Session 3: Farm Business Profitability

Objectives:

At the end of this session the participants shall have:

1. Explained some of the important aspects of farm business in preparation for writing a farm business plan;

2. Appreciated the concept of profit as related to a farm business;

3. Differentiated farm business and farm enterprise;

Objectives:

4. Compared variable costs from fixed costs and its application to farm profitability; and

5. Identified the factors that affect the profitability of a farm business.

Activity 1: Key Aspects of a Farm

BusinessMaterials: Metacards Pentel Pen TapeQuestion: What are the most important things

that you believe you need to know and be able to do to make your farm business a success?

Important Aspects of a Farm Business

What to produce? How to produce it? Is it possible to produce it in

your land? What resources or inputs are

needed and where to get them? What labor do you need?

Important Aspects of a Farm Business

What is the best market for the product?

What price can the product get in the market?

Is it profitable? Do you need have enough cash? What are the risks and what to do

about them?

Key Points

Inputs Production Markets

• The aspects that affect the business viability are linked to:

• A business is meant to be viable and successful

General Commercial Environment

• These aspects or key success factors should be favorable and the farmer should always be able to cope with issues of risks in the farm business

Farm Business Profitability

Key Points

It is important to separate farm income and profit from household income; the farm business is separate from the household.

Household income relies on income from farm and other sources while the profitability of the farm is based on the income and costs related to the farm only, and not the household

Key Points

Farm income is calculated by multiplying the quantity of the product sold, eaten, used or given away with the price of the produce in the market.

If income is < than costs then it is a loss If income is > than costs then it is making

profit The larger the resulting total, the greater

the profit

Farm Business and Farm Enterprise

Describe your own farm. Do you produce only one product?

More than one product? Do you produce crops and animals? How many type of animals do you

produce?

Farm Business and Farm Enterprise

Farm Business

• FARM BUSINESS• Farm business refers

to the whole farm as a business. Together all enterprises make up the farm business as a whole

Farm Enterprise

• FARM ENTERPRISE• Farm enterprises

refers to the individual enterprises of the farm. Each crop or kind of livestock produced is an enterprise. A farmer may produce corn, beans, and eggs. Each of these products is an enterprise. Corn is an enterprise. Beans is an enterprise. Egg is an enterprise.

Farm Business and Farm Enterprise

Each enterprise on a farm makes a unique contribution to the profitability of the whole farm.

Will identify which enterprise are profitable or not. Then, he will be able to decide what to do about the unprofitable enterprise; he can take steps to make it profitable or he can stop producing that enterprise.

Farm Business and Farm Enterprise

To maximize profit, the farmer needs to know exactly how each enterprise is performing.

Must study the enterprise individually by looking at the costs associated with inputs and production of each enterprise and with the income generated by marketing that enterprise.

Activity 2Fixed Costs and Variable Costs

Materials Needed: Metacards Pentel pen

TapeQuestion:1. Ideas regarding variable and fixed

costs.2. List down examples of farm costs.

Understanding CostsA. Variable Costs The cost of actual production. They apply to specific enterprises on

the farm. These costs vary as output changes. The costs occur only if something is

produced. They do not occur if nothing is produced.

Variable costs can be allocated to specific enterprise.

Example of Variable Costs

Seeds Fertilizers Fuel

Hired labor Livestock feed 

Veterinary

Understanding Costs

B. Fixed Costs It apply to the farm as a whole. Costs that do not vary with changes in

production output of a specific product. It remains the same regardless of the

output. Even if there is no output, there will be fixed costs.

Example of Fixed Costs

Farm equipment (e.g. tractor)

Implements and tools

Packing shed Farm infrastructure (e.g. fencing)

What can affect farm business profit?

Farm Profit

Home Consump

tionMarket Demand

Market Price

Competitor

Technology

Credit

Input Supplier

Cost of Inputs

What can affect farm business profit?

Inputs- the right ones being available when needed

Input Costs Input Supplier- reliability and

trustworthiness Market – location, distance,

accessibility Market Demand – what, when and how

much buyers want

What can affect farm business profit?

Market Prices Credit- accessibility, affordability Competitors Technology – for production and

marketing Policy