1. Capital and the Use of Credit
1.1. Economics of Capital Use
1.1.1. When unlimited capital is available, the MVP of capital is the additional net return, before interest payments, that results from an additional capital expenditure. The MIC of capital is 1 + i, where i is the interest rate on borrowed funds.
1.1.2. Allocation of Limited Capital. The use of this rule means limited capital should be allocated among competing uses so that the MVP of the last dollar used is the same in all uses.
1.2. Sources of Capital
1.2.1. Owner equity • Outside equity • Leasing • Contracting • Credit
1.3. Types of Loans
1.3.1. Length of Repayment • Short-term loans: loans used to purchase inputs needed to operate through the current production cycle, due at end of cycle • Intermediate-term loans: length of loan more than 1 year but less than 10 years, usually for purchase of intermediate assets • Long-term loans: A loan with a term of 10 years or longer, usually for the purchase of land
1.3.2. Use • Real estate loans: loans for the purchase of real estate such as land and buildings, or loans that use real estate as security • Non-real estate loans: all business loans other than real estate loans • Personal loans: non-business loans used to purchase items for family
1.3.3. Security • Secured loans: an asset is mortgaged to provide collateral for the loan • Unsecured loans: the loan is obtained with only a “promise to repay,” also called a “signature loan”
1.3.4. Repayment Plans • Single payment • Line of credit • Amortized: equal total payments • Amortized: equal principal payments
1.4. The Cost of Borrowing
1.4.1. A way to compare loans is to find the discounted present value of the series of payments
1.5. Sources of Loan Funds
1.5.1. Commercial banks • Farm credit system • Life insurance companies • Farm service agency • Individuals and suppliers • Commodity Credit Corporation • Small Business Administration
1.6. Establishing and Developing Credit
1.6.1. • Personal character • Management ability • Financial position • Repayment capacity • Purpose of loan • Collateral
1.7. Liquidity
1.7.1. Factors affecting liquidity: • Business growth • Non-business income and expenses • Debt characteristics • Debt structure
1.8. Solvency
1.8.1. Most lenders use the debt/asset ratio to measure solvency.
2. Land − Control and Use
2.1. The Economics of Land Use and Management
2.1.1. Land is a permanent resource that doesn’t depreciate or wear out. Land is immobile and cannot be moved.
2.2. Controlling Land − Own or Lease?
2.2.1. Advantages of Ownership 1. Security of tenure 2. Loan collateral 3. Management independence and freedom 4. Hedge against inflation 5. Pride of ownership Disadvantages of Ownership 1. Cash flow 2. Lower return on capital 3. Less working capital 4. Size limits
2.2.2. Advantages of Leasing 1. More working capital 2. Additional management 3. More flexible size 4. More flexible financial obligations Disadvantages of Leasing 1. Uncertainty 2. Poor facilities 3. Slow equity accumulation
2.3. Buying Land
2.3.1. Value is determined by: 1. Soil, topography, and climate 2. Buildings and improvements 3. Size 4. Markets 5. Community 6. Location 7. Competing uses 8. Agricultural program characteristics
2.3.2. Income Capitalization V = R/d , where R is the annual net income and d is the discount rate.
2.3.3. Market Data Prices of comparable sales are adjusted for differences in factors contributing directly to value
2.4. Leasing Land
2.4.1. A lease is a legal contract whereby the landowner gives the tenant the use of the land for a certain time in return for a specified payment.
2.4.2. Cash Rent Rent is paid in cash. It may be due in advance or at the end of the production season.
2.4.3. Crop Share Leases Crop share leases are popular in areas where cash grain farms are common. These leases specify that the landlord will receive a certain share of the crop.
2.4.4. Other Types of Leases • Labor share lease • Variable cash lease • Bushel lease • Custom farming
2.5. Conservation and Environmental Concerns
2.5.1. Conservation can be defined as the use of farming practices that will maximize the net present value of the long-run social and economic benefits from land use.
2.5.2. Long-Run versus Short-Run Consequences Most conservation practices require some extra expenditures. They may also reduce crop yields in the short run. The short-run reduction in profit may be necessary to achieve higher profits in the future or to prevent a long-run decline in productivity.
3. Human Resource Management
3.1. Characteristics of Agricultural Labor
3.1.1. Labor is a continuous-flow input. It cannot be stored for later use; it must be used as it becomes available or it is lost.
3.2. Planning Farm Labor Resources
3.2.1. Step 1: Assess your situation Step 2: Develop tentative job descriptions Step 3: Match present employees and job descriptions Step 4: Develop job descriptions for remaining tasks Step 5: Hire employees who fit job descriptions
3.3. Measuring the Efficiency of Labor
3.3.1. • Value of farm production per person • Labor cost per crop acre • Crop acres per person • Cows milked per person
3.4. Improving Labor Efficiency
3.4.1. • Increase enterprises to make use of surplus labor • Simplify working procedures and routines • Ensure tools and supplies are at work area • Make sure working conditions are as comfortable as possible • Plan and schedule work in advance
3.5. Improving Managerial Capacity
3.5.1. • Reinforce and upgrade skills • Understand principles behind technology • Develop an efficient office • Apply the principles of immediacy and impact to decide which jobs must be completed first • Participate in community activities • Develop a “world view”
3.6. Obtaining and Managing Farm Employees
3.6.1. • Recruiting • Interviewing and selecting • The employee agreement • Compensation • Training hired labor • Motivation and communication • Bridging cultural barriers • Evaluation
3.7. Agricultural Labor Regulations
3.7.1. • Minimum wage law • Social Security • Federal income tax withholding • Workers’ Compensation • Unemployment insurance • Child labor regulations • Occupational Safety and Health Act (OSHA) • Immigration Reform and Control Act • Migrant labor laws • Civil Rights • Disability
4. Machinery Management
4.1. Estimating Machinery Costs
4.1.1. Ownership Costs: depreciation, interest, taxes, insurance, housing and leasing. Operating Costs: repairs, fuel and lubricants, labor, custom hire or rental, and others
4.1.2. Capital recovery = [amortization factor x (beginning value – salvage value)] + (interest rate x salvage value)
4.2. Examples of Machinery Cost Calculations
4.2.1. 1. List the basic data 2. Calculate ownership costs 3. Calculate operating costs 4. Calculate total cost per hour 5. Calculate cost per acre
4.3. Factors in Machinery Selection
4.3.1. Machinery Size Field capacity = speed (mph) x width (feet) x field efficiency (%) / 8.25
4.3.2. Minimum field capacity = acres to cover / (hours per day x days available)
4.3.3. Field days needed = acres to cover / (hours per day x acres completed per hour)
4.4. Alternatives for Acquiring Machinery
4.4.1. • Ownership • Rental • Leasing • Custom hire
4.5. Improving Machinery Efficiency
4.5.1. • Machinery investment per crop acre: current value of all machinery divided by total acres • Machinery cost per crop acre: total annual machinery costs divided by total acres
4.5.2. Techniques to Improve Efficiency • Maintenance and operations • Machinery use • New versus used machines • Replacement
4.5.3. Replace 1. When machine is worn out 2. When machine is obsolete 3. When there are increasing costs 4. When there is insufficient capacity 5. To reduce taxes in high profit year 6. To fit cash flow 7. For pride and prestige (not a good economic reason)