O Level Notes : Agriculture - Principles of economics and marketing

Farming is a business that needs to be carefully managed by farmers in order for them to have profit. Farmers are encouraged to make best decisions to prevent risks which may affect the profitability of the farming. Some agriculture produce are marketed through marketing boards. For example, Grain Marketing Board controls the marketing of cereal crops and Dairy Marketing Board which controls the marketing of milk and its products. This is done through the use of marketing legislation.

Principle of economics

Economics is the study of management of money and resources. Diminishing returns is a principle of economics used to determine yield obtained after the use of different quantities of specific inputs. An example is of adding different amounts of fertilizers in maize on a fixed portion of land. It is sometimes called the law of variable factor proportions or simply the law of proportionality.

The law of diminishing returns

The law of diminishing returns states that if one factor of production is fixed after a certain point in a production process , continued addition of extra units of a variable input to the fixed factor will yield less  than  proportional return for each successive input of the variable factor. In other words there is a positive increase in output for every increase in input, but only to a certain level beyond which the output will decline. For example assume that a farmer has one hectare of land (fixed factor) planted sorghum. He applies different quantities of fertilizer (variable factor) in successive seasons. The yield increase proportionally to the applied input but up to a point of inflection when the crop yield will remain constant and suddenly start to decline as more fertilizer is continuously added.

Schedule showing diminishing returns

It can be seen from both the table and the graph that although a farmer did not apply fertilizer in the field, the farmer still harvested 1000kg of sorghum. This was possible because the crop had relied on inherent soil fertility. The farmer decided to apply 2 bags of fertilizer and the farmer harvested 2000kg of sorghum getting an increase of 1000kg. When the farmer added 4 bags of fertilizers, 4000kg of sorghum were harvested showing an increase of 2000kg. The farmer constantly continue adding number of bags of fertilizer up to 8 bags but the yield was the same as that of adding 6 bags of fertilizer. This point where there is no longer an increase in yield is known as point of inflection. The further addition of fertilizer will drastically reduce the yield of sorghum.

Implications of the law of diminishing returns in farming

For a farmer to have a maximum yield, correct amount of fertilizers should be applied in the field. Once the farmer reached the maximum yield, no more additions of fertilizers is required because the farmer will start to get less and less yield after point of inflection. It is uneconomic to continue adding more fertilizers when infect the yield is no longer increasing but decreasing. This will not pay the farmer because the increased cost of the fertilizers will exceed the value of the yield obtained there by making a loss. It helps the farmer to produce the best quality due to use of optimum inputs. It also saves time by avoiding unnecessary operations such as applying more fertilizers when the point of inflection is reached.

Risks and uncertainties in farming

Risk – a risk is an unwanted event whose likelyhood of occurrence can be predictable with statistical probability attached. Risks can be insured against.

Risks that can be encountered in agriculture

• Health of the famer and/ members of his family

In some cases a famer or his member of the family may fall sick at a critical time when there is a lot of work to do in the farm.

• Weather changes

Farming largely depends on climatic conditions of the area. Adverse weather conditions such as frost, drought and whirl winds can drastically affect both animal and crop production.

• Price fluctuation

Prices of farm produce vary depending on marketing forces. Usually the prices for food crops are not announced before crops are grown. There is a high probability that a farmer can sale farm produce at a lower price to the extent that it will be difficulty for the farmer to go back into farming the following season because of the loss. This is usually due to market flooding when more products are offered to the market.

• Fire

Fire can result from lightning or electrical faults and can destroy veld and pastures resulting in their shortage for livestock animals.

• Theft

Theft of farm implements, tools, machinery, and livestock can lead to a set-back in farming.

• Pests and diseases

Outbreaks of pests like army worm and locusts can wipe off all the crops resulting in heavy losses by the farmer.

Uncertainties

It is an unwanted event whose likelyhood of occurrence is difficult to know. Hence

statistical probability cannot be attached to it. Uncertainties cannot be insured against.

Uncertainties encountered by farmers

• Breach of contract

A farmer may be in agreement with a service provider, for example to hire a tractor at a specific time and the later may fail to fulfil the promise.

• Change in demand

One farmer cannot be certain how much his fellow farmers are going to produce. Demand may be different from what the farmer anticipated and that will have a negative effect on the profit of the farmer.

• Unavailability of inputs

Unavailability of agricultural inputs such as seed, fertilizers and herbicides due to factors such as political instability in the country that can greatly affect farmers.

Management of risks and uncertainties

These are precautionary measures to reduce risks and uncertainties.  Farmers should

observe the following management practices:

• Enterprise selection

The farmers are encouraged to select enterprises that are less susceptible to risks.

• Insurance cover

A farmer can have an insurance policy which cover crops against fire, storm and theft in Zimbabwe. Examples of insurance companies are Zimnat and Old mutual. These insurance companies will compensate the farmer should there be a risk that is insured against.

• Producing crops on contract

Producing the crops under a contract will help the farmer with ready market after harvesting.

• Diversification

The farmer is encouraged to carry out a number of enterprises as this will spread the risk of failure.

 Decision making

It is a process of making choices in solving problems.

Importance of decision making

• Decision making in farming allows a farmer to identify risks before he/she encounters them, thereby making alternative choices.
• It guides the farmer from not making suicidal decisions which affect the profitability of the farming business.
• It enable a farmer to implement correct and economically sound decisions which are more effective to production systems carried at the farm.
• It minimise losses.
• Improves efficiency of operation thereby maximising on quality of the product.
• It service time by preventing unnecessary operations.

Economic factors influencing decision making

Market

A farmer should always have a market before producing any particular crop. Research can be done to find out what is preferred by the customers at the market.

Capital

Decision making can be determined by the amount of money a farmer have. The size of operation can be determined by capital availability for example a farmer with little amount of money cannot opt to use a Centre pivot as a means of irrigation system at a farm since it requires a lot of money to purchase it.

Experience and knowledge

Good decisions to take at a farm are determined by knowledge and experience of the farmer. An experienced and knowledgeable farmer is likely to make the best decisions in farming.

Labour

Labour is the most important resource at a farm. Some enterprises require much labour than others.  For example a farmer cannot decide to grow crops such as peas which require more labour when there is little labour at the farm.

Availability of transport

Transport is required for convenience in carrying produce, inputs and workers at the farm.

Steps to follow when making decisions on a farm

1. Identify and define a problem

It is important in decision making to carry out a research in order to identify the problem which must be solved as well as the causes of the problem. By knowing the causes of the problem and the problem itself, it makes easy for decision maker to know how to handle the problem.

2. Identify the limiting critical factors

Look at constrains that rule out the ranch of your alternatives. For example time

, money and equipment.

3. Develop alternative solutions

There is need to develop alternatives to possible solutions because environment is ever changing and therefore a solution which can be applicable today may not be applicable tomorrow. Also each possible solution will be having its own demand on the farm's resources.

4. Evaluate different alternative solutions

Solutions must be compared against each other with the aim of identifying strength and weaknesses of each of them. After assessing the alternatives of solutions they can be arranged in a preferable order starting with the most preferred solution to the list solution.

5. Select the best solution

Choose the best preferred solution among all the alternatives. The best solution should be the one which brings about the desired results at the lowest cost possible. This means that the cost benefit analysis must be used.

6. Implementation

There is need to implement the solution, that is the solution must be used to solve the problem at hand. This implementation must be done by experts because even if the solution is the right one but wrongly implemented then the problem cannot be solved.

7. Establishment and evaluation control system

This collective evaluation is important in the whole farming process and it is meant to determine whether the effort was of any value in solving the problem or not. Generally if the problem persist, there is need to take necessary action in order to improve the situation.

Marketing

Marketing is a system which ensures that goods move from producers to consumers through the process of buying and selling.

Marketing legislation

In this country, the marketing process of certain agricultural products is regulated by Agricultural Marketing Authority (AMA). Most of farm produce such as milk, tobacco, meat, cotton and grains are marketed through marketing boards. Prices of these products are gazetted by the Government through their boards. Examples of marketing boards in Zimbabwe are- dairy marketing board (DMB),  cotton marketing board (CMB), grain marketing board (GMB) ,tobacco industry marketing board (TIMB). There are specific standards that are recommended for the products to be accepted by these marketing boards.

Here is what we have discussed on this topic

• Common risks faced by farmers are pest and disease outbreak, frost , theft , drought , fire outbreak.
• Uncertainties faced by farmers are price fluctuation change in Government policy, availability of transport ,change in demand, breach of contract, technological changes and unavailability of labour.
• Marketing boards responsible for buying agricultural produce are (GMB) grain marketing board, (CMB) cotton marketing board, (DMB) dairy marketing board and (TIMB) tobacco industry board.