Principles of Farm Economics
Senior 1 · Agriculture
Principles of Farm Economics
Lesson 5 of 5
22 min
Let's begin
Before season A begins in September, a young farmer in Musanze must decide: keep growing maize on her 0.2 ha terrace, or switch to Irish potatoes, which sell well but cost much more to grow? She cannot run the experiment twice. What she can do is work it out on paper first.
A farm budget is a plan that estimates the future costs and returns of a farm or of a change on the farm, before any money is spent. Records (the previous lesson) tell a farmer what did happen; a budget estimates what will happen if a plan is followed. Good budgets are built from good records.
| Budget | Used for |
|---|---|
| Enterprise budget | Estimating the gross margin of ONE enterprise, such as a plot of beans or a dairy cow |
| Complete (whole-farm) budget | Planning the WHOLE farm for a year: all enterprises together, with fixed costs, to find the net farm income. Used when starting a farm or changing it completely |
| Partial budget | Testing a SMALL change to part of the farm, such as a new crop on one plot, a new breed, or buying a machine. Only the items that change are counted |
A farmer plans 0.5 ha of climbing beans. She expects 2,000 kg per ha and a price of 600 Frw per kg (illustrative figures).
| Variable cost | Frw |
|---|---|
| Seed: 50 kg at 800 | 40,000 |
| Manure and fertiliser | 60,000 |
| Stakes | 60,000 |
| Hired labour | 150,000 |
| Pesticide | 20,000 |
| Bags and transport | 20,000 |
| Total variable costs | 350,000 |
3. Gross margin = 600,000 − 350,000 = 250,000 Frw for 0.5 ha.
4. Gross margin per hectare = 250,000 ÷ 0.5 = 500,000 Frw per ha. Expressing it per hectare lets the farmer compare enterprises of different sizes fairly.
The same farm expects these gross margins for the year: beans 250,000 Frw, maize 150,000 Frw, one dairy cow 400,000 Frw. Fixed costs are depreciation 60,000 Frw, land tax and rent 40,000 Frw and cooperative fees 20,000 Frw.
Back to the farmer in Musanze. Should she switch her 0.2 ha from maize to Irish potatoes? A partial budget has four boxes. The plan is worthwhile if the first two boxes add up to more than the last two.
| Gains from the change | Frw | Losses from the change | Frw |
|---|---|---|---|
| A. Added returns: potatoes, 0.2 ha × 12,000 kg per ha = 2,400 kg at 250 Frw per kg | 600,000 | C. Added costs: potato seed, fertiliser, fungicide, extra labour | 350,000 |
| B. Reduced costs: maize seed, fertiliser and labour no longer needed | 60,000 | D. Reduced returns: maize given up, 0.2 ha × 3,000 kg per ha = 600 kg at 350 Frw per kg | 210,000 |
| Total gains (A + B) | 660,000 | Total losses (C + D) | 560,000 |
Net change = 660,000 − 560,000 = +100,000 Frw. On these illustrative figures the switch is worthwhile. Before deciding, she should also weigh the risks the numbers do not show: potatoes need more cash up front, suffer from late blight in wet seasons, and their price falls at harvest time.
Tip
Memory hook for the partial budget: "Gains = Added returns + Reduced costs; Losses = Added costs + Reduced returns." Returns and costs swap places between the two sides.
Exam technique: set out every budget as a table with a clear total on each side, and finish with a one-line decision: "Net change is +100,000 Frw, so the change is worthwhile." The decision is often worth a mark on its own.
Classify each cost as fixed or variable: (a) maize seed; (b) depreciation of a cattle shed; (c) vaccine for broilers; (d) annual cooperative membership fee.
Solution: (a) variable; (b) fixed; (c) variable; (d) fixed.
A 0.25 ha plot of Irish potatoes yields 1,800 kg, sold at 350 Frw per kg. Variable costs are 330,000 Frw. Calculate the gross output and the gross margin.
Solution: Gross output = 1,800 × 350 = 630,000 Frw. Gross margin = 630,000 − 330,000 = 300,000 Frw.
In question 2, what is the gross margin per hectare?
Solution: 300,000 ÷ 0.25 = 1,200,000 Frw per ha.
A farmer's enterprises have gross margins of 300,000, 180,000 and 220,000 Frw. Fixed costs total 150,000 Frw. What is the net farm income?
Solution: Total gross margin = 700,000 Frw. Net farm income = 700,000 − 150,000 = 550,000 Frw.
A partial budget shows added returns 200,000 Frw, reduced costs 30,000 Frw, added costs 150,000 Frw and reduced returns 100,000 Frw. Should the change be made?
Solution: Gains = 200,000 + 30,000 = 230,000. Losses = 150,000 + 100,000 = 250,000. Net change = −20,000 Frw, so the change should NOT be made.
Summary
Sources and credits
Written by Ganzaa.
