Entrepreneurship with vision!
Methods and Tools for Managerial Capacity Building
of Agricultural Producers in Central and Eastern Europe


Business – planning

How to perform the Economic Analysis of the farm and chosen strategy?

Download Business Planning Module

 

Why do I need economics for strategy planning?

 

The economics of every activity, also in agriculture, most generally concerns all phenomena and dependencies on which the effects of activity depend, above all, economic results. The results achieved are the result of decisions made by the producer, who can support the decision-making process and estimate the expected results by applying various forms of the economic calculation. The economic calculation is used for the purposes of economic analysis, and its basic application is to support the process of making business decisions.

 

Simple economic calculation tools include agricultural calculations that help the farmer find answers to three basic questions: What to produce? How much to produce? How to produce?….. in order to achieve satisfactory production and economic results in specific farm conditions.

 

In general terms, the decisions what to produce on an agricultural farm most often have a historical character – they were taken a long time ago, often even by their predecessors from previous generations. Such decisions have in general determined the direction of production (specialization) of farms.

As was proved by our ISM trainings in current and previous projects, switching the farm to a completely different production direction is carried out relatively rarely. If the specialization of the farm has been properly chosen, for example adapted to natural conditions (eg cattle on a farm with a large share of permanent grassland) or to the market (eg growing vegetables or fruit in the vicinity of larger agglomerations), generally another direction of production could be expensive and would not always be successful. The limitation in radical changes in the structure of production on the farm is also the accumulated equipment (specific machines, livestock buildings). It is also worth taking into account the acquired knowledge and experience of the farmer in conducting a specific type of production, as well as existing contacts useful in the sale of farm products.

 

More often, farmers make adjustments in the production structure without radical changes in farm specialization, increasing only the size of one production activity in relation to the other. For example, a farmer can reduce the area under winter wheat crops to increase the area of rape cultivation. The motive for such changes are usually expectations of higher prices or rising demand on the market. An important factor in the changes in the production structure in recent years in the EU are changes in market trends (eg decrease in demand for potatoes), concentration processes in animal production (resignation of many farms from keeping small herds of animals, increase in the number of animals in large herds), impact of agricultural policy (abolishment of milk quotas, liberalization of the common agricultural policy, etc.). In all the above-mentioned situations farmers decide what to produce. The economic calculations based on the business-planning tools and other instruments may support the decision-making process.

 

The developed within the ISM+ project, MsExcel based BP-tool allows calculating the economic result of the farm in the current (basic) state (farm gross margins, net profit, cash flows and cash balance) basing on the actual structure of crop and animal production. It allows also to simulate the possible changes depending on the strategy choice of the farmer. The scenario analysis gives information about the future farm gross margins, net profit, cash flows and cash balance, after realization of a certain strategy. It balances also the feeds for animals. It gives the possibility of quick change of parameters (allows to test different variants of the strategy and to check sensitivity of results of changes of some key parameters – like prices, variable costs, fixed costs, financing sources, subsidies etc).

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