...................... Price or cost/unit Quantity 25.00 Value or cost 137.50 137.50 5.50 Variable costs Preharvest Seed..................... Fertilizer'................. Lime..................... Herbicide................. Insecticide................. Macbinery................. Tractors.................. Interest on operating capital.... Subtotal, prebarvest. Harvest costs Macbinery................. Subtotal, harvest.......... TOTAL VARIABLE COSTS. bu. cwt. ton acre acre acre acre dol. acre 8.60 6.12 12.00 9.34 1.00 2.00 .33 8.60 12.24 3.96 9.34 1.00 1.00 1.00 1.00 19.72 1.00 8.62 .87 3.81 .09 2.72 8.62 .87 3.81 1.78 49.21 2.72 2.72 51.94 85.56 Income above variable costs . Fixed costs Macbinery.................. Tractors ................... TOTAL FIXED COSTS........... acre acre 19.74 4.04 1.00 1.00 19.74 23.78 0 0 0 4.04 Labor costs Prebarvest labor (tractor & macbinery).............. Harvest labor (tractor & macbinery)............... TOTAL LABOR COSTS......... . . TOTAL COSTS .............. bour hour 0 0 1.20 .31 75.72 'CT Net returns to land and management................ 61.78 'Fertilizer rates used (0-40-40). MANAGERIAL ABILITY AND FARM GROWTH APPENDIX TABLE 6. WHEAT, ESTIMATED COSTS AND RETURNS PER ACRE, IMPROVED MANAGERIAL ABILITY, 1978 3 33 Item Cross receipts Wheat.................... TOTAL...................... Unit bu. Prceo 3.00 Quantity costunitcost 40.00 Value or 120.00 120.00 9.69 13.65 18.75 .22 1.61 2.22 46.13 1.74 1.74 47.87 72.13 9.17 1.42 10.59 0 0 0 58.47 61.53 Variable costs Preharvest Wheat seed................ Ammonium nitrate.......... Fertilizer'................. Machinery................. Tractors.................. Interest on operating capital.... Subtotal, preharvest....... Harvest costs Machinery................. Subtotal, harvest.......... TOTAL VARIABLE COSTS. bu. cwt. cwt. acre acre dol. acre 7.75 6.50 7.50 .22 1.61 .09 1.74 1.25 2.10 2.50 1.00 1.00 24.64 1.00 Income above variable costs .. Fixed costs Machinery.................. Tractors ................... TOTAL FIXED COSTS........... acre acre 9.17 1.42 1.00 1.00 Labor costs Preharvest labor (tractor & machinery) ............... Harvest labor (tractor & machinery) ............... TOTAL LABOR COSTS.......... TOTAL COSTS................. hour hour 0 0 .71 .35 Net returns to land and management................ 'Fertilizer rates used (90-60-60). 34 34 ALABAMA AGRICULTURAL EXPERIMENT STATION APPENDIX TABLE 7. CORN FOR GRAIN, ESTIMATED COSTS AND RETURNS PER ACRE, IMPROVED MANAGERIAL ABILITY, 1978 Item Gross receipts Corn..................... TOTAL...................... Price or Unit cost/unit ,... ~vni~u YI l l~~~ll l vir ni I. bu. 2.10 Qua ntity 70.00 Value or cost 147.00 147.00 6.70 12.75 20.80 3.96 6.94 1.14 4.69 2.47 59.45 1.74 1.74 61.19 85.81 14.35 4.67 19.01 3.72 .88 4.60 84.80 62.20 Variable costs Preharvest Seed...................... . . . . . . . . . . . Fertilizer' . . . . . Nitrogen.................. Lime..................... Herbicide................. Macbinery................. Tractors.................. Interest on operating capital.... Subtotal, preharvest....... Harvest costs Machinery................. Subtotal, harvest.......... TOTAL VARIABLE COSTS. lb. cwt. cwt. ton acre acre acre dol. acre .67 7.50 6.50 12.00 6.94 1.14 4.69 .09 1.74 10.00 1.70 3.20 .33 1.00 1.00 1.00 27.44 1.00 Income above variable costs .. Fixed costs Machinery.................. Tractors................... TOTAL FIXED COSTS........... acre acre 14.35 4.67 1.00 1.00 Labor costs Preharvest labor (tractor & machinery)............... hour hour 2.50 2.50 1.49 .35 Harvest labor (tractor & machinery)............... TOTAL LABOR COSTS........... TOTAL COSTS .............. . Net returns to land and management................ 'Fertilizer rates used (120-40-40). MANAGERIAL ABILITY AND FARM GROWTH 35 APPENDIX TABLE 8. CORN FOR SILAGE, ESTIMATED COSTS PER ACRE, IMPROVED MANAGERIAL ABILITY, 1978 IeUnt ItemUnit Cross receipts Silage.................... TOTAL...................... Price or costunit 0 Qatt Quanity 14.00 Value or cost 0 0 8.04 21.75 30.88 3.96 6.94 1.14 4.69 2.73 80.13 3.12 2.56 5.68 85.81 -85.81 16.95 6.86 23.81 3.72 2.25 5.97 115.60 -115.60u tons Variable costs Preharvest Seed ..................... Fertilizer'................. Nitrogen.................. Lime.................... Herbicide ................. Machinery................. Tractors.................. Interest on operating capital.... Subtotal, preharvest. Harvest costs Machinery................. Tractors.................. Subtotal, harvest.......... TOTAL VARIABLE COSTS ... lb. cwt. cwt. ton acre acre acre dol. acre acre .67 7.50 6.50 12.00 6.94 1.14 4.69 .09 3.12 2.56 12.00 2.90 4.75 .33 1.00 1.00 1.00 30.38 1.00 1.00 Income above variable costs . Fixed costs Machinery.................. Tractors................... TOTAL FIXED COSTS........... acre acre 16.95 6.86 1.00 1.00 Labor costs Preharvest labor (tractor & machinery)............... hour hour 2.50 2.50 1.49 .90 Harvest labor (tractor & machinery) .............. TOTAL LABOR COSTS.......... TOTAL COSTS................. Net returns to land and management................ 'Fertilizer rates used (180-70-70). 36 36 ALABAMA AGRICULTURAL EXPERIMENT STATION APPENDIX TABLE 9. STOCKER BUDGET, ESTIMATED COSTS AND RETURNS PER UNIT (20 STEERS), IMPROVED MANAGERIAL ABILITY, 1978 ItemUnit IeUnt cwt. cwt. acre cwt. acre head head head dol. dol. Price or cost/unit 40.00 40.00 60.48 4.00 133.25 6.00 Qu Qatiy 20.00 4.25 .80 .45 .05 1.00 2.00 1.00 2,690.29 Value or cost 5,600.00 5,600.00 3,400.00 967.68 36.00 133.25 120.00 30.00 168.00 2.10 242.13 5,099.16 500.84 68.01 101.76 Cross receipts Steer calves (700 lb.)......... TOTAL..................... Variable costs Steer calves................ Pasture'................... Salt & mineral.............. ....... Hay............. Veterinarian and medical. Custom hauling............. Sales commission........... Equipment (fuel, fube, repairs).. Interest on operating capital.... TOTAL VARIABLE COSTS ... .75 8.40 .09 Income above variable costs .. Fixed costs Coastal hay................. Ryegrass-clover ............. Interest on other equipment .... Depreciation on other equipment dol. dol. dol. dol. dol. 68.01 6.36 .09 1.00 16.00 87.50 7.87 7.00 6.12 190.76 5,289.92 310.08 ............... Other farm machinery & equipment ............... TOTAL FIXED COSTS .......... TOTAL COSTS................ Net returns................... 'Utilizing rye, ryegrass, and clover grazing. MANAGERIAL ABILITY AND FARM GROWTH 37 APPENDIX TABLE 10. STOCKER BUDGET, ESTIMATED COSTS AND RETURNS PER IMPROVED MANAGERIAL ABILITY, 1978 UNIT (100 STEERS), teUnt IeUnt Price or cost/unit cwt. cwt. acre cwt. acre cwt. bead bead bead dol. 40.00 40.00 85.81 4.00 61.19 11.25 .75 8.40 6.00 Qatt Qatiy 100.00 4.25 16.10 .45 9.20 2.70 2.00 1.00 1.00 15, 473.45 Value or cost 28,000.00 28,000.00 17,000.00 1,381.54 180.00 562.95 3,037.50 150.00 840.00 600.00 Cross receipts Steer calves (700 lb.)......... TOTAL...................... Variable costs Steer calves................. Corn silage................ Salt & mineral .............. Corn..................... Protein supplement.......... Custom hauling............. Sales commission........... Veterinarian & medicine. Equipment (fuel, lube, .. repairs) ................ Interest on operating capital... . TOTAL VARIABLE GOSTS ... .09 24.16 19.36 .09 1,392.61 2.10 Income above variable costs . Fixed costs Corn silage................. Corn..... ................. Interest on otber equipment Depreciation on otber equipment......... Otber farm macbinery & equipment ............... Net returns................... 25,146.70 2,853.30 16.10 9.20 87.50 388.98 178.11 7.87 7.00 6.12 588.08 25,734.78 2,265.22 ... . dol. dol. dol. dol. dol. TOTAL FIXED COSTS........... TOTAL COSTS................. 'Utilizing produced corn silage. 38 38 ALABAMA AGRICULTURAL EXPERIMENT STATION APPENDIX TABLE 11. RYE, RYEGRASS, AND CLOVER FOR WINTER CRAZING, ESTIMATED COSTS PER ACRE, IMPROVED MANAGERIAL ABILITY, 1978 Item Cross receipts TOTAL..................... Unit Pieo Quantity costunitcost Value or Variable costs Preharvest Rye...................... Rye grass seed.............. Clover seed ................. Fertilizer'................. Ammonium nitrate.......... Machinery................. Tractors.................. Interest on operating capital.... Subtotal, preharvest....... Harvest costs Subtotal, harvest.......... TOTAL VARIABLE COSTS ... bu. lb. lb. cwt. cwt. acre acre dol. 8.95 .25 2.11 7.50 6.50 .76 2.94 .09 1.00 15.00 5.00 2.50 1.60 1.00 1.00 48.72 8.95 3.75 10.55 18.75 10.40 .76 2.94 4.39 60.48 0 60.48 -60.48 Income above variable costs . Fixed costs Machinery.................. Tractors ................... TOTAL FIXED COSTS .......... acre acre 2.47 3.89 1.00 1.00 2.47 3.89 6.36 2.06 2.06 68.91 -68.91 Labor costs Preharvest labor (tractor & machinery) .. ............ TOTAL LABOR COSTS.......... TOTAL COSTS .... .......... . hour 2.50 .82 Net returns to land and management................ 'Fertilizer rates used (75-60-60). MANAGERIAL ABILITY AND FARM GROWTH APPENDIX TABLE 12. COASTAL BERMUDA FOR HAY, ESTIMATED ESTABLISHMENT COSTS PER ACRE, IMPROVED MANAGERIAL ABILITY, 1978 39 3 Ie Cross receipts TOTAL ..................... IeUnt Unit Price or cost/unit Qunt Qatiy Value or cost Variable costs Preharvest Sprigs'.................... Fertilizer'................. Ammonium nitrate.......... Lime..................... Machinery................. Tractors.................. Interest on operating capital... Subtotal, preharvest....... Harvest costs Subtotal, harvest ........... TOTAL VARIABLE COSTS j.. bu. cwt. cwt. ton acre acre dol. .50 6.12 6.50 12.00 1.27 3.67 .09 30.00 2.00 2.70 1.00 1.00 1.x'0 26.20 15.00 12.24 17.55 12.00 1.27 3.67 2.36 64.09 0 64.09 -64.09 Income above variable costs .. Fixed costs Machinery.................. Tractors ................... TOTAL FIXED COSTS .......... acre acre 9.08 4.11 1.00 1.00 9.08 4.11 13.19 2.86 2.86 80.14 -80.14 Labor costs Preharvest labor (tractor & machinery) ............... TOTAL LABOR COSTS.......... TOTAL COSTS.... ......... . hour 2.50 1.14 Net returns to land and management................ 'Clippings can be substituted for sprigs 2 Fertilizer rates used (90-40-40). - cost may change. 40 40 ALABAMA AGRICULTURAL EXPERIMENT STATION APPENDIX TABLE 13. COASTAL BERMUDA FOR HAY, ESTIMATED ANNUAL COSTS ANI) RETURNS PER ACRE, IMPROVED MANAGERIAL ABILITY, 1978 Item Cross receipts Bermuda................... TOTAL...................... Unit ton Pric eor cost/unit 0 Quantity 6.00 Value or cost 0 0 30.60 58.50 3.00 7.50 .05 .69 2.50 102.84 13.73 16.68 30.41 133.25 -133.25 44.10 15.01 8.01 67.12 .56 24.64 25.20 225.57 -225.57 Variable costs' Preharvest 2 . . . . . . . . . . . . . . . . . Fertilizer . Ammonium nitrate.......... Lime...................... Seasonal labor.............. Machinery.................. Tractors.................. Interest on operatingcapital.... Subtotal, preharvest....... Harvest costs Machinery................. Tractors.................. Subtotal, harvest.......... TOTAL VARIABLE COSTS.. cwt. cwt. ton hour acre acre dol. acre acre 6.12 6.50 12.00 2.50 .05 .69 .09 13.73 16.68 5.00 9.00 .25 3.00 1.00 1.00 27.74 1.00 1.00 Income above variable costs .. Fixed costs Machinery.................. Tractors .................. Prorated establishment cost ... TOTAL FIXED COSTS........... . acre acre acre 44.10 15.01 80.13 1.00 1.00 .10 Labor costs Preharvest labor (tractor & machinery)............... hour hour 2.50 2.50 .22 9.85 Harvest labor (tractor & machinery) ............... TOTAL LABOR COSTS.......... . TOTAL COSTS ................ Net returns to land and management................ 'Fertilizer 'For establishment costs, see the coastal bermuda hay establishment budget. rates used (300-100-100). MANAGERIAL ABILITY AND FARM GROWTH 41 APPENDIX TABLE 14. 100 BUDGET, FABBOW-FINISH 1, ESTIMATED COSTS AND RETUBNS, IMPROVED MANAGERIAL ABILITY, 1978 Item Cross receipts Unit Price or cost/unit Quantity Value or cost Sow Slaughter hogs (220 lb.). Sows (300 lb.)............ Boar (400 lb.)............. TOTAL.................. Variable costs Corn..................... Protein supplement.......... Creep.................... Truck hauling.............. Veterinarian and medicine. Utilities................... Repairs................... Boar. ......... .. Equipment (fuel, lube, repairs). Interest on operating capital... . TOTAL VARIABLE COSTS ... Income above variable costs .. Fixed costs Interest on livestock capital .... Interest on other equipment .... Depreciation on other equipment ............... Other fixed costs, machinery & equipment .............. TOTAL FIXED COSTS ......... TOTAL COSTS.............. Net returns2 . . . . . . . . . . . . . . . . . . cwt. cwt. cwt. bu. ton ton head head head dol. head dol. dol. dol. dol dol. dol. 36.00 28.00 21.00 2.50 280.00 295.00 .50 1.00 500.00 1.00 350.00 .09 1,606.00 60.00 4.00 23,000.00 124.00 24.00 1,670.00 1,790.00 12.00 350.00 4.00 53,514.91 127,195.20 5,040.00 336.00 132,571.20 57,500.00 34,720.00 7,080.00 835.00 1,790.00 6,000.00 350.00 1,400.00 1,190.00 4,816.34 115,681.34 16,889.86 .09 .09 13,399.99 34,499.99 1,206.00 3,105.00 4,075.00 10,800.98 2,414.98 126,482.32 6,088.88 'Complete confinement, buying all corn fed, assuming an 80 percent conception rate, 8.5 pigs weaned per and a 2 percent death loss from weaning to market. 'Net returns to operator's land, labor, and management. litter, 42 ALABAMA AGRICULTURAL EXPERIMENT STATION APPENDIX TABLE 15. MARKET HOGS', COSTS AND RETURNS PER 1,500-HEAD UNIT, IMPROVED MANAGERIAL ABILITY, 1978 Item Itemcost/unit Unit cwt. bu. ton head head head . dol. dol. Price or Quantity Value or cost 116,424.00 116,424.00 35,265.00 19,748.40 45,000.00 1,485.00 750.00 165.97 4,064.22 106,478.59 Gross receipts Slaughter hogs (220 lb.) ........ TOTAL ..................... Variable costs Corn ......................... Protein supplement ............ Feeder pigs .................. Truck hauling............... Veterinarian & medicine ....... Equipment (fuel, lube, repairs) .................... Interest on operating capital .... TOTAL VARIABLE COSTS ....... 36.00 2.50 280.00 30.00 .50 .50 .09 1,470.00 14,106.00 70.53 1,500.00 2,970.00 1,500.00 45,158.00 Income above variable costs ..... Fixed costs Interest on other equipment ... Depreciation on other equipment .................. Other fixed costs, machinery & equipment ............... Net returns .................... TOTAL FIXED COSTS .......... TOTAL COSTS ................ 2 9,945.41 dol. dol. dol. .09 5,472.49 492.52 901.96 383.07 1,777.55 108,256.14 8,167.86 'Dry lot finishing operation, buying all corn fed, 2 percent death loss from weaning to market, 3.7 pounds feed per pound gain. 2 Net returns to operator's land, labor, and management. tidI W\ith .in agric ulr5t.htt r Liin in \ tila O n AtiX (1 Auburn I nix ~rs it sefx es the needs of field crOp, livestock. totestr\, and hortir ultural p rodu ers in each region ilt i ~l -Si t\l 1 AIlltuna. Fri-x citi zctI of the Stjte has a stake in this research n i 01 Since alnx ad'ant~ aie fn)Im Ilex phr( gran. anid 11101 eC(OiiOI- ical \vva\ SOf prodc ing and handling taint products di-_ret ti benefits the cr )nsunin.g public. , 0u i ~ ® Main Agricultural Experiment Station, Auburn. iC E. V. Smith Research Center, Shorter. 1 2 3. 4. 5 6 7. 8 9 10 11 12 13 14. 15 16. 17. 18. 19. 20. 21 22 Tennessee Valley Substation, Belle Mina. Sand Mountain Substation, Crossville North Alabama Horticulture Substation, Cullman Upper Coastal Plain Substation, Winfield Forestry Unit. Fayette County. Foundation Seed Stocks Farm. Thorsby Chilton Area Horticulture Substation C anton Forestry Unit, Coosa County Piedmont Substation, Camp HI!l Plant Breeding Unit, Tallassee Forestry Unit, Autauga County Prattville Experiment Field, Prattville Black Belt Substation, Marion Junction. The Turnipseed-Ikenberry Place, Union Springs Lower Coastal Plain Substation, Camden Forestry Unit. Barbour County Monroeville Experiment Field, Monroeville Wiregrass Substation, Headland. Brewton Experiment Field. Brewton. Solon Dixon Forestry Education Center, Covington and Escambia counties Ornamental Horticulture Field Station. Spring Hill Gulf Coast Substation, Fairhope