Selecting Profitable Enterprises Or Selling The Farm
Most farmers are notoriously bad at knowing what to charge for their products. They cope with the vagaries of nature better than pricing outputs sufficiently to cover costs and to provide enough money for farm growth, and their living expenses. This is perhaps because agricultural education still emphasises production and neglects accounting. Consequently, this paper attempts to combine the two and will concentrate on three things:
1. the price that a farmer must set for a product, to meet basic costs and four other often unrealised costs associated with farm growth and living standards. This price is the “asking price” for each of the farm’s enterprises.
2. comparing the asking price of the product to its prevailing market price. This comparison will produce one of four possibilities.
3. examine each of these possibilities and suggest what the firm should do in each case.
The procedure to calculate asking price is called budgeting. Once the asking price is determined, it is compared with the market price. If the market price is greater, then the farm makes more money than it expected. If the market price is smaller then one of two things can happen. Either the farm makes less money than it wanted to, but it still makes more than its costs. The other is that it makes a short or long term loss. If it is short term, then the farm can survive for a bit. If it is long term then the farm will either have to close before it loses all its equity or produce something else. Thus the asking price indicates whether a farm should or should not be in that line of business.
Author(s): van Blokland, Prof. P.J.
Organizations(s): Food and Resource Economics Department, University of Florida