Farm Efficiency Measures

An important element in farm business management or decision making relates to the manner in which available resources are allocated vis-à-vis the objectives of the farmer.

A "measuring stick" is necessary to provide guides and standard for appraising accuracy of decisions regarding the use of resources. One method of production is said to be more efficient than the other when it yields a greater valuable output per unit of a valuable input. From an economic stand point, efficiency is desirable and the science of farm management deals with such principles and theories of farm business organization which are instrumental in increasing the efficiency of the business.

Efficiency can be related to (1) the operation of the farm business as a whole, (2) any individual phase of the business, line of production or enterprise (dairy, poultry, wheat, cotton, sugarcane, maize, etc.).

Various efficiency measures, therefore, need to be developed to express technical efficiency in various farm enterprises and to relate these to the financial success.

The various farm efficiency measures can be discussed as: (I) Physical efficiency measures (Physical Efficiency) and (II) Value efficiency measures (Financial Efficiency). They can be further categorized as: (I) Ratio measures and (II) Absolute or aggregate measures.

A brief description of some of the farm efficiency measures is given below:
Total Area of the Farm
The first measure of size is the acreage of the farm: either or total land or land under crops. This is a fairly satisfactory measure for comparing a given type of land and a given type of farming. Average area per farm varies from region to region and the combination of enterprises also varies from good to poor soil and from humid to arid climates. One can consider number of standard acres under such situations and compare the size of farms.

Land Use Efficiency
Some of the measures or indices measuring the rate of production are:
i. Yield per acre (production efficiency). The production efficiency of a farm with respect to any particular crop enterprise can be expressed in terms of percentage as compared with average yield of the locality.
An example: Wheat yield per acre of Farm ‘A’ = 13 qtls.
Average yield of the locality = 10 qtls.
Production efficiency of Farm ‘A’ = 13 x 100 = 130% 10

ii. Crop yield index. It is a measure of comparison of the yield of all crops on a given farm with the average yields of these crops in the locality. The relationship is expressed in percentage terms. This yield index is a convenient measure because it combines all the yields into a single figure.
Example

Crop yield index = 1899 = 111.7% 17

Intensity of cropping. It measures the extent of the use of land for cropping purposes during a given year. It is expressed as a percentage.
Cropping intensity = Area cropped x 100
Total cultivated area

LABOUR EFFICIENCY MEASURES

By comparing the labour efficiency we can know whether the labour on a farm is more or less than what is required. We can also find out whether the labour is relatively more or less efficient.

i. Crop acreage per man equivalent
The significance of this measure is influenced by the varying proportion of crops with high or low labour requirements, such as potatoes compared with wheat. It is one of the simplest measures and is computed by dividing the total acres in crops by man-equivalents.

ii. Productive.man-work units per man-equivalent

It is another good and accurate general measure of labour efficiency for all types of farms. This measure is computed by dividing total productive man-work units by the number of man-equivalents on the farm. For average efficiency on most of the Indian farms a full-time worker (man equi.) should accomplish at least 250 units per year. This measure can compare even farms in different type-of-farming areas with different degrees of intensity or with varying crop acreages and livestock. A productive man work unit is the average amount of work accomplished by one man in the usual 10-hour day. The total productive man work units from a given farm represent the number of 10-hour days required under average conditions and abilities to do all the work necessary on the production of crops. The P.M.W.U. are obtained by multiplying the acres of each crop and number of each kind of livestock by the average labour requirements per unit of each enterprise in a region.

P.M.W.U. per man = Total P.M.W.U.
Man Equivalents
Capital Efficiency
This may be expressed in various ways:
Power, machinery and equipment costs per crop acre (including bullock power)
This is a useful measures and can be calculated as given in an example below (a farm of 50 acres):

Machinery cost per crop acre = Total Cost
Total crop acres = Rs. 8400
= Rs.168

Power & Equipment Investment per crop acre = Total Machinery investment

No.of crop acres = Rs. 20.000/50 = Rs. 400.

COST RATIOS

Most of the ratios or efficiency factors discussed up to this point are needed in the process of analysis of the records. Their purpose, in general, is to indicate a strong or weak point in the organization or operation of the business and to call attention to the specific phases or angles of the business where greater managerial attention is needed. In addition, there are other ratios that are often used in a more general analysis. They deal with the relationship between costs and returns, relationship of capital investment to income, and the rate of activity or turnover of the capital.

Cost ratios are averages and their magnitudes reflect physical production efficiency, selection of enterprises, prices received for commodities and the expense for the production elements. These cost ratios are discussed below:
i. Operating cost ratio
The operating ratio is the percentage which operating expenses absorb out of gross profit. It shows the proportion of total income used in (1) hiring labour (2) buying seeds, fuel and other annual supplies and (3) in keeping equipment in operation, etc.
It is computed by dividing total operating expenses by gross profit and can be expressed as a percentage or a ratio
Operating cost Ratio = Total operating cost
Total Profit
Improvement in operating efficiency is directly reflected in this ratio. It should be watched closely from year to year. It may also increase or decrease because income may increase or decrease due to commodity price changes.

ii. Over-head charges (Fixed Ratio)
Fixed expenses continue in about the same amount regardless of the current operating policy. Their relative importance in production can be expressed by a ratio determined by dividing the total fixed costs by the gross profits.

The fixed costs generally include: (1) Land revenue (2) Water taxes, (3) Other taxes, (4) Depreciation, (5) yearly insurance premium, (6) Interest on total investment, etc.

Over-head charges ratio = Total fixed cost per year

Gross income
For a growing efficient business, the rate of increase in gross income should be faster than rate of increase in fixed costs. The fixed cost ratio will vary with changes both in gross profits and fixed costs. Little can be done to reduce total costs within a short period but their magnitude relative to output can be reduced by expanding production while holding buildings and other such over-head –capital investments constant.

Costs Per Acre. Both operating and fixed costs per acre can be computed as. = Total costs

Number of acres.
These ratios do not vary with selling prices and income as does the ratio of fixed or operating costs per unit of gross profits. They are somewhat meaningless when crop and livestock are intermingled in varying proportions. Only farms with similar enterprises can be compared with these ratios.

Gross (Cost) Ratio
The gross (cost) ratio of total expenses to gross income is a combined measure of the profit making ability of the farm. While the net income expresses the amount by which income exceeds expenses: the gross ratio expresses the percentage of gross income consumed by expenses and is, therefore, independent of the absolute size of the business. Gross income and total expenses both affect the ratio. It may be large or small depending on the level of prices as well as the amount and level of expenses. It is indicative of the profit margin for the business as a whole. At any given level of costs and prices, it can be usefully employed in the analysis of the business. The percentage of gross income absorbed by expenses also varies with the type of the farm. With this ratio, comparisons between farms should be made only when the farms are of the same general orgaisation.

CAPITAL RATIOS

Capital ratios can also be used in the analysis of the organization with respect to the resources of the farm.
1. Capital per unit of Gross Income
Occasionally a ratio is computed to measure the total amount of capital invested per unit of gross income = Total capital invested gross income

2. Capital per man
The ratio of capital per man indicates the combination of resources in a general way. It is ordinarily computed by dividing the total capital by the number of man-year equivalents employed on the farm. An optimum ratio will vary depending on the kind of farming and the availability of funds. It does not adequately reflect variations which can be possible through capital labour substitution.

3. Rate of capital turnover
It is most common measure of capital efficiency. It is the ratio of the total farm income to the farm capital (total farm assets). Rate of capital turn over = Gross Income_________ x 100

Total farm Total farm assets
The ratio of capital turnover indicates the number of years required for the farm receipts (income) to equal the average farm capital. A faster turnover rate is a sign of good farm business. A high rate of turnover is especially important for the beginning farmer who is short on capital. This rate ordinarily varies widely with the type of farm investments.

MEASURES OF FARM INCOME AND PROFIT EFFICIENCY

There are various measures which can be used to evaluate farm incomes and profits. The measures listed below can be useful for such an analysis.
i. Net Cash Income. Total cash receipts from production minus total cash operating expenses.
ii. Net Farm Income: Net cash income from production plus or minus change in inventory in non-depreciable items and depreciation on power machinery, livestock, buildings, etc.
iii. Farm Earnings: Net farm income + value of farm privileges (farm products) used in home.
iv. Family labour earnings. Farm earnings minus interest charges on farm capital.
v. Percent Returns to capital. Ratio of farm earnings minus imputed value of the family labour to average, capital investment expressed in percent terms.
vi. Returns to management: Family labour earnings minus imputed value of the family labour.