Private Profitability

The data entered in the first row of Table 2.1 provide a measure of private profitability. The term private refers to observed revenues and costs reflecting actual market prices received or paid by farmers, merchants, or processors in the agricultural system. The private, or actual, market prices thus incorporate the underlying economic costs and valuations plus the effects of all policies and market failures. In Table 2.1, private profits, D, are the difference between revenues (A) and costs (B + C); and all four entries in the top row are measured in observed prices. The calculation begins with the construction of separate budgets for farming, marketing, and processing. The components of these budgets are usually entered in PAM as local currency per physical unit, although the analysis can also be carried out using a foreign currency per unit.

The private profitability calculations show the competitiveness of the agricultural system, given current technologies, output values, input costs, and policy transfers. The cost of capital, defined as the pretax return that owners of capital require to maintain their investment in the system, is included in domestic costs (C); hence, profits (D) are excess profits-above-normal returns to operators of the activity. If private profits are negative (D G 0), operators are earning a subnormal rate of return and thus can be expected to exit from this activity unless something changes to increase profits to at least a normal level (D = 0). Alternatively, positive private profits (D > 0) are an indication of supernormal returns and should lead to future expansion of the system, unless the farming area can not be expanded or substitute crops are more privately profitable.