Measures of Farm Efficiency

In this article we will discuss about the measures of farm efficiency.

The Efficiency Measures Based upon the Concept of Ratio:

Following efficiency measures are generally used for farm management:

(a) The Capital Ratios Income Ratios

(b) Cost Ratios

(c) Cropping Intensity Index

(d) Crop Yield Index

(e) System Index

The following paragraphs describe these efficiency measures in some detail:

(A) The Capital Ratio:

(Measures for comparing the financial safety of various farms).

These measures include.

(i) Net capital Ratio:

(ii) Working Capital Ratio:

(iii) Current Ratio:

Whereas the net capital ratio can be used to measure the relative degree of solvency of the business of various farms in the long run, working capital ratio will indicate the solvency the farm business for a medium term and the current ratio for a short period.

(iv) Ratio between Net worth and Fixed Capital:

Net worth of a farm is the difference between its total assets and total liabilities. In other words, net worth shows the amount of owned capital and reserves. If the firm is successful as a going concern, its net worth should be more than its fixed assets and this ratio is above one, it will indicate, that the firm has its own resources for use as working capital and for liquidity purposes.

(v) Debt Equity Ratio:

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This measure shows whether the owned resources of the farmer are sufficient to pay for the loans taken from external sources or not.

(vi) Ratio between Working Capital and Total assets:

This ratio will indicate the efficiency of a farm from another angle. Both fixed and working capital is necessary for running the business properly. A proper balance between the working capital and other assets is to be maintained. This ratio will help us to know how far the total assets have a reasonable amount of working capital. This can be known by comparing the actual ratio with the normal ratio meant for the type of farm under study.

It may be noted that for comparison over time, all the above mentioned ratios should be adjusted for price changes.

(B) Income Ratios:

These ratios give the most popular measures of efficiency of a farm.

These are:

(i) Rate of turn over: It is equal to

When there is a shortage of capital, a higher turnover per unit of total assets will indicate a better use of given assets. It is necessary that this ratio should be used to compare the farms operated by the same category of farmers. This is because different categories of farmers can afford to have different amount of total assets e.g., a self-cultivator possesses more assets than a tenant cultivator.

(ii) Net income per acre:

This is a very important measure of efficiency in a region where land is the most scarce factor. Net income is found after deducting all expenditure incurred-actual as well as inputted-for farm production, from the gross value of farm output.

This efficiency measure helps in measuring the efficiency of different farms in the same region or in the different regions or of the same farm on different points of time In order to ensure a better comparison, the area of each farm may be divided into irrigated and un-irrigated land. In such a case, difficulty, however, may arise in allocating joint costs for farm operations on the two types of land.

(C) Cost Ratios:

(i) Gross ratio: (Total expenses)/(Gross income)

(ii) Fixed Ratio: (Fixed expenses)/(Gross income)

(iii) Operating ratio: (Operating expenses)/(Gross income)

(D) Cropping intensity Index:

Cropping intensity on a farm is found’ by dividing the gross area sown by the Net area sown. This measure gives us an idea about multiple cropping taking places on a farm.

(E) Crop yield index:

This index is meant to see how the yield on a particular farm compares with the average yield in the region as a whole. If it were only one crop, the yield on a particular farm could be directly compared with the average yield in the region.

The crop yield index becomes necessary because many crop are sown in a year on a given farm, some with yield higher than the average yield in the region and others with yield lower than the average yield. For the construction of crop yield index, the average yield of a crop in the region serves a base (=100) for computing the yield relative for the crop sown on the particular farm.

(F) The system index:

The system index on the other hand, assumed that percentage distribution of cropped are a under different crops on a farm is not similar to the one for the region as a whole. However, the net income yield per hectare of a crop on a farm is exactly the same as is for the region as whole.

The index is used to find out how much the income on a farm will be different from that on an average farm if, given its own percentage distribution of cropped area under various crops, its hectare net income for different crops were the same as for the region as a whole.

For constructing this index, we, in the first instance, find out the relatives for the area under each crop as percentage of the total area on a farm, with total area under this crop in the region as a percentage of total area under various crops in the region, as the base. These relatives are then allotted weights according to the per hectare net income yield by each crop in the region.

Aggregate Measures of Farm Efficiency:

There are two sets of measures of farm efficiency namely:

(a) Measures in terms of ratios and

(b) The aggregate measures.

Some of these measures are as follows:

(i) Gross income:

This measure shows the size as well as the volume of farm business and can be used for comparing the performance of farmers under similar farm situations. Gross income is found by adding up the sale proceeds during the accounting period, value of the products used for domestic consumption during the same period and the closing stock of finished and unfinished goods and then deducting from it the opening stock of finished and unfinished goods at the beginning of the accounting period and the purchase of inventories to be used in production during the accounting period.

(ii) Cash income:

This is a measure which indicates how much cash a farmer can have at his disposal for utilizing for various agricultural improvements. Cash income is found out by adding the total cash sale proceeds and the income earned by hiring out the farm resources and then deducting from it the cash paid out for various farm operations.

(iii) Net operating income:

This is found out by deducting various operational expenses from the gross income as defined in (i) Operating expenses include (ii) value of hired human labour, charges for hired bullock labour, operational expenses of owned farm machinery (including tube wells) except its depreciation, payment for hired machinery, cost of seed, fertilizers, manure and insecticides, canal irrigation charges, taxes (excluding land revenue) depreciation on working assets, miscellaneous charges and rent on leased in land.

Not operational income is thus the income accruing to the farmer when he has deducted all the expenses (besides depreciation on working assets) incurred in operating his farm except that on owned bullock labour.

(iv) Net farm income:

If actually paid out fixed expenses incurred on cultivation and the depreciation on fixed assets (like building, machinery and irrigation structure) are deducted from net operating income, one gets what is known as net farm income. Net farm income is thus, the total income earned by a farmer as rentier, labourer, and capitalist and as an entrepreneur, on the assumption that the maintenance cost of owned bullock labour is zero.

(v) Surplus over variable costs:

This is found by subtracting the total variable costs from the gross income. This is also known as return to the fixed resources.

(vi) Returns to management:

This is the return which the operator gets – for his management services. Superficially, this means that all expenses imputed or actually paid for various inputs (intermediate or primary) belonging to outsiders or to the operator himself have to be deducted from the gross income.

(vii) Returns to Labour and management:

Obviously this measure implies a total earning of the farm operator as an entrepreneur and as the supplier of family labour. As such, we calculate its value by adding the imputed value of family labour to the value represented by Returns to management. This measure can be used for comparing the efficiency of labour.

(viii) Return to Capital & Management:

This measure can be used for measuring the efficiency of capital. It is found by adding depreciation on fixed capital and the fixed expenses, to return to Management. From the foregoing narration of the farm efficiency measures, it is evident the measures based upon the concept of ratio should be used if comparison with other farms is to be made.

The aggregate measures mainly tell us what has been earned on a farm as a whole. The aggregate measures will permit comparison with other farms only if the other farms are completely similar to the farm in question in all respects.