Technological Change and Partial Budgeting

The construction of representative budgets for specific crops is time-consuming, even when secondary data are available to provide most of the quantity and price information. Once the budget is constructed, the marginal costs of further use and modifications of budget data are relatively small. The numerous variations of a representative budget can be generated easily by alteration of a subset of input and output data. This exercise is termed partial budgeting.

Partial budgeting is most often used in the PAM methodology as a means of assessing the effects of new technologies on farm profitability. A new seed-fertilizer package for rice, for example, would be modeled by alteration of a traditional technology budget for changes in seeds, fertilizer, and yield. If the new technology increases yields, the budget might have to be modified further to recognize additional labor requirements for tending and harvesting the crop. Although such procedures seem mechanical, they are often useful portraits of the actual process of technological change. Farmers rarely jump from one set of practices to a new technology that uses entirely different inputs and practices. Instead, they modify current practices to incorporate a particular innovation.

The input and output data required for partial budgeting ideally are drawn from observations of the actual practice of farmers. Even if producers do not know specific quantities of inputs used and outputs derived, estimates can be obtained with comparative questionnaire techniques, in which producers provide information about the performance of the new technology relative to the old one. If information about actual practice is not available, the analyst is forced to rely on experiment station results or to modify them to reflect expected farm practice.

Comparisons of old and new budgets give the analyst information about the economic incentives for technological change. Consideration of both profitability and changes in the structure of costs is necessary for this assessment. Even if the new technology proves more profitable than the old one, potential constraints to adoption could appear. Cash-flow problems sometimes arise when new technologies entail a greater use of purchased inputs. The lack of marketing services can also limit adaptation. If marketing boards must handle the increment in production induced by technological change, physical and financial facilities might have to be expanded. By aggregating the representative budgets to a regional or national level (for example, multiplying per hectare budget data by the number of hectares on which the technique is used), the analyst can generate the total impact of technological changes.

Partial budgeting techniques can also be used in formulation of the agenda for future research and development. New technologies, such as high-yielding seed-fertilizer packages, improved means of pest control, substitutions among machinery and labor, and better water control and management, are often a direct consequence of the pattern of investment in research. Working with technical experts, agricultural economists can use partial budgeting techniques to simulate the impact of hypothetical technological changes on profitability. If potential changes do not create positive private and social profits and improvements over traditional techniques, alternative investment paths or changes in policies need investigation.

Whole Farm Analysis

Crop-specific budgets indicate the profit incentive to produce a particular commodity. But they give no insights into the contribution of particular commodity systems to farm income, the income characteristics of the farm operation, or the presence of input constraints on the expansion of particular systems. If representative budgets are available for all the principal farm crops, a representative farm can be modeled as a weighted sum of individual crop budgets, where the weights are units of the numeraire (such as number of hectares or number of animals per farm). Measures of total input and output requirements are determined by addition of the weighted sums across the individual crops. Such exercises add size of farm and crop mix to the list of factors that must be specified in the identification of a representative farm. Census data, advice from extension agents, and casual observation are usually sufficient to characterize typical types of farms.

These calculations give additional insight into data quality. The addition of input requirements across crops provides estimates of total demand for each input. Comparisons of aggregate labor requirements with labor supply (family plus hired) give an indication of the reliability of estimated labor requirements, for example. Whole farm models also avoid the arbitrary assumptions that may be needed to generate models of single commodity systems. Fixed inputs do not need to be allocated among commodities, and their costs are determined by total use (on-farm use plus rental of the inputs to others).

The main attraction of whole farm analysis is insight into farm income. Three income-related issues are amenable to PAM analysis. One is the estimate of total income and consideration of the consumption opportunities afforded by particular farm sizes. Some division of labor and capital costs is made to differentiate between owned inputs and rented inputs (hired labor and machinery rental). The sum of own-input costs and profits, less land rental payments (if any), gives a measure of the income received by the household from farming activities. Estimates of off-farm income are then added to give total farm family income. Second, if whole farm models are developed for various sizes of farms, the analyst can draw inferences about the bias (if any) that a policy demonstrates toward particular types of farms. Finally, whole farm models offer insights into the dynamics of technological change by estimating the potential change in total income from a particular innovation and the capacity of individuals to self-finance new investments in land, machinery, or other improved inputs. Income less consumption yields savings, and whole farm budgets can be combined with information about consumption requirements to generate measures of potential financial contribution of the farm to new investments. Such calculations yield insights into the importance of credit markets and imperfections that distort the access to credit.