AGRICULTURAL ECONOMICS III Production economics Notes by Onyango

AGRICULTURAL ECONOMICS III (Production economics) Notes by Onyango Ngoye

Objectives • By the end of the topic, the learner should be able to; • Explain various parameters of national development • Relate national development to agricultural production

Objectives cont. • State the factors of production and explain how each affects production • Describe how the law of diminishing returns relate to agricultural production • Describe agricultural planning and budgeting in a farming business

Objectives cont. • State sources of agricultural support services • Describe risks and uncertainties in farming • Explain ways of adjusting to risks and uncertainties

A. National Income • This is the monetary value of all goods and services produced by a country within a period of one year.

Income • Income is generated through interaction of three units namely; i. Household- made up of the farmer and the family members ii. Firm- private or public unit involved in production as well as consumption iii. Central authorities- either the government or its agents. Play a regulatory role in the production and consumption of goods and services

Household-firm relationship a) Producer roles Consumer roles a) Household • Produce raw materials used • Buys household goods from industries • Buys various services from industrial firms

b) Business firm • Produce finished goods from the households raw materials • Provide various services to the household • Buy raw materials from the household • Absorb household members to provide labour

National income can be expressed in three terms 1. Gross Domestic Product (GDP) This is the sum-total of all goods and services produced by residents of a country both citizens and foreigners within a period of one year.

2. 2. Gross National Product (GNP) This is the sum total of all goods and services produced by the citizens of a particular country regardless the country of operation

3. 3. Gross National Income (GNI) This is the GNP expressed in monetary terms

Per Capita Income • This is the average income person in a given country • Per capital income= GNI______ Total population

Roles of Agriculture in National Development • Source of raw materials for industries • Provides market for industrial goods and services • Provides food for urban and rural population

Role of Agr. Cont. • Earn the country foreign exchange through exports • Provide capital and revenue to the farmers and the government respectively • Provide employment both directly and indirectly • Creates good international relationship • Develops infrastructure in agricultural areas

FACTORS OF PRODUCTION These are resource factors required in the production process 1. Land 2. Labour 3. Capital 4. Management

1. Land • This is areas of the ground that somebody owns/area of land that is property to somebody • Land is the most important of production

Methods of acquiring land in Kenya 1. Inheritance 2. Buying from willing sellers 3. Leasing 4. Allocation by government 5. Being given as a gift/ reward

2. Labour. This is human services employed in the process of production

Types of Labour • Family labour • Hired casual labour – Skilled. -Unskilled. • Permanently employed labour skilled and Unskilled.

Measurements of labour output • Labour efficiency/ output is expressed in terms of work done per unit time e. g. man-hours, man-days, man-years etc.

Ways of increasing Labour efficiency. • Imparting skills to the labour force/ Training the labour force • Proper supervision of the labour • Providing the labour with appropriate tool and machinery

Labour efficiency cont. • Giving incentives to motivate the workers • Assigning specific tasks to the workers • Proper remuneration of the workers

3. Capital • These are man made assets essential in the production process • There are three types of capital

Working Capital • This refers of raw materials that are used in the production process e. g. fuel, seeds, fertilizers, pesticides, herbicides, containers, veterinary drugs etc • They do get used up in the production process

Liquid Capital This refers to money either in cash or in bank. It can be used to acquire other types of capital.

Durable/Fixed Capital • These are assets needed in the production process but they do not get used up in the production process e. g. land, machinery, buildings perennial crops, breeding stock, water systems etc.

Sources of Capital • Self savings • Inheritance • Grants/donations • Credit from financial institutions: could be in kind (in form of inputs) or in cash (money)

Sources of Agricultural Credit • Co-operative societies • Agricultural Finance co-operation (AFC) • Commercial banks • Statutory boards

Sources of credit Cont. • Settlements Fund Trustees (SFT) • Non-governmental organizations (NGO’s) • Insurance • Companies • Hire purchase companies •

4. Management • This is the organization of the factors of production to produce the desired goods at minimum cost •

Roles of a Farm Manager • Gathering information relevant to the farm business • Risk bearing in case of any eventuality • Making decisions both of long term and short term effect

Roles of a Farm Manager cont. • Implementation of decisions made • Comparing the performance of the farm with that of other similar farms • Accounts for all financial transaction Budgeting

PRODUCTION FUNCTION (PF) • This is the physical relationship between inputs and outputs in the production process. • There are two types of inputs used in the production process

1. Variable inputs • E. g. livestock, feeds, fertilizers, pesticides, herbicides, fuel, veterinary drugs, casual labour etc

Variable inputs are Characterized by: • Being used up in the production process • Quantity used vary with the level of production • The cost incurred vary with the type and quantity used • The cost value is used to calculate the gross margin • They are usually allocated to specific enterprises

Fixed inputs Land, machinery, tools, breeding stock, perennial crop, permanent labour etc.

Characteristics of fixed inputs • Quantity used remain fixed regardless the level of production • They do not get used up in the process of production/ they can be used season after season • Their cost value is not used in calculation of gross margin • They are used in several enterprises on the farm

Types of Production Functions • There are three types of production functions a)Increasing returns production functions • This is where each additional unit of input results to a greater increase in output than the preceding unit on input • Only observed at the initial stages of input application

Constant returns production function • This occurs where each additional unit of input results to an equal increase in output as the preceding unit of input • Not common in agricultural production

Decreasing Returns Production Function • Occurs where each additional unit of input results into smaller increase in output than the preceding unit of input • This is the most common type of production in agricultural production • This production function gives rise to the law of diminishing returns

Economics Laws and Principles • These are used to guide the farmer in making appropriate decisions so as to maximize profit. • They include: 1. Law of diminishing returns This law states that “when successive units of one variable input are added to fixed quantities of other inputs, additional output first increases to reach a peak, and then start to decline.

Importance of the la of Diminishing returns • Helps to determine how much of a variable input a farmer should apply so as to maximize output. • Law of substitution • States that if the output remains constant, it is profitable to substitute one input factors for another as long as the substitute is cheaper.

Law of Diminishing returns cont. • Helps to determine how to combine various variable inputs so as to maximize output • Helps to determine how to combine various enterprises so as to reduce the cost of production

Law of equimarginal returns • States that limited resources should be allocated in such a way that the marginal returns to these resources are the same in all alternative uses to which they might be put. Importance • Help the farmer to determine the most profitable point of combining competing enterprises using limited resources

Principle of profit maximization • States that profit is maximized at point where marginal cost (MC) is equal or approximately equal to the marginal revenue (MR) Importance • Help to maximize profit at minimum cost

Farm Planning • This is the process of organizing the various factors of production to meet the production goals of the farm business Factors to consider in farm planning • Size of the farm: - determine the types and number of enterprises • Climatic factors • Farmers objectives and preference

Farm plan cont. • Government policy and regulations • Resources available • Transport and communication • Market conditions • Expected returns

Farm Budgeting • This is the process of estimating the expenses and income of a proposed farm Importance of farm budgeting • Assist the farmer in securing credit from a financial institution • Help the farm to estimate the required production resources

Farm budgeting cont. • Helps to detect strengths and weaknesses of the farm business • Encourage hard work so as to meet the set objectives • Help to reduce risks/improve predictability in farm business • Help the farmer to make appropriate decisions when selecting between enterprises

Types of Budget • Partial budget- necessary when minor changes are proposed on the farm • Complete budget- necessary when planning a new farm; when major changes are proposed in an-existing farm.

Agricultural Support Services available to the Farmer. • Support service 1. Extension and training Service provider (s) -Ministry of agriculture -Ministry of livestock -Farmers training centres -Agricultural colleges and universities

Extension &training Cont. -Private companies e. g. British American Tobacco (BAT), East African Breweries Limited (EABL)

2. Credit. -Agricultural Finance co-oporation (AFC) -Commercial banks -Farmer co-operatives -Statutory boards

Credit cont. -Insurance companies -Hire purchase companies -Settlement fund trustee (SFT) -Individual money lender

3. Agricultural Research - Kenya agricultural research institute (KARI) -Agriculture colleges and universities -International research bodies e. g. ILRI, ICIPE, ILRAD

4. Artificial Insermination - Artificial Insemination Department in the ministry of livestock - Dairy co-operatives -Private veterinary practitioners

5. Veterinary services -Veterinary department ministry of livestock -Farmer co-operatives - Private veterinary practitioners

5. Banking Services - Commercial banks -Co-operative societies -Micro-finance institutions

6. Marketing - marketing boards -Processors -Co-operative societies -Wholesalers -Retailers -Brokers -Commission agents

7. Input Supply - Farmer co-operatives -Seed companies -Fertilizer companies -Agricultural development cooporation (ADC)

8. Tractor Hire Services - Farmer co-operatives -Ministry of agriculture -Private companies -Individual farmers

Risks and Uncertainities • Uncertainity is a situation of imperfect knowledge on the future outcome of a proposed venture • Risk is the difference between the expected outcome and the actual outcome

Common risks & Uncertainoties in Farming • Price fluctuation • Obsolescence • Change in government policy

Risks and Uncertainities cont. • Personal; uncertainity • Technological advancement uncertainity • Failure of physical product uncertainity • Change in market demand

Adjusting to risks & Uncertainities At the Farmers level • Production diversification • Insurance • Input rationing • Contract production • Adopting modern methods of production • Production flexibility • Selection of more certain enterprises

At the Government Level • Provision of extension services • Weather forecasting • Funding scientific research • Market regulation • Subsidization on input prices

Thank You • Ichieni