Agricultural Economics
Farm management, cost analysis, marketing, and business planning
Table of Contents
1. Introduction to Agricultural Economics
Definition
Agricultural economics is the application of economic principles to agricultural production and the rural sector.
Scope of Agricultural Economics
- Production Economics - efficient use of farm resources
- Farm Management - decision-making at farm level
- Agricultural Marketing - movement of products from farm to consumer
- Agricultural Finance - credit and investment decisions
- Agricultural Policy - government programs and regulations
- Rural Development - improving rural livelihoods
Basic Economic Concepts
Scarcity
Limited resources vs unlimited wants. Farmers must choose how to allocate land, labor, and capital.
Opportunity Cost
Value of the next best alternative foregone. If land is used for rice, you cannot use it for corn.
Diminishing Returns
Adding more of one input while holding others constant eventually yields smaller additional output.
Comparative Advantage
Producing goods at a lower opportunity cost than others. Basis for regional specialization.
2. Farm Management Principles
Factors of Production
| Factor | Description | Return/Payment |
|---|---|---|
| Land | Natural resources, soil, water | Rent |
| Labor | Human effort, skills, knowledge | Wages |
| Capital | Equipment, buildings, inputs | Interest |
| Management | Decision-making, planning, organizing | Profit |
Types of Farm Records
Physical Records
- • Production records (yield per hectare)
- • Inventory records (seeds, inputs)
- • Labor records (man-days used)
- • Crop calendar/farm diary
Financial Records
- • Cash receipts and disbursements
- • Balance sheet (assets, liabilities)
- • Income statement (profit/loss)
- • Enterprise budgets
Farm Planning Steps
- Inventory of Resources - assess available land, labor, capital
- Identify Alternatives - possible crops, livestock, enterprises
- Develop Budget - estimate costs and returns for each option
- Select Best Combination - choose enterprises that maximize profit
- Implement Plan - execute the chosen plan
- Evaluate Results - compare actual vs planned outcomes
3. Cost and Return Analysis
Types of Costs
| Cost Type | Description | Examples |
|---|---|---|
| Fixed Costs | Costs that don't change with output | Land rent, depreciation, insurance |
| Variable Costs | Costs that change with output | Seeds, fertilizers, labor, fuel |
| Total Cost | Fixed costs + Variable costs | All expenses combined |
| Average Cost | Total cost ÷ Quantity produced | Cost per kilogram/cavan |
| Marginal Cost | Cost of producing one more unit | Additional input for extra output |
Profitability Measures
Key Formulas
Gross Revenue = Price × Quantity Sold
Gross Margin = Gross Revenue - Variable Costs
Net Farm Income = Gross Revenue - Total Costs
Return on Investment (ROI) = (Net Income ÷ Total Investment) × 100
Benefit-Cost Ratio (BCR) = Gross Revenue ÷ Total Costs
Interpreting BCR
- • BCR > 1 = Profitable (revenue exceeds costs)
- • BCR = 1 = Break-even (revenue equals costs)
- • BCR < 1 = Loss (costs exceed revenue)
Break-Even Analysis
Break-Even Point (BEP) - the level of production where total revenue equals total costs (zero profit/loss).
BEP (units) = Fixed Costs ÷ (Price per unit - Variable Cost per unit)
Example: If fixed costs = ₱10,000, price = ₱20/kg, and variable cost = ₱10/kg, then BEP = 10,000 ÷ (20-10) = 1,000 kg
4. Supply and Demand
Law of Demand
As price increases, quantity demanded decreases (inverse relationship), ceteris paribus.
Demand Shifters:
- • Consumer income
- • Prices of related goods
- • Tastes and preferences
- • Population size
- • Expectations of future prices
Law of Supply
As price increases, quantity supplied increases (direct relationship), ceteris paribus.
Supply Shifters:
- • Input prices
- • Technology
- • Number of sellers
- • Weather conditions
- • Government policies
Price Elasticity
| Type | Elasticity Value | Meaning |
|---|---|---|
| Elastic | E > 1 | Quantity changes more than price (luxury goods) |
| Inelastic | E < 1 | Quantity changes less than price (necessities like rice) |
| Unit Elastic | E = 1 | Quantity changes proportionally to price |
Philippine Context
Most agricultural products in the Philippines have inelastic demand because they are food staples. Rice, vegetables, and meat are necessities that people buy regardless of price changes.
5. Agricultural Marketing
Definition
Agricultural marketing involves all activities in moving farm products from producer to consumer, including buying, selling, storing, transporting, processing, and standardizing.
Marketing Functions
Exchange Functions
- • Buying
- • Selling
- • Price determination
Physical Functions
- • Storage
- • Transportation
- • Processing
Facilitating Functions
- • Standardization/grading
- • Financing
- • Market information
- • Risk bearing
Marketing Channels
Common marketing channels in Philippine agriculture:
- Direct: Farmer → Consumer (farm gate, talipapa)
- Short: Farmer → Retailer → Consumer
- Traditional: Farmer → Trader → Wholesaler → Retailer → Consumer
- Institutional: Farmer → Cooperative → Processor → Retailer → Consumer
Marketing Margin
Marketing Margin = Consumer Price - Farm Gate Price
This covers costs of transportation, storage, processing, and profit margins of intermediaries. High marketing margins often indicate inefficient marketing systems.
6. Agricultural Credit and Finance
Sources of Agricultural Credit
| Source | Type | Features |
|---|---|---|
| Land Bank of the Philippines | Formal | Low interest, requires collateral |
| Rural Banks | Formal | Community-based, accessible |
| Cooperatives | Semi-formal | Member-owned, flexible terms |
| Traders/Middlemen | Informal | Easy access, high interest |
| Five-Six (5-6) | Informal | No collateral, very high interest (20%) |
Types of Credit by Purpose
Production Credit
For inputs like seeds, fertilizers, pesticides. Short-term (less than 1 year).
Investment Credit
For equipment, machinery, land improvement. Medium to long-term (1-10 years).
Consumption Credit
For household needs during lean season. Short-term, often informal.
The 5 C's of Credit
- Character - borrower's reputation and willingness to repay
- Capacity - ability to repay from income
- Capital - borrower's net worth
- Collateral - security for the loan
- Conditions - economic and industry conditions
7. Agricultural Policy in the Philippines
Key Agricultural Laws
RA 8435 - Agriculture and Fisheries Modernization Act (AFMA)
Comprehensive framework for modernizing agriculture through infrastructure, credit, research, and marketing support.
RA 6657 - Comprehensive Agrarian Reform Law (CARL)
Land distribution to landless farmers. Maximum retention of 5 hectares for landowners.
RA 7607 - Magna Carta of Small Farmers
Rights and benefits for small farmers including credit access, price support, and social services.
RA 11203 - Rice Tariffication Law (2019)
Replaced quantitative restrictions on rice imports with tariffs. Created Rice Competitiveness Enhancement Fund (RCEF).
Government Support Programs
| Program | Description |
|---|---|
| NFA Price Support | Buying palay at floor price during harvest |
| PCIC Crop Insurance | Insurance against natural calamities and pests |
| RCEF | ₱10B annual fund for rice farmer support |
| ACPC Credit Programs | Low-interest loans through accredited lenders |
Key Takeaways
- ✓Four factors of production: Land, Labor, Capital, Management
- ✓Fixed costs stay constant; variable costs change with output
- ✓BCR > 1 means profitable; BCR < 1 means loss
- ✓Most agricultural products have inelastic demand
- ✓Law of Demand: Price ↑ = Quantity Demanded ↓
- ✓Law of Supply: Price ↑ = Quantity Supplied ↑
- ✓5 C's of Credit: Character, Capacity, Capital, Collateral, Conditions
- ✓AFMA (RA 8435) is the main agricultural modernization law