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www.downloadslide.net Farm Management Photo by Tim McCabe, USDA Natural Resource Conservation Service Eighth Edition Farm Management Ronald D. Kay Professor Emeritus, Texas A&M University William M. Edwards Professor Emeritus, Iowa State University Patricia A. Duffy Professor, Auburn University FARM MANAGEMENT, EIGHTH EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2012, 2008, and 2004. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOC/DOC 1 0 9 8 7 6 5 ISBN 978-0-07-340094-5 MHID 0-07-340094-7 Senior Vice President, Products & Markets: Kurt L. Strand Content Licensing Specialist: Beth Thole Vice President, General Manager, Products & Markets: Cover Image Titles: FRONT: “Case IH Early Riser© Marty Lange 1255 planter with Magnum™ 380 Vice President, Content Design & Delivery: Kimberly CVT tractor and producer.” BACK: Meriwether David Tashner Dairy Farm Building, Managing Director: Michael Hackett DSCN7680.JPG. Brand Manager: Marija Magner Cover Image Credits: FRONT: © Case IH, Early Riser Senior Director, Product Development: Rose Koos 1255_B-0194_05-16-13. Product Developer: Mandy Clark BACK:© Marty Tashner, Tashner Marketing Manager: Kristine Rellihan Dairy Farm, 1995 Model Road, Senior Digital Product Analyst: Jake Theobald Cuba City Wisconsin. Director, Content Design & Delivery: Terri Schiesl Compositor: Lumina Datamatics, Inc. Content Production Manager: Faye Schilling Herrig Typeface: 10/12 Times Roman Content Project Managers: Mary Jane Lampe, Judi David Printer: R.R Donnelley Buyer: Laura M. Fuller Cover Design: Studio Montage All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Kay, Ronald D., author. Farm management / Ronald D. Kay, Professor Emeritus, Texas A&M University, William M. Edwards, Professor Emeritus, Iowa State University, Patricia A. Duffy, Professor, Auburn University. – Eighth edition. pages cm Includes index. ISBN 978-0-07-340094-5 (alk. paper) – ISBN 0-07-340094-7 1. Farm management. I. Edwards, William M., author. II. Duffy, Patricia Ann, 1955– author. III. Title. S561.K36 2014 630.68—dc23 2014035732 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. www.mhhe.com Contents Preface xi Summary 32 Questions for Review and Further Thought I II Management 3 C H A P T E R Measuring Management Performance 35 1 Farm Management Now and in the Future Chapter Outline 7 Chapter Objectives 7 Structure of Farms and Ranches 8 New Technology 11 The Information Age 12 Controlling Assets 13 Human Resources 13 Producing to Meet Consumer Demands 14 Contracting and Vertical Integration 15 Environmental and Health Concerns 15 Globalization 16 Summary 17 Questions for Review and Further Thought 17 C H A P T E R 2 Management and Decision Making Chapter Outline 19 Chapter Objectives 19 Functions of Management 20 Strategic Farm Management 21 Decision Making 26 Characteristics of Decisions 29 The Decision-Making Environment in Agriculture 30 32 19 7 C H A P T E R 3 Acquiring and Organizing Management Information 39 Chapter Outline 39 Chapter Objectives 39 Purpose and Use of Records 40 Farm Business Activities 42 Basic Accounting Terms 43 Options in Choosing an Accounting System Chart of Accounts 44 Basics of Cash Accounting 48 Basics of Accrual Accounting 49 A Cash Versus Accrual Example 50 Farm Financial Standards Council Recommendations 52 Output from an Accounting System 52 Summary 55 Questions for Review and Further Thought 55 C H A P T E R 43 4 The Balance Sheet and Its Analysis 57 Chapter Outline 57 Chapter Objectives 57 v vi Contents Purpose and Use of a Balance Sheet Balance Sheet Format 58 Asset Valuation 62 Cost-Basis Versus Market-Basis Balance Sheet 63 Balance Sheet Example 65 Balance Sheet Analysis 69 Statement of Owner Equity 72 Summary 74 Questions for Review and Further Thought 74 C H A P T E R 58 5 The Income Statement and Its Analysis 77 Chapter Outline 77 Chapter Objectives 77 Identifying Revenue and Expenses 78 Depreciation 81 Income Statement Format 85 Accrual Adjustments to a Cash-Basis Income Statement 87 Analysis of Net Farm Income 89 Change in Owner Equity 95 Statement of Cash Flows 97 Summary 98 Questions for Review and Further Thought 99 C H A P T E R 6 Farm Business Analysis 101 Chapter Outline 101 Chapter Objectives 101 Types of Analysis 102 Standards of Comparison 103 Diagnosing a Farm Business Problem 104 Measures of Profitability 105 Measures of Size 109 Efficiency Measures 110 Financial Measures 114 Summary 118 Questions for Review and Further Thought 118 III Applying Economic Principles 121 C H A P T E R 7 Economic Principles: Choosing Production Levels 123 Chapter Outline 123 Chapter Objectives 123 The Production Function 124 Marginal Analysis 125 Law of Diminishing Marginal Returns 126 How Much Input to Use 127 Using Marginal Concepts 128 Marginal Value Product and Marginal Input Cost 132 The Equal Marginal Principle 133 Summary 136 Questions for Review and Further Thought 137 C H A P T E R 8 Economic Principles: Choosing Input and Output Combinations 139 Chapter Outline 139 Chapter Objectives 139 Input Combinations 140 Output Combinations 144 Summary 149 Questions for Review and Further Thought 149 C H A P T E R 9 Cost Concepts in Economics 153 Chapter Outline 153 Chapter Objectives 153 Opportunity Cost 154 Cash and Noncash Expenses 155 Fixed, Variable, and Total Costs 156 Application of Cost Concepts 159 Economies of Size 163 Long-Run Average Cost Curve 167 vii Contents Summary 169 Questions for Review and Further Thought Appendix. Cost Curves 170 169 IV Budgeting for Greater Profit 175 C H A P T E R 10 Enterprise Budgeting 177 C H A P T E R Chapter Outline 177 Chapter Objectives 177 Purpose, Use, and Format of Enterprise Budgets 178 Constructing a Crop Enterprise Budget 180 Constructing a Livestock Enterprise Budget 185 General Comments on Enterprise Budgets 187 Interpreting and Analyzing Enterprise Budgets 188 Summary 191 Questions for Review and Further Thought 191 C H A P T E R 11 Whole-Farm Planning 12 Partial Budgeting 215 Chapter Outline 215 Chapter Objectives 215 Uses of a Partial Budget 216 Partial Budgeting Procedure 216 13 Cash Flow Budgeting 227 Chapter Outline 227 Chapter Objectives 227 Features of a Cash Flow Budget 228 Constructing a Cash Flow Budget 230 Uses for a Cash Flow Budget 238 Monitoring Actual Cash Flows 239 Investment Analysis Using a Cash Flow Budget 239 Summary 242 Questions for Review and Further Thought 243 V 193 Chapter Outline 193 Chapter Objectives 193 What Is a Whole-Farm Plan? 193 The Planning Procedure 194 Example of Whole-Farm Planning 198 Other Issues 205 Summary 209 Questions for Review and Further Thought Appendix. Graphical Example of Linear Programming 210 C H A P T E R The Partial Budget Format 217 Partial Budgeting Examples 219 Factors to Consider When Computing Changes in Revenue and Costs 222 Sensitivity Analysis 222 Limitations of Partial Budgeting 223 Final Considerations 224 Summary 224 Questions for Review and Further Thought 225 Improving Management Skills 245 C H A P T E R 14 Farm Business Organization and Transfer 249 209 Chapter Outline 249 Chapter Objectives 249 Life Cycle 250 Sole Proprietorship 251 Joint Ventures 252 Operating Agreements 253 Partnerships 255 Corporations 258 Limited Liability Companies 261 Cooperatives 263 Transferring the Farm Business 264 Summary 267 Questions for Review and Further Thought 267 viii Contents C H A P T E R Managing Risk and Uncertainty 269 Chapter Outline 269 Chapter Objectives 269 Sources of Risk and Uncertainty 270 Risk-Bearing Ability and Attitude 272 Expectations and Variability 273 Decision Making Under Risk 278 Tools for Managing Risk 281 Summary 290 Questions for Review and Further Thought C H A P T E R C H A P T E R 290 293 Chapter Outline 293 Chapter Objectives 293 Types of Income Taxes 294 Objectives of Tax Management 295 The Tax Year 295 Tax Accounting Methods 296 The Tax System and Tax Rates 298 Some Tax Management Strategies 299 Depreciation 302 Capital Gains 306 Summary 309 Questions for Review and Further Thought 333 Chapter Outline 333 Chapter Objectives 333 Profit and Cost Centers 334 The Accounting Period 335 Types of Enterprises 336 Land Costs 341 Verifying Production 342 Accounting Systems 343 Summary 344 Questions for Review and Further Thought 345 VI Acquiring Resources for Management 347 C H A P T E R 19 Capital And Credit 309 17 Investment Analysis 18 Enterprise Analysis 16 Managing Income Taxes C H A P T E R The Discount Rate 329 Net Cash Revenues 330 Net Present Value 330 15 311 Chapter Outline 311 Chapter Objectives 311 Time Value of Money 312 Investment Analysis 317 Financial Feasibility 322 Income Taxes, Inflation, and Risk 323 Summary 326 Questions for Review and Further Thought 327 Appendix. An Example of an Investment Analysis 328 Initial Cost 328 Estimating Cash Expenses and Revenues 328 351 Chapter Outline 351 Chapter Objectives 351 Economics of Capital Use 352 Sources of Capital 353 Types of Loans 355 The Cost of Borrowing 362 Sources of Loan Funds 363 Establishing and Developing Credit 365 Liquidity 366 Solvency 368 Summary 370 Questions for Review and Further Thought C H A P T E R 20 Land: Control and Use Chapter Outline 373 Chapter Objectives 373 373 371 ix Contents Factors that Affect Farmland Values 374 The Economics of Land Use and Management 375 Controlling Land: Own or Lease? 377 Buying Land 379 Leasing Land 384 Conservation and Environmental Concerns 394 Summary 396 Questions for Review and Further Thought 396 Cash Farm Lease 397 C H A P T E R 21 Human Resource Management 403 Chapter Outline 403 Chapter Objectives 403 Characteristics of Agricultural Labor 405 Planning Farm Labor Resources 405 Measuring the Efficiency of Labor 410 Improving Labor Efficiency 411 Improving Managerial Capacity 412 Obtaining and Managing Farm Employees 413 Agricultural Labor Regulations 420 Summary 422 Questions for Review and Further Thought C H A P T E R 423 22 Machinery Management 425 Chapter Outline 425 Chapter Objectives 425 Estimating Machinery Costs 426 Examples of Machinery Cost Calculations 431 Factors in Machinery Selection 433 Alternatives for Acquiring Machinery 436 Improving Machinery Efficiency 441 Summary 444 Questions for Review and Further Thought 445 Appendix 446 Glossary 452 Index 460