Procedures for Budget Preparation

Once representative firms have been identified, the estimation of budgets can proceed. Because PAM results are adversely affected by the omission of cost or revenue items, budgets should reflect a complete set of input and output activities. Preparation of the cropping calendar-a time line that identifies the various tasks in crop production, such as land clearing and preparation, planting, fertilization, pest control, and harvesting-reduces the likelihood of data omissions. This information is often readily available from extension agents or secondary sources. Otherwise, primary data on cropping calendars are relatively easy to collect. A single visit to each type of farm is usually sufficient to gain an adequate picture of cultivation practices.

The next step in budget preparation involves the specification of inputs and outputs associated with each task of the cropping calendar. Outputs are placed in a single category; inputs are classified into fixed, direct labor, and intermediate inputs. Fixed inputs include only the capital equipment owned by the operator of the farm activity. Direct labor inputs of both family and hired workers are maintained in a separate category for reasons of convenience. The employment effects of the activity and changes in assumptions about labor requirements are commonly of interest to the analyst, and separate categorization makes such calculations readily accessible.

Because each input will be evaluated in social as well as private prices, inputs have to be identified with a high degree of specificity. Labor is often divided into four categories-unskilled adult male, unskilled adult female, unskilled child, and skilled-because these types of labor usually have private market wages and social opportunity costs that differ from one another. Machinery such as tractors, plows, harrows, planes, wagons, and seed planters needs to be identified individually as well.

A research project in northwest Mexico had two principal objectives. The first was to assess the international competitiveness of Northwest irrigated agriculture, a sector dominated by capital-intensive techniques and reputed to be dependent on numerous input subsidies. The second objective was to evaluate the impact of government policy on the profitability of the ejido, a small-farm system established by the government. The evaluation was made through comparison of the policy incentives for private farms with the incentives provided to the ejidos.

A vast number of farm systems were available for analysis. The two largest agricultural states of the northwest-Sonora and Sinaloa-contain twelve irrigation districts. More than forty different crops are grown. Almost all of these crops are found on both ejiditario and private farms. In total, hundreds of commodity systems are present.

To reduce the set of commodity systems to a manageable number, aggregate production data were examined. The set of crops was reduced to fourteen. The prominent staples were corn, wheat, beans, sorghum, and rice. Oilseeds included soybeans, safflower, and sesame. The principal vegetables were tomatoes (large, salad, and cherry), green peppers, and potatoes. Cotton, chickpeas, and alfalfa were also prominent crops. Site visits sugggested relatively little difference in technologies among irrigation districts. This factor allowed reduction of the number of irrigation districts to four, two in Sonora and two in Sinaloa. To allow consideration of the subsidies to different irrigation techniques, one district was chosen because it utilized groundwater pumping, whereas the remaining districts utilized dams and gravity-fed water supplies. In total, 120 commodity systems were identified.

The number of systems is large, but substantial economies of scale were present in the data collection and analysis. For a given crop, principal technology differences among irrigation districts were usually limited to type of irrigation. In many cases, the ejido and private-farm techniques were identical; differences were primarily in yield, because of differential land and management quality. Postfarm technologies were limited to transportation and storage, and these technologies were similar for many of the commodities. Many elements of activity budgets, therefore, were transferable across representative systems. But even with substantial amounts of secondary data on costs and returns, data collection required about six months. In many policy analysis situations, time constraints and the lack of secondary data will limit researchers to far fewer systems. Between ten and twenty systems is a more common range, and usually several months of effort will be required for construction of the activity budgets.

inputs, such as barns, silos, and primary irrigation works, necessary to farming but not directly involved in the field processes of production. In most studies, only a portion of the costs of infrastructure will be attributed to the activity budget. For example, if the budget concerns costs and returns for one hectare of wheat, the analyst might choose a proportion factor, such as the inverse of farm size, as the share of the cost of the infrastructural input to allocate to the activity budget. The choice of a proportion factor is arbitrary. Infrastructural inputs are indivisible fixed costs for the farm, whereas the budget calculations require that farm costs be allocated among various cropping activities. No correct allocation exists for such inputs. Because such inputs are indivisible, one activity may contribute more or less than others to the costs of infrastructure.

The amount of particular inputs or outputs associated with the farm activity must be consistent with the choice of farm-level numeraire, usually a unit of area (acres or hectares, for example) or, for animal production systems, a specified herd size. For most fixed and direct labor inputs, quantity measures will be readily available. But in some circumstances, they will be hard to obtain, and the analyst will have only total cost for an input or total revenue for an output. These cases arise most frequently with intermediate inputs and secondary outputs. For example, the analyst could have estimates of machinery service costs or of pesticide and pesticide application costs. But quantity measures-hours of machinery time and kilograms or liters of pesticide-might not be available.

The absence of quantity measures is not a problem for PAM construction, so long as the social values can be calculated from the estimates of private market costs or returns. If social value can be estimated in terms of a percentage premium or discount relative to private value, a separate quantity estimate is unnecessary. When the particular input or output is a small component of total costs or revenues, arbitrary estimates of percentage differences between private and social values can be used to complete the budgets with relatively little effect on the results. But if the items are important elements of total costs or revenues, the arbitrariness of such estimates becomes a critical element in the reporting of results of the analyses. Policy-makers cannot evaluate results without some notion of the reliability of the estimates of costs and returns.

For inputs and outputs that are identified in quantity terms, unit prices represent the final ingredient necessary for the formulation of the budget. All prices need to be standardized to a common time period.When prices are not from the existing time period, the analyst can impute them from available data by applying an inflation adjustment. Prices must also be standardized for location. To calculate the farm-level profitability of the activity, farm-gate prices or price equivalents are the relevant values. For intermediate inputs, prices therefore include marketing costs incurred in delivering the input to the farm. For example, the cost of fertilizer is not the ex-factory price but the ex-factory price plus the costs of marketing and delivering the fertilizer to the farm gate. Outputs should be valued similarly-not with the price in some consumer center but with a price or price equivalent that represents the ex-farm-gate value.

For direct labor, intermediate inputs, and outputs, the quantity and price information is sufficient to calculate private cost. As described in the previous chapter, the valuation of fixed and capital equipment inputs requires additional information on useful life and salvage value. Capital recovery factors are applied to determine annual equivalent costs of the fixed inputs. The costs are then multiplied by the share of total annual use (for example, hours per hectare divided by hours per year) to derive the fixed input cost for the activity budget. Figure 9.1 provides a summary of the quantity and price data most commonly needed for farm activity budgets.