ll. IV‘IIV. ,.r 4.1; u 3.?!.A§l¢&..l~'ul.xatf .33....”- vita-pvt!!! MICH ‘ D]. MR- UIH IZJE SPECIAL; if f E513 0-169 Ph.D This is to certify that the thesis entitled presented by Optimmn Enterprise Organization For Southern Michigan Specialized Dairy Farm William Mack Cros swhite has been accepted towards fulfillment of the requirements for 774 Date @ 162 1960 L I B R 2 Michigan Univ“ Agrlcultural degree mm J / 1 Major professor dw» OPTIMUM ENTERPRISE ORGANIZATION FOR SOUTHERN MICHIGAN SPECIALIZED DAIRY FARMS (Incorporating Available New Technology) AN ABSTRACT Submitted to the School for Advanced Graduate Studies of'Michigan State University of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics by William.Mack Crosswhite 1960 Approved by ABSTRACT Specialization and adoption of new technology have forced dairy farm.operators to make important farm organizational changes. In view of present trends, it appears that Specialization in dairy production will continue to be favorable for a large number of dairy producers. This thesis is directed toward situations in which.new technology is being introduced on dairy farms. The primary task of this study is to outline a number of farm.plans which will be helpful and.useful to farm families considering the feasibility of making organizational changes arising from the incorporation of the new technology available in milking, feeding and housing. Several techniques for determining efficient farm organizations are available. Functional analysis and linear programming are employed in this study. Functional analysis is employed in evaluating present dairy farm.organization for a sample of fortybfour Southern.Michigan dairy farms. Cobb-Douglas functional analysis is used in deriving estimates of marginal value products. Linear programming is employed in evaluating the profitability of using the new technology available in milking, feeding and housing. Recent adaptation of linear programming techniques to farm.planning has made it possible to examine systematically the relative profitability of various combinations of enterprises and production possibilities. The results of the functional analysis carried out for a total of forty-four Southern Michigan dairy farms suggest that the average dairy farm.is organized along the scale line. Further, increasing returns to scale are being realized for the sample farms. These increasing returns to scale suggest that dairy farm Operators should enlarge their farm operations, at least within the range of the data in the derived production function. The larger farms were organized around a combination Of approximately 300 acres of land, 30 months of labor and milking approximately 50 cows. A modified linear programming procedure was used in which the supply of Operating capital was variable; that is, the supply of capital was allowed to vary continuously from.zero to an.unlimiting amount. The study of relationships which exist for changes in the amount of limited resources of land, labor and Operating capital gave the following results fOr both stanchion and loose housing arrangements: 1. Increasing the amount of Operating capital brought about a more adequate utilization Of land and labor resources. 2. Increasing the amount of land increased the relative importance of the grain selling activity except for situations with a large number of cows and a resulting low labor requirement for each animal unit. 3. An increase in the amount of labor resulted in an increase in the relative importance of the dairy enterprise. changes: 1. 5. The Important changes in the Optimum farm plan resulted from changes in either land, labor or operating capital. use Of a loose housing system.resulted in the following Increased Operating capital requirements. A larger number of cows in the optimum farm plan for a given level of operating capital. With.unlimiting Operating eXpenses, the Optimum farm plan included the purchase of large amounts of forage. A minimum of $7,000 increase in investment capital in milking parlor, milking equipment and housing were required in converting to loose housing. Only small increases in returns to land, labor, capital and management. increase in the number of cows resulting from reduced labor requirements could have a.number of important effects if loose housing is adopted in a large area such as Southern Michigan. The most important of these is a large increase in the output of milk and a resulting large decline in the price of milk. A second important effect suggested by the programming results is the need fer improved cropping practices and improved forage harvesting methods; and, a third important effect is the large increase in capital investment required to incorporate the new technology. OPTINMM ENTERPRISE ORGANIZATION FOR SOUTHERN MICHIGAN SPECIALIZED DAIRY FARMS (Incorporating Available New Technology) By William.Mack Crosswhite A THESIS Submitted to the School for Advanced Graduate Studies oijichigan State University Of Agriculture and Applied Science in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1960 ACKNOWLEDGMENTS The author is grateful to the many persons who have given Of their time and.assistance in the development of this study. The guidance of Dr. James Nielson has been most helpful and the author is especially pleased to have been associated with Dr. Nielson for the period of his graduate study. The writer is grateful to Dr. L. L. Boger, Head Of the Department of Agricultural Economics, for financial aid in the form of a research assistantship. Appreciation is expressed to Mrs. Anne M. Swan for an exceptional job in typing the final draft of the manuscript. Many thanks are due the members of the statistical pool Of the Department of Agricultural Economics who assisted in the computational work. The author would like to acknowledge the assistance received from Professors Ray Hoglund, Dick Wheeler and Dean.McKee and for their many suggestions and constructive criticisms. Suggestions by'Alan Bird, Mike Wbrth, Robert Bevins, Darrell Flaunt and Del Blank were most helpful. Finally the author is indebted to his family for their sincere encouragement at all times. TABLE OF CONTENTS CHAPTER PAGE I INTRODUCTION 1 Orientation of the Problem 3 Purposes and Objectives 5 Procedure 6 II DEVELOPMENTS IN DAIRY PRODUCTION IN SOUTHERN MICHIGAN Soil Type, Topography and Climate 8 Type of Agriculture 11 Dairy Production Developments 13 Praducing Ability. 1h Feeding Methods 15 Milking Systems 15 Housing Arrangements 16 Crop Enterprises 17 III OVERALL EARMZANALXSIS Marginal Analysis 19 The Sample 20 Resource Classification 21 Analysis of Relationships 2h Estimates of Margin Value Products 28 Adjustments Suggested by Comparison of‘MVP/MFC 31 Returns to Scale 33 Summary of Results 33 IV ECONONEC ANALYSIS OF THE APPLICATION OF AVAILABLE NEW TECHNOLOGY IN A LOOSE HOUSING SYSTEM The Mathematical Problem 36 Data 38 Farm Situations and Resource Restrictions 39 Dairy and Crap Enterprises uh Analysis of Effects of Changes in Resource Restrictions and Housing Systems on the Optimum Farm Plan h9 Effects of Changing the Supply of Capital 51 Effects of Increasing Farm Size 63 Effects of’Increasing the Labor Supply 7h Effects of Changing Housing Systems 80 V SUMMARY AND CONCLUSIONS 97 APPENDIX A 10h APPENDIX TABLES 108 BIBLIOGRAPHY 123 LIST OF TABLES TABLE NMMBER l. 2. 3. b. S. 6. 7. 9. 10. 12. 13. Regression Coefficients (bi's), Their Standard Errors ( bi's), I't" values and.Level of Significance Matrix of Simple Correlation Coefficients Level of Resource Inputs and Estimates of Marginal Value Products for the Selected Sample, 1958 Reservation Prices for Factor’Inputs Comparison of Estimated bi's and the bi's Necessary to Yield Minimum.Marginal Product Marginal Value Products and Marginal Factor Costs for Categories of Inputs Combinations of Land, Labor and.Housing Feed and Capital Requirements for A Cow and Replacement and Returns Per Livestock Unit Labor Requirements in Hours Per Month for A Cow and Replacement Alternative Processes Included in the Crapping Program thimum.Fa m Plans for lhO Acres of Land and 15 Months of Labor Using Stanchion Housing Optimum.Farm Plans for lhO Acres of Land and 15 Months of Labor Using Loose Housing Optimum Farm Plans for Three Different Farm Sizes of 210, 280, and 350 Acres of Land and 27 Months of Labor Using Stanchion Housing Optimum Farm Plans for Three Different Farm Sizes of 210, 280, and 350 Acres of Land and 27 Months of Labor Using Loose Housing PAGE 26 27 29 30 31 32 ho I45 h6 h? 53 60 6S 70 IIST OF TABLES (continued) TABLE NUMBER 15. 16. 17. 18. 19. Optimum.Farm.Plans for Two Different Labor Supplies of 15 and.27 Months of Labor, 210 Acres of Land.and $6,500 Operating Capital Using Stanchion Housing Optimum.Farm.Plans for Two Different Labor Supplies of 15 and 27 Months of Labor, 210 Acres of Land and $6,500 Operating Capital Using Loose Housing Optimum Farm Plans for lhO Acres of Land and 15 Months of Labor Using Stanchion.and Loose Housing Systems and Two Levels of Capital Comparison of Optimum Farm Plans for Stanchion Housing and Loose Housing Systems‘With Unlimited.0perating Capital Comparison of Optimum.Farm Plans for Stanchion and Loose Housing With Three Different Combinations of Land, Labor and Operating Capital PAGE 76 79 82 87 92 IIST OF APPENDIX TABLES TABLE NUMBER PAGE 1. Estimated Daily Labor Requirements For Cow and Replace- ment -.Minutes Per Animal Per Day 109 2. Cows Milked Per Hour and Per Man Hour in Four Parlor Types, Standard for Better Than.Ayerage Milking Performance 110 3. various Expense Items for Crops 111 h. Monthly Distribution of Labor for'Major Craps 112 5. Crap Yields and Application Rates for Fertilizer 113 6. Average Prices for Farm Products and Factors of Production 113 7. Optimum Farm Plans for 210 Acres of Land and 15 Months of Labor Using Stanchion Housing 11b 8. Optimum.Farm Plans for 210 Acres of Land and 27 Months of Labor Using Stanchion Housing 115 9. Optimum Farm Plans for 280 Acres of Land and 27 Months of Labor Using Stanchion Housing 116 10. Optimum Farm Plans for 350 Acres of Land and 27 Months of Labor Using Stanchion Housing 117 11. Optimum Farm Plans for 210 Acres of Land and 15 Months of Labor Using Loose Housing 118 12. Optimum Farm Plans for 210 Acres of Land and 27 Months of Labor Using Loose Housing 119 13. Optimum Farm Plans for 280 Acres of Land and 27 Months of Labor Using Loose Housing 120 1h. Optimum Farm Plans for 350 Acres of Land and 27 Months of Labor Using Loose Reusing 121 15. Optimum Farm.P1ans for h80 Acres of Land and 39 Months of Labor Using Loose Housing 122 LIST OF FIGURES FIGURE 1. Type 'of Farming Areas in Michigan on a Natural Live Basis Representing the Influence of Soil, Climate and Market 2. Optimum Farm Plans for 1’40 Acres of Land and 15 Months of Labor Using Stanchion Housing 3. Optimum Farm Plans for 1110 Acres of Land and 15 Months of Labor Using Loose Housing PAGE 10 Sh 61 CHAPTER I INTRODUCTION Dairy production is Michigan‘ s most important single agricultural enterprise. Over the past ten years receipts from the sale of dairy products have accounted for approximately 27 percent of the cash receipts from farm marketings in Michigan. In addition to the sale of dairy products, there has been revenue from the sale of cows and calves for herd replacement, breeding and slaughter. Dairy production has major importance in the Detroit milk shed where 60 percent of the total farm income is derived (from the dairy enterprise. 3/ The average number of cows on farms with a dairy enterprise has been increasing since World War II. This important change in dairy farm organization has resulted from increased specialization and the application of new technolog in housing, nilking and milk handling developed during this period. Important technology available to the dairy industry includes artificial breeding, milking parlors, self- unloading wagons and silos, bulk tanks and loose housing. Important developments in feed production and feeding methods are providing the opportunity to reduce feed cost by substituting high quality roughages for concentrates. Only a small number of farm operators have made the shift from a stanchion to a loose housing arrangement. There are, however, y Michigan Department of Agriculture, Michigan Agricultural Statistics, Lansing, Michigan, July 1959. economic forces in operation that encourage the use of a loose housing system. 3/ Rising prices for the factors used in production and a decline in the price of milk have made it necessary to increase the size of operation in order to maintain a given income level. A loose housing system provides one of the most promising way to expand the dairy operation and, at the same time, provide flexibility for further expansion. In a study of the low income problem on dairy farms , Fuller 2/ concluded that new technology (loose housing system) must be incorporated into the farm organization if income on specialized dairy farms is to be competitive with industry. Complementary to the addition of new technology has been the tendency toward specialization on dairy farms. As dairy herd sizes have increased, competing enterprises have been dropped from the farm organization. Livestock enterprises competing for feed and labor have been discontinued and the cropping program has been adjusted by chang- ing both the kinds and preportions of crops produced. However, others have dropped the dairy enterprise and emphasized other livestock or cropping enterprises . Specialization in the dairy enterprise and adoption of new tech- nology have forced farm operators to make important farm organizational _2/ Loose housing system will be used as an all inclusive term for an arrangement including loose housing and milking parlor. loose housing arrangement will imply a loose housing system. _3/ Fuller, Earl 1., Some Labor Efficient Dairy Farm 0r anizatiens Designed for Michigan CEnditions, Agricultural Econox'flcs Department Pu cation 690, Department ofigricultural Economics, Michigan State University, _July 1957. _, L; ' " l ._ _ _ _ 3. 'I , 'I: U . - - " - I ' x '. .' I I ' - I 4 - .. ' I . . - . . . . ’ ' . ' - ' . _; - '. .' .'.. - s' .’ -- -‘.' ".'. Y! '7 ' . _ ’ I ‘ I.) . . '. i" ' . .u ' "" 'l -. ' \ .' {J .- 2 - . ' ' . - r ' ' ._ _ ‘- ' . -_ . ' 'l u .. .. . . -. . . l l . v . _V. ' . - l .I .f ' - . : ' " € ._ ___ . -. . I_ - .. .. I ... ‘. .. .1. - n. .. 5' - 'l. . u- I u . . -' , . I”. " . v .' ' . . ., u .. .-. . ‘ ' .. . . ' ' _' .. - ' a . - - -.‘ T .4: . " .. .. . -.'.."'— "'- . :1 . . -. ' - I. .' -'~ _ ' ' . ‘- --' ' u". ‘ '.\ x . x. '. | I ‘ . ' '.' '. - . ' . . . T . __ . .' . .'.'. u '_ -. 1.1-. .‘-_.- ' . - - - . . - ' .. n . -- -_ s I ... - ‘.'.' ' : 1 '. :-' .. . -' ' _ . .' p I .. ‘ ... u ..a . . " ‘. ' ' , n. _x. If) - . - - . 'Z- {n . 1 ' .1 I: ...:- ' _( .: ,' . ". .." ‘_ .. =-. L5. 5; .. -.-' . : \. .- | 5 . , .- ,. -. , \ . I .- a . .. . . . .- . |. - . - .- -- .. - 3-1.2 :' . "L' a J. . ' -' " '- .. - _ \ 4' . - .' ' ' . .' C" 'J ' _‘ . _ . . . , _ . . . . . . '.- \ ' ' . . ‘ . v' _ . ' .. ' '. .. . . . . .‘ - ' . .' , ' . . . .— ' . ‘ -' I' . I. .c ' - .' '. .-. . . :\ - _ a. .-. i J... -'. _ . .-.. . .. .a...“ .. ..- .-.... . _ i -. _. l -. n - . . . ' . . I l .' ‘ I. I.. ' I. ' I.- .'u . .. I :uu _‘ . U z i I. ' I 'l u. .l . - .- I. . - I . ... u \l L ... . ..-. .5 ... .. .'- 0.5 - , . . . . . . . . . . . . . . . -.. . . L .. '. ‘ ' ' ' . .. . . . '- . | .- , I .- I I. c ' . ,- ' - . . - n- - - LI .. ‘...- Z LI . . . . . . ' . | ". . - .\ .. _J. ..L . . ' '.. changes. The factors over which individual farmers have some, but not complete control, are farm.organization and management practices. Within certain.linits, farm.operators hare a choice in the enterprises they select, the number of cows they keep, the crops they produce, and in the seeding, grazing, harvesting, and storage methods they use. These choices are influenced.by many factors including the availability'of crop land, buildings, equipment and capital, the complementary and competitive relationships of craps, the intensity of the livestock program, the supply of labor, management experience, prices, level of technology, production.possibilities, and many others. In.addition, personal preferences, risk and uncertainty, and many'nonpeconomic factors play an important role in these choices. The problems with which this study is concerned are those rising out of organizing the total farm.operationc much has been accomplished in studying separate enterprise problems such as feeding, forage harvest~ ing, breeding, and crop production. There has been relatively less accomplished in studying the problem.of determining the Optimum.total farm organization. Total farm.organization.is of primary importance to the farm.manager. The parts are important,_but only when they are preperly fitted together can returns be maximized. Orientation of the Problem In view of present trends it is assumed that specialization in dairy production will continue to be favorable for a large number of operators. This does not eliminate the possibility that many others - - _ — . . — - . . .- . - \ - . . . , . . t _ I .- . ." .1. ~ I . l - .4 . '. . . ' . - . . g .I ' \. II I . .. I ' I. . . -- \.I ‘ . ‘ ' ' . . .- . ' ' ' . . I \ . L . u _ l . ‘ -I _ I ' ' - , . - . . . . . - . I _ \I _ .. . l . II 1 . ' ' . . . I. . . . . ‘ .'. s t . . I .. . - . .: . . . I ' I . . . \— . ..'. . - . -.I I ' 3 . ‘ 'l . I . I. 1 ' -. I _ .' - . . I. . '-"' L'! " .- I. _ . . - ' I' l '—. —. ' ' ' '. '- ~. .. ' . ‘ I ._ . . - - _ I . . - , - J - .I I l . I. I .\. . . . .n . I I I) - as .1. I I ' s l'. .'. . I " ' l I 'l I .— ' ' ‘ - . ' . I t n . I'. . n e . I a... A I s l l — ' I ' . n . I . ‘. ._ . ' _I . . _ .1 " I I I a. . \. l \ l . ' l . . . ' I .s . -'.- I . _ ' I: . . ' - _I. ..'.; . .I _ ‘_ '. I: .' J'I I_ . H I . _ '. . _ ' ' l .. . . I ‘ ' , _ ' ' ' ' . _ I . 1 ., . .I . I ' .. x. I ‘ I - u I , ' . ' l . . I- ' "i . J. . L.) . . ‘ _ ' a ' ‘ I II I .. . .:. . - . .. . . ‘ - . I. -. . 1 . : . I. - ' I \. J . IJ . . . I. - ' _. I -‘. I . _-. I .. '-‘ . .' 7'; . _ _ . . . . I . . . , I L' I. I . I.L 4 .... . . - '. - - I . . - I. ' - - r. I I ' l‘ .. ." I. .I. - . . .\- II . r‘ ' . .. . J . - a . I. I. \ s l . . - " \-I . L 'J I. - I I- .. '5' I. l' I . . 1' . l \I .-1 ..-... . . . . . . . .. . . . e . . '. _ . __ - . . . . .- . . . . . ..I I ' I I I . I . . ..II .I .. . .. ;.I I .. ' . '.. '-' 4. . l. I' ' y ' J l. . ' . . J ". ' 'I ' I . ‘ - - I ' I ‘ . . l I rI I s' I . . I . - -. . -.. . _ . \. I . . a '. -' .. . . may still. find it feasible to combine other livestock or cash crop enterprises with-their dairy enterprise. Specialization is expected to bring about a greater emphasis on increased numbers of cows with a resulting decline in competing livestock enterprises. The basis for the above assumption is two-fold. The Detroit milk market and smaller markets throughout the state provide important market outlets. Favorable soil and climatic conditions exist for the production of feed crops. The combination of these two elements encourages specialization. An increase in herd size provides the second motive for specials ization and limits the number of livestock enterprises. An.increase in the size of the herd requires additional capital outlays for live- stock, buildings and equipment. many of the new developments are not good complements with the techndlogy employed in a stanchion housing system. This situation is illustrated in the following example. Remodeling the stanchion barn for use as a loafing area may require an additional investment as large or larger than the investment required to construct a pole type loafing barn to provide comparable facilities. Furthermore, the investment in stanchions becomes unproductive and use- less when a new milking parlor is installed. Under the organization developed by Fuller an investment in excess of $100,000 was required to bring labor earnings on dairy farms up to the level of labor earnings in industry. Furthermore, the farm.operators with adequate facilities for a stanchion arrangement are finding the new investment required to change to a loose housing system.is often as high as $30,000. The introduction of labor saving methods having high investment cost requires additional gross income, usually from carrying more cows, if an increase in net income is to be realized. High capital require- ments for new investments in housing and herd expansion reduce capital supplies available for investments in other livestock. In addition, the time and cost of gaining technical knowledge, marketing information, and keeping I'up to date" in more than one livestock enterprise may be prohibitive; ' Many factors have an influence on the rate at which farm organi- zational adjustments are made . Units on the amount of capital for investments and operating expenses, the need to gain management ex- perience, managerial abilities of the operator and time requirements for making changes create bottlenecks in making adjustments. These organizational adjustments may be worked out more rapidly by special- izing and placing limits on the number of livestock enterprises. Purposes and Objectives This thesis is directed toward situations in which new technology is being introduced on dairy farms. Many dairy farm operators will be considering the feasibility of changing to a loose housing system in the next five years. Farm families planning to make these changes should plan carefully the transition well in advance of any change and attempt to avoid making mistakes that could be discovered with adequate planning. The primary task of this study is to outline a number of farm plans that will be helpful‘and useful to farm families considering the feasibility of making organizational changes arising from the incorporation of the new technology'available in milking, feeding and housing arrangements. The first objective is concerned with the question of efficient ‘use of resources. ‘Lssuming farm operators attempt to maximize net income, the overall farm.organization of a sample of dairy farms will be studied to determine adjustments required to bring about the effi- cient use of resources on dairy farms employing the technology available in a stanchion housing system. The second objective is to derive a number of optimum farm plans for conditions existing in.Southern Michigan subject to resource restrictions on land and labor. Present developments in milking, feeding and.housing will be incorporated into these farm plans. Procedure Several techniques of determining efficient farm organizations are available including functional analysis, budgeting, linear programming, and the techniques of traditional farm.management. In.the case of the present study functional analysis and linear programming were decided upon for several reasons. First it seemed essential to consider adjustments of two types: adjustments on an existing production function, and adjustments imp volving a shift from.one production function to another. Functional analysis is more adequate than some other techniques in handling intra- functional adjustments. The procedure yields estimates of marginal . . . . . . t - - . - .. . - - _ ‘ a ... I. ' _fl ' .L-. ~ .. .. L I. I . '. P . 0. . _ a . '. I ‘ u . . Tu. . -.|' ' .‘1 '-'.I. - . T: i. .IJ;':' "L - ' ' . . ' '. - I'- I .. -_ .- .J . .I . ' J _.: J'“ ' . . L ' -.. 1; .- . ..'. .. - . \ .1 A i -_ . .... 1 -_ . Lu __ . i .' ' w \ ,_ 2. ‘J' L ._ _ . .- . . . . J 'i . ., I . 1 . . . " -_ . f. '.I . '..-, ..'.! - - -' : J . v ,“ _,_ _ ' . C J ' 11.- .‘ . I ’ r ‘ .1. - .-_) ). . . . . J I I '. ") a .. _ .. - . . c _ 0-. '- I l . .- n . a. '- J . ..- '- . E. . - . ... - . '.. . r ... I _-l - .... . _. ’ .‘ . -0_ l. “.1 'I I? .- 1 I. '.‘ '. .-- . . -. . '-' I' .1; -.. . .L -' . . . . . -: . . . .. . _ . 1-." \. . - ' - .-. . . - 4 .. . ) '. I __u_ . ..'.. -' a - . . . . . . .- '._ A a . -I ' a .'. - u. v..- .- ,‘ . ~ 4 :' . ' . - . \a - I. .. ’ \J ._ . LU - 1 -~.- .. u. . . . “II ..'J I. ...\. .. ". .'. t I." :‘_ f -‘ . _ 1) ' .‘s 1,; ___ ... .. . .. " . '_ _ F .- _. . _ . I .. 'l - I. h.- \4 J I .L . - n — II. ~ ' L) ‘ 'l . l. I .' I. _'_ . ..Iil . value productivity from the data independent of knowledge about coeffi- cients of productivity. Further, these estimates of marginal value productivity are subject to test of reliability. Neither budgeting nor linear programming at their present level of development are as capable as functional analysis of measuring the effects of interaction of different levels of inputs or their respective value productivities. The Cobb-Douglas function was selected for this analysis. Previous experience has indicated that it is fairly adequate for the purpose of deriving estimates of marginal value products. E/ The most important weakness of the function in the present study is its inability to show other than constant elasticity. linear programming is an appropriate technique to use in inter- functional analysis. Recent adaptation of the linear programming technique to farm planning has made it possible to examine systemat- ically the relative profitability of various combinations of enter- prises and production techniques for farms with specified quantities of productive factors. The problem of introducing new tehenology can be readily handled by programming techniques. 3/ Whgley, Robert Vance, Marginal Productivities of Investments and §§penditures, Selected 125535 County Farms, l§§§., Unpublished Master 5 t esis, Department of Ag cultural EcOnomics, Michigan State College, 1953. Bolger, William R., A Partial Evaluation of the Michi an Townshi Extension Pro;ram in BenmarE TownsEIo Over the Period I§§§ to I9E8 CHAPTER II DEVEIOPIMTS IN DAIRY PRODUCTION IN SOUTHERN MICHIGAN Type of farming areas 2, 5, 6 and 7 are included in this study of Southern Michigan dairy farms .-]-'/ These areas are outlined in Figure l. The agriculture of these areas is characterized by dairy production, cash crops and general farming. The sources of income are about equally divided between dairy products and all other sources of income. The farm plans developed will be more useful if the reader has some lmowl- edge of factors affecting the agriculture of these areas. To this end a number of important factors were examined. The most important of these are physical factors of soils and climate and a number of economic factors including farm organization. Soil; Type, Tom and Climate Examination of a Michigan soil map shows many soil associations and land divisions. 3/ A close inspection reveals that the soil associa- tions in areas 2, 5, 6, and 7 fall into four major land divisions with y The type of farming areas referred to are those outlined in a study by E. B. Hill and R. G. Mawby, mes of Farnnng in Michigan, Special Bulletin 206, Second Revision, Agricultural Experiment Station, Michigan State College, East Lansing, September 1951;. _2_/ The best reference available is Soils in Michi an by E. P. Whitesides and I . F. Schneider, Michigan Agricultural e nt Station Special Bulletin 102, January 1956. The outline of a number of land divisions which follows was taken from this publication. only minor exceptions. These major land divisions are listed below: Land Division Soil Association T Miami, Conover V Hillsdale, Belefontaine, Spinks, Fox, Oshtemo , Warsaw I Sims, Kawkawlin, Capac, Losco Wiener S Essexville, Harsh, Broakston, Blount , Hoytville Soils in division T are deep, relatively high in fertility and durable under cultivation except on the steeper slopes. Drainage varies from good to imperfect. Poorly drained soils are found in depressional areas and in natural drainways. Topography is nearly level to rolling and is favorable for tillage operations. Corn, wheat, oats , alfalfa, beans, and sugar beets are suited to the soils. Soils in division V are easily tilled, moderately productive, and require fertilizer for high crop yields. Lack of moisture holding capac- ity together with the natural low fertility are probably the greatest limiting factor in crop yields. The soils are subj act to wind and water erosion. lining is usually required for satisfactory stands of alfalfa. In general, the soils are well adapted to a wide variety of feed crops. I The soils of division I and S are nearly level and relatively high in organic matter, nitrogen, and lime. They have high moisture retention, good natural fertility and are durable under cultivation. It is necessary to provide artificial drainage to insure good crop production. The soils 10. 12. 13. 15. 16. 17 . 10 TYPE-OFBFARMING AREAS IN MICHIGAN (Areas on a.naturaleline basic) MICHIGAN General Livestock and Corn Dairy, Livestock and Corn Southwestern Fruit, Dairy and Truck Dairy, Poultry and Truck Dairy and General Farming jff Dairy, Part-Time and Truck 'Dairy and Cash Crops Cash Crops and Dairy General Livestock and Part-Time Dairy, Potatoes and Truck Northwestern Fruit and Dairy Dairy, Part~Time and Potatoes Farestry, Part-Time and Cattle Cattle, Potatoes and Part-Time Cattle, Hay and Part-Time 4 Dairy and Potatoes Dairy, Potatoes, Part-Time Forestry ’ Figure l. Type-of-farming areas in Michigan on a natural-line basis representing the influence of soil, climate and markets are very productive and are not subject to serious erosion losses by either wind or water. The soils of Southern.Michigan do not generally occur as uniform individual types over large areas. They exist more commonly in small bodies and in associations comprising a.number of soil types which not only differ chemically and.physically, but also exhibit diversity in.topography and.drainage. The soil is a very important factor in determining the type of farming, productivity and value of farms. The four land divisions, so far discussed, provide good crop land. Feed craps are well adpated for production on these soils. The major climatic factor affecting the selection of crop enter- prises in Michigan.is the length of growing season. The growing season for Southern Michigan ranges from.1h0 to 170 days and is primarily influenced by the Great Lakes. Rainfall and total.precipitation, ranging from.about 28 to 32 inches, have little or no effect on the selection of crops. major feed crops can be produced successflmrky. Type of.Agriculture The areas under consideration were selected on the basis of a reasonable degree of similarity with respect to factors associated with the crop and.livestock enterprises. The previous section out- lined the similarity and differences in two important physical factors - soils and climate. In this section a.number of economic factors will be examined. The four areas are not perfectly comparable for important 12 variations between areas do exist. The division between areas as shown in Figure 1 are not as definite as the boundary lines would indicate. The transition from.one area to the next is a gradual one. Important market outlets for milk ' are available in each area. In area 2, there are the local markets of Battle Creek and.Kalamasoo. The major cities included in area S are Lansing and Jackson. A considerable portion of the milk goes outside the area to Grand Rapids, Flint and Detroit. Area 6 is the metropolitan area of Southeastern.Michigan and contains the major cities of Detroit, Pontiac, Flint and many other good milk markets. Area 7 is more of a commercial farming area and.is close enough to the Detroit metropolitan center to favor milk production and cash crops. Part-time farming is important in these areas with the major cities providing opportunities for off-farm.employment. These opportunities are quite favorable in area 6 where we find more than half the farmer Operators working 100 days or more at off-farm.employment. Dairy production provides the main source of farm income in these four areas. However, important variations between areas exist. Areas 2 and S are largely characterized by dairy cattle and general farming. On certain farms hog, beef cattle, poultry and sheep may be an important livestock enterprise. Corn and.beef cattle are relatively more important in area 2 than in area 5. Truck crop and.part~time employment are imp portant in area 6. Cash crops are more important on the heavier, wetter soils of area 7 than is true of the other 3 areas. : I I. ‘. I 'I I ‘ - .. I - . ' . . I‘ I' . . . - . . l - - ' I " "- - n ' ' ' 'I . ‘ - "' - "' l . I I ' F." i . . "I ' . _ 'I- . _ _ ' . -I - - . I. I ' .- ' -I - . I .." . . ' . . ' ' I . ‘ . . - ' . " _. I . ' __ l . I . . I ~ . . \— ' I _ II ' ' .. . 1 . . - , '. . . _ _ ' .' l --- I ' .-- .I . _ . _ . . . . I .. . . . I. . ' ._ . - - .- r . . - . ' . . ' I - . .. - - - . . . . ' . . - I g . . - I I . - . I . . . .— . . . I I .. . .' _ I- I'. .. . I I . I . - - . I . .. I I. . I. ' I .. -I . I I _ _ . l _ .. ' I . I. _ I - I .‘ . _ .- . , ~I . _ _ ' '. '. . . . . . . _._ . . I - . . I . I '.J _ II I ' . . I . - -' I.I . - I ' - I n ._ I . I . . .. . .. _ . I I _ . I . . . . I I . I I . . . . - . . - ' . - ' - - . . I . ' L ' . . . . l. _ I -— -. . _ _ _. _ — _ -' : l . . . _ I .- . .. . - - . .. I - - I I - - I - 5‘ . I .' I I I I I _ . l . . _ .. l3 In.summary, there is a reasonable degree of similarity of physical and economic factors throughout the total area. These applying the results obtained in the following sections, however, should be aware that soils do range from.those that are only'fairly productive to some soils that are level and highly productive. The greatest dissimilarity arises from.differences in the intensity of possible crop operations. For example, intensity of corn production might range from.30 to 100 percent and the requirements for sod crops from.SO percent to no sod crap required. Dairy'Production‘Developments' The introduction of loose housing, mechanical feeding of forages, improved milking systems and.bulk handling of milk have brought about a revolution in milk production. The use of labor-sawing methods in dairy production has lagged behind the use of similar improvements in crops and other livestock enterprises. In this section, developments in milking, feeding, housing and other improvements will be outlined. These new production methods appear to provide opportunities for imp creasing income on dairy farms. This statement does not imply that a loose housing system is the most feasible plan for all dairy producers. Expansion of the dairy Operation to 50, 80, or 120 cows on many Michigan farms may often require investments in land and labor resources in addition to the large investments in a milking parlor, bulk tank, dairy housing, and o. (In '1 II . .‘ . -'. ., r \ ll ' .. :' .1 . _ . ._. I . r ' ‘ a ' \' u I .. .' I _ - .. .. . -' .... I . I . .' .. L. _I. I . . l '- ... 4' -. '. ._' :I. - -. .I ' . _ i i .‘. , - ' I',I I I at ,‘ . \. I - .-". I In ' - l .. ..J- (i c 'L :. '.' . . .5 I I.I - - I l- _._ such feed storage and handling facilities as silos, forage harvesters and silage feeders. Profitability of expansion much beyond the 30-cow level remains to be demonstrated on many Michigan farms. 2/ The small dairy farm may find it more profitable to make improvements in manage- ment practices and organizational adjustments than to begin an ex- pansion program. Building a herd with high producing ability and im- proving crop yields should come before a large expansion program. Produc Abili It is both feasible and possible to raise the level of milk produc- tion per cow to the 10,000 pound level. A dairy-mam with a reasonable degree of managerial ability can up Ib_r_e_e_g_l a herd from average to good cows by using improved breeding, culling, mid management practices. A higher rate of calling is needed to maintain a herd of high producing cows. The rate of turnover should be at least 25 percent a year. Artificial breeding is being used successfully by a large number of producers and is the most promising way of improving the milk produc- ing capacity of the herd. Breeding troubles have been experienced by a number of Operators but these have failed to develop into a major problem. Breeding costs have been reduced by using artificial breeding services. 2/ Wheeler, R. G., ”If you have 20 or 30 cows, will it pay to expand herd size?", Michi an,Farm Economics, Department of Agricultural Economics, Michigan 3. niversity, East Lansing, February 1959. 15 There are several benefits to be gained from higher producing cows. They enable the Operator to improve feed utilization and capitalize on the benefits from.higher quality feed, pasture, and improved feeds ing practices. Labor and management returns are much higher than the returns from.average cows. The greater value of milk sold is enough to more than Offset higher feed and labor cost. Feeding Methods Under a loose housing arrangement labor requirements for feeding are reduced by moving the cows to the feed rather than carrying feed to the cows. Convenient location of feed and feeding areas contribute much toward efficient use of labor and mechanical feeding of forages has made the job easier and safer for the Operator. Among the labor saving machines are the silo unloader, bunker feeders, or feeding from wagons with racks, and handling Of silage from a horizontal silo with a tractor and scoop. These changes involve high equipment investments but their application brings about substantial reductions in labor requirements. Milking System The milking parlor is probably the most important component in the loose housing system. In the overall system as much as eighty percent of the labor required for chores is Spent in the area of the milking parlor. Efficient use of labor begins with an improved milking system. 16 A.number of alternative milking systems are available with a parlor type arrangement. The predominant types of milking parlor arrangements being constructed on Michigan dairy farms are the herring- bone system, walk through parlor, a‘U shaped.parlor and a side opening arrangement. The herringbone milking system.was developed in New Zealand and has only recently been introduced in the United States. It is important that dairy farmers select the milking system.that best fits their individual farm needs. The dairyman planning to milk up to 30 or to cows can choose from.any of the above systems and get satisfac- tory results. For herds over he cows, it is expected that the herring- bone milking system will be preferred because of its flexibility and lower cost. See Appendix Table 1 for performance rates using the different milking systems. Housing Arrgpgements Loose housing is now more practical than ever before because of new ideas in housing, new types of equipment, and new concepts in herd management. Good.management is especially important in the pen type barn.because of the attention needed in bedding and housing to keep the cows clean and the quality of.milk highm It is advisable to consult the milk inspector before constructing a loose housing barn to be sure the arrangement conforms to required standards. Farmers who have preperly arranged and well managed chore routines are producing milk low in bacterial count and are able to meet all health requirements. 17 An important advantage of loose housing over the stanchion barn is the opportunity to reduce labor requirements. The annual housing cost is lower with a loose housing system and a smaller investment is required to preside housing for larger herds when compared to a stanchion system. There is flexibility in the use of'buildings and expansion in herd size. Room for more cows can'be provided.by lengthening the hay and silage hunks and enlarging the pens. More cows can be added temp porarily'hy crowding the cows in the feeding and loafing areas. Crop Enterprises Economic aspects of crap production have always been important considerations in.the maximization of individual farm.profits. The one best combination of crops to produce is influenced by the proportion of sod crop needed to control erosion, the labor supply, the size of farm, kind and intensity of the livestock program, capital supply, and other resources on the farm. It is beyond the scape of this study to cover in detail the major advancements made in crop production during the past decade. These advancements should be incorporated into the cropping program. Efficient farm.planning requires important consid- eration of all alternative crepping possibilities. The competition.between livestock and crOp enterprises for the limited supplies of labor and capital intensifies the managerial problem of farm.organization. The organization or plan for the farm, if it is to maximize profits, must fit the resources peculiar to the individual farm. Thus, in organizing the farm.operation the kinds and proportions of crops to produce must be determined by considering its effect upon the entire farm Operation. 18 CHAPTER.III OVERALL FARM ANALXSIS Farm.menagers have the responsibility of organizing the farm business. ‘we assume the goal of the farm family is to maximize the net return from.all inputs. In accomplishing this objective the operator must decide the products to be produced, the kinds and amounts of resources to be used including the technology to be employed, and the Optimum.combination of enterprises. ZMany dairy farm organizational changes are made in a continuing process of making adjustments. Additional acres of corn may'be grown with reductions in cats, hay or other crops. An additional cow may be added to the herd. .A new piece of machinery or equipment may be pur- chased. New technologies such as bulk milk handling, new seed varieties, and.new weed sprays may be employed without important maladjustments in enterprise organization. IMarginal analysis has been successfully used in determining the efficiency of resource allocation on farms of a given type'using similar methods of production. Adjustment in resource allocation will.be examined in this section of the study using results of marginal analysis. The incorporation of new technology may often require substantial changes in farm.organization. An example of this is the incorporation of new investments in loose housing arrangements which result in the reduction of labor requirements in caring for the dairy hard. The labor made available by applying this new technology will have an influence on 19 both the size of the herd and the cropping program as well. Linear programing tehcniques are capable of handling the organizational changes resulting from the adaption of new technology. Programming will be used to determine optimum.enterprise organization.employing new housing, feeding, and milking methods available to the dairy farm operator. This analysis will be presented in the following chapter. Mnal Analysis The important problem of determining the optimum combination and utilization of resources will be studies in this chapter. Marginal analysis will be employed to determine the marginal return to resources for a sample of Southern Michigan dairy farm operators . l/ This informa- tion will be exasdned for possible adjustments which are needed in the farm organization. A procedure appropriate for this type of analysis y The marginal value product of a given factor (Xi) is obtained by taking the partial derivative of the production function with re 3pc ct to that factor. b bi b 1) ru-nuxlblx2 2 xi ...xnn 2) .gi' ulbl x2b2 bixibi'l xnbn Multiplying the right hand side of equation (2) by Iii/X1 gives 3) a . bi (Mlbl x2b2 ... xibi ... xnbn) *1 which reduces to may _ ”333 ”mm The level of all resource inputs is specified to be at the goemetric mean. The marginal value product can be computed for any level of Y or Xi which lies within the range of the data from which the function was estimated. 20 is Cobb-Douglas analysis . Production function analysis is employed in analyzing relationships between categories of resource inputs and the resulting output, i.e. gross farm income. The Samle The data used in determining the returns to resources were obtained from a sample of 141; Southern Michigan dairy farms for the year 1958. These farms are located in three areas of Southern Michigan including Calhoun county, Almont and Burnside townships in Lapeer county, and Odessa township in Ionia county. Farms included in the study were chosen from a larger sample of farms selected for a study in the eval- uation of the Township Extension Program. 3/ The farms were selected to comply with, the requirements that all farms used in deriving the production function were homogeneous with reSpect to procmction possibilities and product and factor prices. It was required that all farms: 1) have about the same inherent productive capacity 2) be using the same range of technology from the given bundle of technology which is available 3) be using inputs within each eXpense or investment category in least cost combination )4) be of the same farm type 3/ Nielson, James and Crosswhite, William, The Michigan Township Extension eriment: What Ha ened Durin the First No Years, Michigan 11ng $tural EXperiment gati on, Tec%ca matin' 253, February 1958. 5) be‘using the same categories ofainputs, and 6) be operated by managers possessing a similar degree of managerial ability. The criterion for selection of the dairy farms to be included in the analysis was percent of gross income from.dairy product sales. All farms had 80 percent or more of gross income from.dairy. The second requirement was a ten percent limit on the amount of income from other livestock enterprises. Resource Classification Resources have been classified into five input categories. This is made necessary by the problem of imperfect complementarity and' imperfect substitutability of factors used in.production. IIn addition, the number of variables must be reduced to manageable proportions for computational.purposes. Completely unbiased estimates of production coefficients would require aggregation of all perfect complements and perfect substitutes. Separate treatment would be required for all imperfect complements and imperfect substitutes as well as individual treatment of income by source. Accounting procedures are not available for separating the factors into the necessary categories because present knowledge of physical relationships are not sufficient to do so. Inter- correlation between levels of inputs can also introduce bias into the results. The categories of resources employed in the analysis are: ...-- 22 ’ 1. 141113 (X1). The land input was measured by the total acres of tillable land owned, rented and/or leased by the farm.operator. The value of buildings is not reflected in.this measurement. The return.to the land.input is in the nature of a rental payment for use of the land, The return must be high enough to cover fixed chargeS'of taxes and a return on.investment. 2. £5225.(12)° The total labor input includes all labor available on the farm during the year excluding custom.werk. Several farm.operators had off-farm.employment which was taken into account in determining the number of months of Operator's labor used. The seasonal distribution of labor required and labor productivity'were not taken into consideration. The return to labor is in the nature of a wage. Comparison of the marginal return for labor and the marginal factor cost in terms of either monthly wage rates or value of leisure time (at the margin) would indicate the desirability of expanding or contracting the use of labor. 3. Machinegy'investment (X3). The machinery and equipment input was treated as an investment value. It includes the beginning of the year auction value of all machinery and equipment, plus a proportional ‘ addition for machinery purchased during the year, minus a proportional deduction for machinery sold during the year. The return to machinery and equipment investment represents a return on the amount invested to cover repair, depreciation, and return on the undepreciated value of the investment. h. Idrestock-forage investment (Xh). Livestock and forage investments were considered complementary inputs. As such they were combined and include the total dollars invested in breeding livestock and forage crops. Breeding livestock is regarded as all livestock except feeder stock. The total livestock investment was computed by taking the beginning inventory value of all breeding stock, plus a proportional cost for breeding stock purchased during the year, minus a proportional credit for breeding stock sold during the year. The total forage investment was computed by taking the beginning inventory value .3/ of all hay and pasture stands (i.e. all perennials and second year clover btands) , minus a proportional credit for perennials destroyed, plus cost of machinery hired for labor reclama- tion y, plus the value of perennial seeds purchased and used during the year. Returns are in the nature of a return on investment. 5. Productive expenses (XS). This resources category combines those items of operating capital expense for which the operator would expect a dollar-fcr-dollar return within an accounting period. It 23 includes the items of feed purchased, annual seeds and plants purchased, custom work and machinery hired, supplies purchased, gas and oil for farm use, livestock expense, farm share of electricity and telephone expenses, farm share of auto and truck expenses and upkeep, beginning inventory of feeders and/or broilers, feeders purchased, beginning 2/ See Appendix A for values used in the hay and pasture evaluation and procedure followed in calculating proportional credits for perennials destroyed. .li/ All land reclamation cost in excess of 100 dollars was included in forage investment. 2h value of clever stands, and beginning value of perennials destroyed prior to June 1. Certain nonrproductive expenses such as depreciation charges, insurance charges, taxes, repairs, maintenance, etc. were excluded from this input category. As a result of excluding these non-productive expenses, reservation prices used in determining the economic optimum.must be high enough to cover noneproductive expenses. Unless capital is limited, the Operator would add.productive expenses to the point where marginal returns are one dollar plus an allowance for interest paid on borrowed funds and a.payment for risk hearing. The dependent variable-4gross income-includes total cash receipts from the sale of all products, plus or minus inventory changes in live- stock, feed, seed, etc., plus the value of family living furnished by the farm. Items net included in gross income were government payments and changes in.the inventory value of buildings and machinery due to depreciation. Government payments were excluded because they were not income from.farmpproduced products. Analysis of Relationships The analysis will consist of an examination of the derived production function, comparison of marginal value products and their respective marginal factor cost, discussion of returns to scale, and evaluation of the results. Statistical measures will be used to test the reliability of the equation and the estimated parameters. 25 The equation I - Axibl X2b2 ... xhén has‘been simplified through the use of logarithms thereby reducing an equation.of a.higher order to a linear form. The logarithmic equation was fitted.with the five independent variable or resource categories by method of least squares. The results from.fitting the Cobb-Douglas function.for the sample of hh Southern.Michigan farms for the year 1958 was: log I - - .1553h + .1960? log X1 + .3h659 log 12 + .1588? log 13 + .37905 log Xh + .25h36 log X5 where I - Gross farm income 11- Tillable acres of land 12' Tenths of menths of labor X3- machinery'investment th‘Livestock - forage investment X5- Productive expenses The regression coefficients, their standard errors, and "t" values are shown in Table 1. Significant test of the regression coefficients indicated the bi values of all the independent variables were found to be acceptable at the ten.percent level of significance when tested against the null hypothesis that the regression coefficients, taken individually, were equal to zero. The sum.of'bi's was 1.33h96 indicat- ing increasing returns to scale. This aspect of the problem will be discussed.in.more detail later in this chapter. 26 Table 1. Regression coefficients (bi's), their standard errors (531's), I't" values, and level of significance Input 693598017 ‘91 0'51 1" sigiYeficche .3;/ X1 acres of land .1960? .11955 1.615 .10 X2 tenths of months of labor .3h659 .13683 2.533 .02 x3 machinery investment .15889 .09117 1.7h3 .10 Xh livestock - forage ~ investment .37905 .1h09h 2.689 .01 X5 productive expenses .2Sh36 .llS6h 2.200 .05 hi 1.33h96 R - .92076 3/ R2 - .8h78 2/ s - .0968 fi/ _1_/ For N-l—K 8 38 degrees of freedom, where K - number of independent variables. _2/ Multiple correlation coefficient. _3_/ Coefficient of determination. 5/ Standard error of estimate. The multiple correlation coefficient (r) was found to be .92076. This high correlation between observed and estimated scores (I and §) is effective in explaining the variation of observed values of the dependent variable - gross income. The coefficient of determination (R2) of .8h78 indicates that eighty-five percent of the variance in gross income can be ascribed to the five independent variables. The remaining fifteen percent of variance in gross income is the influence of unmeasured factors such as quality differences in the independent variables, management, weather, and other uncontrolled or unmeasured 27 factors..§/ R2 was found to be significantly different from zero at the one percent level of significance. 9/ The geometric mean of gross income in logarithms is b.1h79 ($1h,056) with a standard error of eStimate (S) of .0968. Under the conditions existing in.l958 it is eXpected that for samples drawn from.the p0pula- tion sixtybseven percent of the time the logarithms of gross income would be expected to fall within the range h.lh79 + .0968 (between $11,250 and $17,570). The factors of production are expected to be organized around the scale line. Fer this reason there may be important problems of inter- correlation.between independent variables. The effect of intercorrelation are to introduce bias in the estimates of the regression coefficients. The matrix of simple correlation coefficients are presented in Table 2. Table 2. IMatrix of simple correlation coefficients variable I X1 X2 X3 Xh XS Y 1 .81 .72 .75 .86 .82 x1 1 059 069 079 069 X2 1 .h9 .62 .61 X3 1 .68 .69 X1, 1 .76 X5 1 éy'ln our regression model these influences are regarded as normally and randomly distributed disturbances which are independent of the independent variables. 2 46/ Under the hypothesis that R2 a 0, the quotient F . R - N'K-l l i K has an "F" distribution with.K and N-K-l degrees of freedom where K is the number of independent variables. 28 It»may be observed by examining the simple correlation coeffi- cients that some degree of correlation.exists between all pairs of independent variables. The correlation between)!1 and Xh (land and livestock-forage investment) and Xh with X5 (livestock-forage invest- ment and productive expenses) are relatively'high. It is quite possible that the estimated regression coefficients for these variables may contain.error due to intercorrelation. This likelihood is dis- counted in the present case on the basis of the small variance in the regression coefficients. Problems of intercorrelation between independ- ent variables would tend to result in large variances for the regression . coefficients. The fitting procedure does not assure that effects will be distributed efficiently if there is high interoorrelation. The estimate of the production function is a reliable estimate. The high coefficient of determination and statistically significant regression coefficients indicate that our derived production function will give reliable predictions of gross income. The independent variables included in the regression are related to gross income quite closely. The reduction in variance indicated byR2 (85 percent) represents an increase in information sufficient to justify its use in studying the problem of resource allocation. Estimates of Magginal Value Products Marginal value products are derived from the production function using the partial regression coefficients (bi's) directly. 'we know that IMVP’Xi I hi (I) for the usual organization, i.e., level of X1 29 resource inputs at their geometric mean. The geometric mean amounts of inputs for the sample and their reapective MVP's are presented in Table 3. Table 3. Level of resource inputs and estimates of marginal value products for the selected sample, 1958 Geometric mean IHVP (return for Input category amounts of an additional ' inpu: unit) Y’ ' Gross income X1 ' Acres of land 1h8.h T.A. $ 18.57 X2 - Months of labor 19.2 months 35 2514.00 X3 'IMachinery investment $8,572 .260 Xh - Livestock-forage investment 11,021 .h83 XS - Productive expenses h,511 .793 The close relationship between the regression coefficients (bi's) and the marginal value product estimates provides a procedure for testing the margin value product estimates..z/ A comparison of the estimated bi's with the biis which yield the minimum expected returns at the margin 7/ The Optimumbogls (bi 's which equate MVP to MFG) may be derived by substitutin e respective MFG in the MVP equation and solve for the optimal 1. The difference between the estimated'bi's and their respective optimal bi's gives the following statistic which has a "t" distribution with N—K-l degrees of freedom. 1', I bi - bi bi where: bi is the estimated regression coefficient '51 is the optimal bi U‘bi is the standard error of the bi N is the sample size K is the number of independent variables 30 (marginal factor cost) provides a measure of the divergence of the iHVP's of the various input categories from.their respectivequC's. This procedure tests the null hypothesis that the estimated marginal value product is equal to the margin factor cost and.provides a satisfactory measure of the present level of adjustment in the use of a given input category. 0n the basis of study and discussion with members of the Depart- ment of Agricultural.Economics of Michigan State University, a set of minimum.expected returns (reservation prices) were derived and are presented in Table h. Table h. Reservation prices for factor inputs* Input category Unit Value Land Dollars/LA. $ 2h.00 1/ Labor Dollars/month '250.00.3/ Machinery investment Percent on investment 2 5 .3/ Livestock-forage inrestment Percent on investment ho Productive expenses Dollar return on dollar spent 1.06 % iIn establishing these reservation prices no allowance was made for risk. ‘1] Return of 6 percent on land valued at $300 per acre and payment for taxes and assessments. ‘g/ Approximate salary for full—time hired help including room and board. .g/ This is based on the following charges: 12 percent for depreciation, 5.5 percent for maintenance and repair, 1.5 percent for taxes and insurance and 6 percent for interest. The optimumfbi's (bi's which yield MVP's equal to minimum expected returns at the margin) were derived by substituting the respective reservation prices in the apprOpriate MVP equations. The optimum731 31 becomes the unhown and the equation is solved for the bi's which would yield minim expected returns. The estimated bits were com- pared with the optimal-51's to determine whether or not they were ‘ the same values. The nature of the adjustment needed or suggested in resource use can be determined by this comparison. agustments suggested by comparison of MVP/MFG The results of testing the estimated regression coefficient (bi) for each input category against its respective Optimal regression coefficient (51) are presented in Table 5. An emanation of the statistical results indicates there is no significant difference between the estimated regression coefficients and bi's yielding the minimum expected return. On the basis of these results, it is con- cluded that there is no maladjustment in the use of resources under the usual organization. Inputs are being used at the point where the marginal value product is equal to its marginal factor cost. Table 5. Comparison of estimated bi's and the bi's necessary to yield minimum marginal product bi E stimated bi ' 3 Egg; 22:”; Difference 8133:;ch e b1 .1960? .2533h -.05’727 *5 b2 .3h659 .3h062 .0059? * b3 .15889 .152h6 .006h3 * bh .37905 .31363 .065h2 -u- b5 .25h36 .29781 -.oh3h6 * 3% Did not reach the 50 percent level of significance with 38 degrees of freedom. 32 A.comparison.of the mean of the estimated marginal value product and respective margin factor cost reveal substantial absolute differences. As shown in Table 6, there are differences between.MYP and MFC values for land.and productive expenses and lesser differences for livestock- forage investment, labor, and machinery investment. The reason for this lies in the fact that error is present in the estimate of the regression.coefficient. This error is due to factors not included in the regression.and perhaps errors in the measurement of both the dependent and the independent variables. When the MVP values are cal- culated for plus or minus one standard deviation in the regression coefficients, we get a range for the MVP values. The MFG values all fall within.this range indicating that the two values are the same for computational purposes. See Table 6. Table 6. ZMarglnal value products and marginal factor costs for categories of inputs Input Unit MVP 3211538111651»? MFG Land Dollars/TA. $ 18.57 $29.90 - $7.25 21; Labor Dollars/month $2su.oo ' 355 - 151. 250 Machinery Percent on ' investment 26 bl - ll 25 Livestock- Percent on forage investment h8 63 - 30 ho Productive Dollar returns per . expenses dollar spent $ .793 $ 1.15 - $ .h3 1.06 33 Returns to Scale The regression coefficients of our equation are the elasticities of production fer each individual input category. The elasticity of production.indicates the percentage by which output is increased with a one percent increase in the input. The elasticity coefficients are less than one for each individual resource indicating that successive units of the resource, with other resources held constant at their geometric mean, add smaller and smaller quantities to the total.value Of output. The sum of the coefficients is 1.33. A.uniform.increase of one percent in all factors would increase output by 1.33 percent and inp creasing returns to scale exist. Within the range of input on farms in the sample the larger farms are producing proportionately more from inputs used in production. Increasing returns to scale indicate the desirability of increasing the size of Operation on this sample of dairy farms. Summary Of Results The usual organization is efficiently allocating inputs as indicated by the comparison marginal return and marginal cost. .Resources are being combined in the proportions which equate mar- ginal value product and marginal factor cost. However, this is not an optimum.position. Increasing returns to scale indicate that the sample of farms are Operating where marginal value product for all factors combined is rising. Under the assumption of perfect 3h competition, perfect knowledge, and the law of diminishing return, a second condition must be met. The secondvorder condition i.e., the condition that the marginal value product is falling, is the second condition required for an optimum solution. Increasing returns to scale thus indicates the desirability of eXpanding the size of the dairy Operation, at least within the range of inputs employed by farms in the sample i.e., 50 cows. Expansion to a 50 cow operation may require a relatively long period for many Operators with limited resources and adjustments along the scale line are recommended for these farms. The reason for farms adjusting along the scale line is the maximization of returns for an improved allo- cation of inputs. 35 CHAPTER IV ECONOMIC ANALYSIS OF THE APPLI CATION OF AVAILABLE NEW TECHNOIDGY IN A LOOSE HOUSING SYSTEM Many dairy producers will be considering the possibility Of changing from the present stanchion housing system to a loose housing arrangement within the next five years. The specific Objectives of this section are 'to determine the profit meadmizing farm plans using different amounts of capital, labor and land under two separate housing arrangements . Alternative housing arrangements available to farm operators are stanchion housing and loose housing. Optimum farm plans will be studied to determine how they vary with type of housing and different quantities of limited resources. The optimum farm plans derived in this section will serve as guides for Operators making organizational changes in the dairy and crOpping program. Recent adaptation Of linear programming procedures to farm planning 3"] has made it feasible to examine systematically the l/ Heady, Earl 0., ”Simplified Presentation and Logical ASpects of Linear Programming Technique", Journal of Farm Economics, Vol. 36, December 1951;, pp. 1035-10147. Foles, I. J. , “Linear Programing and Farm Management Analysis", Journal of Farm Economics, Vol. 37, February 1955, pp. 1-214. Heady, E. 0., and Wilfred Candler, Linear ProgEamming Methods, The Iowa State College Press, Ames, Iowa, 1953. en, . G. 0., Mathematical Econondcs, MacMillian & Co., LTD, London, 1957. Plaunt, D. P. , @tfir‘ifi aombination of Enterprises on Farms in the Pennggyal Area 0 entucky, Unpublished Master's thesis, University O Kentucky, Lexington, 1957 . 36 relative profitability of a large number of alternatives available to the farm operator. A linear programming problem exists when one or more of the resources used in production are limited. Production and income possibilities for the farm firm may be limited by the kinds, quality, and quantities of resources controlled by the farm Operator, by the operator' 3 knowledge of production technology, by prices of products and factors of production and by institutional arrangements . The Mathematical Problem .2/ Linear programming is used in the analysis of problems in which a linear function of a number of variables is to be maximized or minimized when these variables are subject to a number of restrictions in the form of linear equations. The function to be maadndzed is of the form: 1) {(x1, x2, , xn) - clxl + 02x2 + + ‘3an (a profit function in which prices are constant) subject to a set of linear inequalities: 2) ‘11 X1 M’le X2 * +A1nxneb1 1121 X1 + A22 X2 + + A2,, xngbz O O O O 0 O O Arnl){l"'5'r|12X2"’°°°+Amnx‘-:'--’bn MéN 3) xizo fori-l, 2, ..., n. 3f Developed from lecture notes of Dr. Dean McKee, Michigan State University, on linear programing procedures. 37 where the Ci’ bi, and.Ai are known constants. The constant bi's are the available quantities of limited resources. we wish to determine an optimum.plan which will maximize the profit function subject to these resource limitations. The system does not require that limited resources all be used but allows some quantities to go unused if these quantities are not needed. Note the set of inequalities in (2) and the requirement that the number of rows be less than or equal to the number of columns. The column vectors of the matrix defines, in terms of the limiting resources, alternative processes available to the farm operator. For each.process the kinds and prcportions of resource services used in producing a Specified quantity of a product are given. The Aij are the input and output coefficients showing the relationship between limited resources and output. This relationship is assumed to linear and the coefficients (Aij) are constant. The 01's are net revenue accruing from the production of one unit of output for a given enterprise. Net revenue is defined as the total income less the total direct cash cost. Prices for both output and factors of production are assumed to be known, and are constant. Inequality (3) above requires all processes to be equal to or greater than zero. A negative quantity is not allowed and so one process cannot be made so large that another will be made negative. Resource restrictions, as well as prices, may be varied when uncertainty exists as to the prcper resource restriction to apply and 38 when the researcher is unable to specify exactly all elements in the problem to be solved. Capital supplies vary greatly among farms and designation of a single representative level is often.diffioult. When the objective is to specify optimum.plans for farms in an area where, except for capital (or other resource), farms are homogeneous, a modified simplex method may be used. This modified.method may be described as continuous or variable resource programming..§/ It has the advantage of deriving a large number of Optimum plans as the supply of a scarce resource is varied from.zero to a point where it becomes unlimiting. The technique of variable resource programming will be used in determining optimum.farm.plans for Southern Michigan specialized dairy farms. Capital will be considered as the variable resource and will be allowed to vary from a level of zero and increase to the level it no longer limits returns. The solution that maximizes returns will be restricted by limits on the amounts of land and labor available. Labor restrictions will be by month for April through November 18. Data The information required for linear programming is the same as that need in budgeting studies. For each crop and livestock enterprise ‘2/ Candler, Wilfred, ”A.Modified Simples Solution for Linear Programming With variable Capital Restriction", Journal of Farm Economics, Volume 38, 1956, pp. 1h0-155. 39 the data needed are requirements of limited resources for each.unit of output, expected.yield and net return for each activity or process. Only a limited.number of alternatives may be considered in any one problem. .An activity should be included for each alternative production method, each feasible level of input, each different time schedule of operations allowing farm operators to shift the work from.period to period and each known interaction of level of input, method and time schedule. The fact that there are several alternative ways to organize and analyze data simply stresses the importance of rigorously defining the prOblem.and carefully formulating hypotheses. Linear programming is capable of producing unique optimal answers only in the sense that it is capable of selecting the best resource - technique combination from the alternatives considered. Lack of input and output data can restrict the usefulness of programming results if superior alternatives are left out of the problem, or if the data contain errors. The reliability of the results are directly prOportional to the reliability of the input and output coefficients used in the computation. Farm Situations and Resource Restrictions This study focuses attention on specialized dairy farms. Eleven farm.situations will be studied and optimum farm.plans derived. This large number of situations is required because the labor coefficients for the dairy enterprise vary with the number of cows in the herd. In addition, inputs of land and labor may be acquired only in large discrete ho units in most areas. In this study land is added in units of 80 acres (70 tillable) and labor is added in full man.units. The cone sideration of a number of situations is important due to the scale relationships in farm adjustment. Economic theory and known production relationships indicate that increases in the fixed factors will require the use of additional amounts of variable factors. In making adjust- ments along the scale line, resource acquisitions are usually by discrete units. The eleven situations are outlined in Table 7. Stanchion and loose housing are considered in combination with differing amounts of land and labor. Farm.plans will be derived for each situation and compared for changes in housing, land, labor and capital requirements. Table 7. Combinations of land, labor and housing* Stanchion Housing Loose Reusing Men an Acres 1 2 l 2 3 lhO l-a leb 210 2-a 3-a 2-b 3-b 280 h-a h-b 350 S-a S-b h8o 6-b * The letters "a" and "b" are used.to designate farm plans for stanchion and loose housing respectively. Each farm.plan is selected within the framework of restricting or limiting resources. The use of variable resource programming is a modification of the programming technique that allows determination of the Optimum farm plan for several levels of capital. The operator using bl these results may then choose the appropriate level of capital and the farm.plan outlined for that level of capital resource use. Important resource restrictions of land, labor and capital are applied in the problem. The resources are defined in the following way: Lead: Land is considered to be a homogeneous factor measured in units of tillable acres. Inputs applied per acre of a given crop (i.e. corn) is a constant amount which does not change with changes in the ratio of row, grain and sod crop. Level of inputs will be discussed under orcp enterprises. Labor and management: in average level of management is assumed with all input-output relationships estimated as those attainable by the average Specialized dairy producer following recommended practices for dairy and crop enterprises. Total available man hours for the months of April through November are computed on the basis of a 60- hour week. In all situations an extra 10 days of family labor is arailable per month. Labor is not a limiting factor during the months of November 18 through March and does not influence the optimum plan. There is no labor buying activity included in the program. Under Michigan conditions labor is not readily available on a day- to-day basis and the dairy producer is generally faced with the alternative of hiring a full-time man if labor is to be available when it is needed. This is an important restriction but appears to be realistic. ha All activities in the farm.plan compete for the supply of labor. Labor requirements for the enterprises are determined for one and sometimes two labor distributions. As much as 20 percent of the labor requirements can.often be shifted from.period to period. It would be desirable to include a number of labor distributions for each enter- prise, but lack of input-output coefficients and increases in computa- tional requirements limited the problem to a single distribution for labor except for corn and hay. Custom harvesting is included as an alternative for all crOp activities except pasture. Capital supply: Capital will be differentiated as capital for Operating expense and capital for investment. The capital available for operating eXpenses will be included as a restriction in our problem. Operating capital is often the most limiting resource and, as such, the resource which determines or Specifies the final plan. Capital supplies for operating expense vary from farm to farm and are usually more variable than land or labor supplies. Farm plans employh ing different amounts of capital are used to show how the farm organi- zation will vary, with the amount of available capital. For these reasons, operating capital will be programmed as a variable resource and will enter the program in increasing amounts until the point where it becomes unlimiting. The original supply of Operating capital starts at the zero level. The supply of Operating capital is not fixed at a prescribed level in the problem and with each new plan the amount of operating capital will increase. ’43 The operating capital requirements for the various enterprises include annual cash expenses for crops and livestock. Items included in cash expenses are purchased protein supplement, veterinary services, medicine, seed, fertilizer and supplies. Investment capital required for machinery, livestock and buildings when changing to a loose housing system.will be computed for a small number of farm.plans. Additional machinery investment value will only be required for comparisons of plans with changes in acres Of land. Because the amount of investment capital is not the same for all plans, the amounts of fixed cost will vary. Fixed costs are charges on invest- ment capital covering depreciation, insurance and repairs for machinery; depreciation, insurance and repairs on buildings; automobile expenses; and taxes. Included in fixed costs are items which cannot be allocated to a given enterprise and include electricity, telephone and a number of miscellaneous items, i.e. magazines and dues. ‘Egigggz The prices used for determining Optimum.plans are given in Appendix Table 6. Historical price relationships and trends were used to establish the prices used in this study. Prices used are those predicated to be an average for the next five year period. Although the general price level may fluctuate from the level selected here, the Optimum farm.organization will remain stable provided price levels change prOportionally; If, fOr example, the price of corn should fall relative to the price of milk, the Optimum plan may shift to producing more milk. On the other hand, if both 1&1 prices increased or decreased proportionally, there would be no change in the Optimum farm plan. When product prices deviate simultaneously so the same price ratios are maintained, optimum farm plans are the same regardless of price level. Farm.plans are computed for average price relationships and are not designed to conform with price fluctuations for individual years. The farm.plans are considered to be useful guides or benchmark rec- ommendations for a one to five year period of adjustment. There is a differential between selling and purchase prices of 35 cents per bushel for corn and $10 per ton for hay. This differential is to cover tranSportation and marketing cost. Dairy and Crop Enterprises The choice of livestock enterprises is limited to dairy. The Aargument for this is presented in the introduction. Four alternative rations are considered for the dairy herd combining hay with silage and hay alone. All rations included grain and protein supplement. The rations consisted of high quality roughage with desirable prop- erties of palatability, high protein content, and high TDN. Ration number 1 has 75 percent silage and 25 percent hay. Ration number 2 has 50 percent silage and 50 percent hay. Ration number 3 has 25 h/ percent silage and 75 percent hay and ration number h has all hay.-— 5/ Corn and grass silage were considered perfect substitutes. Silage substituted for hay in a ratio of 3:1. Three pounds of silage is equivalent to one pound of hay. hS Feed and capital requirements for dairy are given in Table 8, and labor requirements are given in Table 9. A unit in the dairy enterprise includes a dairy cow and replacement. Annual milk produc- tion per cow averages 10,000 pounds of milk with an expected productive life of four years. Table 8. Feed and capital requirements for a cow and replacement* and returns per livestock unit Ration Item Unit 1 2 3 h Capital dollar 58.h0 50.ho u6.h0 h2.h0 Grain 1b. 3195 3195 3195 3195 Hay ton l.h7 2.9h h.hl 6.28 Silage ton ll.h3 8.82 5.11 0 Pasture acre 1 l l 1 Bedding ton 1.5 1.5 1.5 1.5 Protein supplement cwt. 6 h 3 2 Returns over var- iable cost: Stanchion dollar 352.00 360.00 36h.00 368.00 Loose housing dollar 3h7.00 355.00 359.00 363.00 * Estimates for feed requirements were made by Don Hillman, Dairy Department, Michigan State University, on the basis Of studies conducted on roughage consumption. Returns are derived from selling grade A milk at $3.80/cwt. and $h0 return from cull cows and deacon calves sold for beef. Variable cost for each livestock unit is minerals $2, breeding $10, veterinarian services and medicine $10, supplies $h, and miscellaneous (2 percent of gross) $8. Operating expense for milking is $15 for a milking parlor system and $10 for a stanchion system. Labor requirement for each livestock unit is based upon an efficient arrangement for both stanchion and loose housing. These requirements are a function of the technology employed, quality of labor and management and the number of cows. Since average managerial ability is assumed, average labor requirements which vary with the type of housing and number of cows as shown in Table 9 were used. The breakdown of labor requirements into individual Operations is given in Appendix Table 1. Table 9. Labor requirements in hours per month for a cow and replacement* Stanchion Loose Housing Item Number of cows Number of cows 20 - 30 30 - ho 30 - ho 60 80 100 April 8.5 8.0 6.6 5.55 h.§ 3.85 May 7.3 6.8 5.6 h.70 h.0 3.35 June 7.3 6.8 5.6 h.70 h.0 3.35 July 7.3 6.8 5.6 h.70 h.0 3.35 August 7.3 6.8 5.6 h.70 8.0 3.35 September 8.5 8.0 6.6 b.70 h.0 3.35 OctOber-November 18 12.8 12.0 9.9 8.33 6.75 5.78 * See Appendix Table 1 for sources of information. CrOpping enterprises are limited to feed crops and wheat. Wheat acreage is the maximum acres of wheat allotment and this crap enterprise is forced into the program. These crops are well adapted to Southern Michigan conditions as outlined in Chapter II. A total of 17 possible alternatives are considered as given in Table 10. The first group consists of craps produced entirely by uSing available farm.resources; the second group consists of crops produced on the farm employing custom harvesting; and the third group includes those crOps which.it might pay to purchase. Lastly, corn, oats, and hay may be sold as cash crops. h? Table 10. Alternative processes included in the cropping program Produced in Custom Crop total on farm harvested Purchased SOld Corn 2 3/ 2.3/ X one (X Cats 1 1 selling (X Winter grain 1 1 activity' (X Corn silage 2 . 1 Grass silage l b/ 1 Bay 2.. l X X Pasture l ‘a/ The same method of production with two labor distributions. b/ Both baled and chopped hay are considered. Basic capital, labor and yield data including fertilizer application rates are outlined in Appendix Tables 3, h, and 5. Capital requirements include variable cost items of seed, fertilizer, machinery, and other expenses. Labor requirements are based upon adequate amounts of machinery and the following recommended tillage methods with eXpected yields attainable under average management by following recommended practices. The more important management practices recommended for feed crops are: l. Grow on adequately drained soils. 2. Plant good seed, properly treated. Use at least two adapted corn varieties to reduce yield variability risk. 3. Mimimum tillage practices are recommended for all soil divisions. h. Follow timely planting. 5. Several specific fertilizer practices are: a. Base fertilizer application rates on soil test results. M8 b. Use improved equipment which places fertilizer beside and below seeds. 0. Apply'extra nitrogen when cats or a row crap follows plowing down of corn stalks or heavy green manure crop. 6. Chemical weed control is feasible for all feed craps. Programming lends itself to considering a number of techniques and different levels of fertilizer application. In our study only one technique is allowed for each crop enterprise except hay. Fertilizer is applied at a single average rate that approximates the predicted optimum for the area. Lack of yield data accurately reflecting the effects on yield of a number of different techniques and fertilizer application levels made the extension to include more than one tech- nique and level of application of fertilizer inadvisable. The problem of crop rotation was handled in the following manner. Instead of requiring a particular crOp rotation, the individual crops were allowed to enter the farm plan in any combination and at any level permitted by the restriction on land, labor, and Operating capital. If rotation requirements were not met in this initial solution, then the program was to be reformulated to require a balance of sod and row crOps. Wind and water erosion is not a serious problem.on most soils in the area and a minimum of 25 percent in sod crops meets the require- ments for recommended soil conservation practices. In all situations the minimum requirement of 25 percent of crepland in sod crops was met in the initial solution. h? Analysis of Effects of Changes in Resource Restrictions and Housing Systems on the Optimum Farm Plan Optimum, or profit maximizing, farm plans have been derived for the 11 separate farm situations outlined in Table 7. The allocation of resources between the dairy enterprise and the several crop enter- prises is dependent on the supply of resources, production possibilities, prices and institutional restrictions. The farm situations outlined in Table 7 have been selected to study the effects on enterprise organiza- tion of changes in capital, labor and land as well as the effects of changing the housing system. With only one limiting resource the optimum combination of enterprises is that combination which gives the highest return to the one limiting resource. However, the optimum plan subject to more than one resource restriction is geared to utilize the combina- tion of all limited resources most profitably, rather than to give the highest return to any one limited resource. There may be many resource restrictions but when the optimum plan is reached, only one or a few factors are usually limiting. Part or all of the limited resources may be underutilized. This interaction effect of the limited resources specifies the optimum combination of enterprises in the farm plan. The optimum farm plans for varying capital levels are presented in Appendix Tables 7 through 15, except for situations l-A and l-B. Farm plans for these situations will be presented in the text to demonstrate the effects of changes in capital supplies. An optimum or revenue maximizing enterprise organization for varying capital supplies 50 is derived for each farm situation. The optimum or final plan is not restricted by capital supplies and is the plan which would result from limitations on land and labor with capital unlimited. Interpretation of the Optimum farm.plans is important. .Lll farm plans presented in this study are for the labor, land, and operating capital restrictions outlined earlier. Investment capital is not a limiting resource in the programming problems. The amount of land for a particular situation does not change. However, the absence of restrictions on livestock numbers and housing facilities allows for wide divergence in the requirements of these resources. For example, in situation.3-B presented in.Appendix Table 12, the number of cows ranges from 38.6 in the first plan to 80.3 in the final plan. The investment in dairy, dairy housing, feed storage and milking equipment is quite different. The difference in net returns from the two plans should.be large enough to give a satisfactory return on the additional investment. The operator will also need to consider the increased responsibilities for management. Since the farm.plans are computed for average price relationships, they are not designed to conform with price fluctuations within a production period. The plans may serve as guides to follow in organizing the-farm operation and determining the farm plan to be followed. The circumstances of the individual operator which differ from those out- lined must be recognized when decisions and recommendations are made. 51 Effects of Chaggiggjthe Supply'of Capital Capital is often the most limiting resource and may specify the farm.p1an when capital supplies are small. Since the capital supply varies among farm.sperators, farm.plans using different amounts of capital are used to show how the farm.organization will vary depending on the amount of available capital. For the purpose of studying these effects, all resources except capital are held constant and capital is allowed to vary for a level of zero to the level where it no longer limits the farm.plan. variable resource programming techniques have been.used to determine the optimum farm organization for the eleven situations considered in this study. The two situations for lhO acres of till- able land and 15 months of labor using first stanchion housing and then loose housing will be examined in detail to determine the changes in enterprise organization as the capital supply is varied. Since farm.plans are the result of the interaction of limited resource supplies and production possibilities, each resource-technique combination will not only give a different combination of enterprises (i.e. a different set of enterprises will come into the farm plan) but a given enterprise will vary in importance. The first set of farm plans to be studied are those determined for situation l-A. A stanchion housing system is used with restrictions of lhO tillable acres of land and 15 months of labor. Labor is limited during the months of April through November 18 or the crap production 52 season and labor for the remaining months of the year does not limit the farm plan. The amount of capital available for operating expenses is allowed to vary from a level of zero to a level that does not limit the farm.plan. Optimum farm.plans are given in Table 11 for different amounts of capital. A visual indication of the relative importance of enterprises for different levels of capital is shown in Figure 2. The farm plans for the points (Pl through P5) in Figure 2 are those given in Table 11 for different levels of capital. The first plan requires $3,028 of Operating capital. Enterprises included in the farm plan are 19.3 cows on an all hay ration and crOp enterprises of 15.7 acres of corn, h8.5 acres of hay, 15 acres of wheat and 19.3 acres of pasture. The limiting resource is the supply of June labor with a marginal value product of $lh.62 an hour. With capital limited to $3,028, the optimum plan leaves hl.S acres of land idle. Separate plans exist for any selected level of capital up to $3,028. The linear relationship indicated by the use of resources at a constant rate is shown by the slope of the lines in Figure 2. Enter- prises are increasing proportionally over this range of available capital. An increase in capital of approximately $127 is required to allow an increase in the dairy enterprise of one unit and to produce the necessary feed requirements for that unit. This first level of capital use ($3,028) represents a "corner" point at which there is a change in the rate of increase in returns. This combination of enterprises gives the highest rate of return of any of the possible alternative combinations. 53 At this corner point the program will be changed.to bring in the combination of enterprises with a lower rate of return than the previous combination. The available June labor supply has effect- ively limited the expansion of this combination of enterprises and so other enterprises now come into the farm plan. Those enterprises coming into the plan will more adequately utilize the remaining supply of limited resources. Through a more adequate use of these unused resources, returns will be increased but at a reduced rate. Table 11. Optimum farm plans for lhO acres of land.and 15 months of labor using stanchion housing Amount of Capital Ente rise rp $3,028 $3,523 $3,865 $u,237 $h,277 Cows - all hay ration 19.3 22.3 23.6 22.1 21.9 Wheat 15.0 15.0 15.0 15.0 15.0 Corn 2 15.7 18.2 6.1; 20.1 Baled hay h8.5 Chopped hay 56.0 59.2 55.5 55.1 Pasture 19.3 22.3 23.6 22.1 21.9 Winter grain 22.5 26.0 26.6 Corn selling (bushel) 1183 1312 Corn 1 21.6 Returns over variable 5 cost 5682 6389 6556 6658 6668 Fixed cost 3126 Net return _ 35h2 Limited resources and their _MVP to the farm June labor 1h.62 16.58 15.07 1h.99 13.97 July labor 2.19 2.59 51 Land 8:h6 5h Bushels 1200_ / 600. CORN sum/val l OL"""LV Acres l WINTER GRAINW - 20 .7 WHfAT ‘N /W' .10 _ _i _w 0 Acres _ 60.. ‘fl,..+s———-""+“‘v~——_;_+_‘ i2: HAY / 30r ‘ l ’7 | I 2" PASTURE 0 I ._ Acres F L l 20 . I . °' ‘ i Number 1 2O 10 u .. .l I . ll 1 3000 3500 hOOO h500 Amount of Operating Capital Figure 2. Optimum farm plans for lhO acres of land and 15 months of labor using stanchion housing 55 In the following discussion, all plans represent "corner" points for returns. Quite often the plans for low levels of capital represent underutilization of resources. This is true of the first plan. Only June labor and capital have been fully utilized while the other limited resources are in excess supply; Those plans which represent under-use of land may result in maximum return. There are areas of the state where underduse of land through summer fallowing is required for weed control and moisture conservation. However, this is not generally true for conditions in Southern.Michigan. With the small amount of operating capital represented by the first plan, returns are the highest possible when they are applied on the herd and fewer crop acres than by any other combination of enterprises in the available alternatives. As the supply of operating capital is increased from P1 to P2 (i.e. $3,058 to $3,523 in Table 11) the chopped hay enterprise replaces the baled hay enterprise. Chopped hay has a higher capital requirement but a lower labor requirement than baled hay. See Appendix Table h. Thus, an.increase in Operating capital brings in the chopped hay enter- prise at a higher level than the baled hay enterprise because of reduced June labor requirements and increased operating capital requirements. The number of cows increases to 22.3 to consume the additional supply of hay. Since June labor is restricting in plan 1 and 2, the next best use of labor comes from adding the winter grain enterprise. The result is a reduction in corn acreage and an increase in cows to 23.6, increase 56 hay acreage to 59.2 acres and pasture to 23.6 acres. The limiting factors become June and July labor and capital. Expanding the capital supply beyond the level of $3,865 requires a combination of enter- prises that utilizes labor more profitably than the enterprises already in the plan. A corn selling activity comes into the plan at a capital level of $h,237. Other adjustments are the reduction of cows by 1.5 units, pasture by 1.5 acres, and hay by 3.7 acres. The increase in grain acreage and reduction in cow numbers are both effective in increasing the grain selling activity; June and July labor are the limiting resources and land is still underutilized. The final plan requires $h,277 of capital. Beyond this point capital for operating expenses is no longer limiting. Land and labor are used in the most profitable way. Further additions of capital cannot give a more profitable reallocation of fixed resources and the return from.this plan represents the maximum attainable profit. This same plan will maximize return even with larger amounts of capital available providing all other restrictions hold. Any additional operating capital which was available would not be used. The final plan differs only slightly from.the plan preceding it. A.new labor distribution on corn enters the final plan with the results that the corn selling activity is expanded. The number of cows and acres of winter grain, hay and pasture are changed very little. The alternative of selling corn is much more important when a high level 57 of capital is available. The last $h0 increase in capital increased profit by $10 or a 25 percent return on the use of this last increment in operating capital. If capital is available at an interest rate of 6 percent, the farm operator could profitably borrow any amount of the required capital in order to follow the suggested farm.plan. The limiting resources in the final plan are June and July labor and land, June labor is returning $13.97 per hour at the margin. This would indicate the profitability of hiring additional June labor. A marginal return of $.51 for July labor and $8.h5 for an acre of land is low and it does not appear profitable to hire additional units of these factors. The graphical presentation in Figure 2 indicates that dairy production is relatively the most important enterprise especially for low levels of capital. At higher levels of capital the corn sell- ing enterprise comes into the farm plan and as capital is increased corn selling becomes relatively more important. As the level of capital increases, then more adequate labor untilization is necessary. The optimum plan is that plan which utilizes the combinations of limiting resources most profitably rather than giving the highest return to any one limiting resource. This interaction effect of the limiting resources finally specifies the optimum combination of enterprises in the farm.plan. The net profit for the final plan is $3,5h2. This is the return for all fixed inputs of land, labor, capital and management. Included 58 in capital is the value of machinery, equipment, buildings, livestock, feed and crop inventories and capital for operating expenses. Payment to management includes the cost of bearing risk. The second set of farm plans to be studied are those determined for situation l-B. A loose housing system.is used with restrictions of lhO tillable acres of land and 15 months of labor. All resource restrictions are the same as those in the foregoing discussion of a stanchion housing system. The only change has been the substitution of labor coefficients which differ for the two systems. See Table 9. Optimum plans are given in Table 12 for different levels of capital. A new farm plan is given for each capital level and is shown in Figure 3 as the points P1 through P7. For example, the plan for P1 in Figure 3 is 21.2 cows on an all hay ration, 15 acres of wheat, 17.3 acres of corn, 53.3 acres of baled hay and 21.2 acres of pasture. This is the plan corresponding to a capital supply of $3,27h in Table 12 and gives a return above variable cost of $6,103. The second corner point occurs at $3,870 of capital or P2 in Figure 3. Cow numbers have increased to 2h.9, chOpped hay enterprise has replaced the baled hay enterprise and the labor distribution on corn has changed. Total acres of crops were increased proportionally to produce the feed for an additional 3.7 cows. Returns above variable cost increased by $86k and June labor is still the restricting resource. As capital is increased from P2 to P3 in Figure 3 (i.e., $3,870 to $h,263 in Table 13) the winter grain enterprise comes into the plan. 59 The production of a winter grain is substituted for some of the corn enterprise. At P3, land and June labor are used up. Hence, expanding the farm plan beyond the capital level at P3 requires a combination of enterprises that utilize labor more efficiently; In.this plan all feed requirements are produced on the farm. The marginal return to June labor is $lh.38 an hour and the marginal return to land is $12.68 an acre. Increasing capital to $h,672 (i.e. point PL in.Figure 3) brings the hay'buying activity into the farm.plan and fully utilizes the supply of August labor. Buying hay allows a reduction of 2.3 acres of hay and the additional acres of land are then used.to produce grain for the dairy cows. The number of cows is increased by 1.1 units to a level of 27.6 cows with an increase in returns of $2h. The next farm plan greatly increases the required amount of operating capital to a level of $6,190. The alternative of buying hay and custom.harvesting of hay requires large amounts of capital but releases additional labor for grain production and herd care (see point P5 in Figure 3). The custom.hay harvesting enterprise gives 2 tons of hay and .3 acres of pasture. As a result, a small amount of pasture is supplied.by the custom.hay harvesting activity. Hay buying is increased to 56.h tons of high quality hay and.at $30 a ton requires $1,692 of capital. The two remaining farm plans again require substantial increases in operating capital requirements. Increased purchase of hay and use of custom.hay harvesting account for the major increase in capital 60 requirement. Oat production comes into the plan at $8,025 capital level and corn selling at the $9,99h capital level. fully utilized in.these two plans. Only May and October labor is Labor is more underutilized at a capital level of $8,025 and.in the final plan May and August labor are underutilized. Table 12. thimum.farm.plans for lhO acres of land and 15 months of labor using loose housing Amount of Capital Enterprise , $3,27h $3,870 $h,263 $h,672 $6,190 $8,025 $9,99h Cows - all hay ration 21.2 2h.9 26.5 27.6 31.6 36.h 39.9 ‘Wheat 15.0 15.0 15.0 15.0 15.0 15. 15.0 Corn 2 17 o 3 28 o 8 Corn 1 20.3 7.7 8.2 10.5 l3.h Baled hay 53.3 Chopped hay 62.6 66.5 6h.2 39.6 9.6 Pasture 21.2 2h.9 26.5 27.6 2h.h 20.1 26.3 ‘Winter grain 2h.h 25.1 26.7 18.7 12.9 Boy'buying (ton) 12.7 56.h 109.3 168.9 Custom.hay and pasture 23.8 52.9 h5.3 Oats 9.9 11.6 Corn selling (bu.) 720 Return over vari- able cost 6103 6967 7181; 7208 7270 73% 7398 Fixed cost 3580 3580 3580 3580 3580 Net return 360h 3628 3690 376h 3818 Limited resources and their MVP to the farm June labor 15.79 18.18 lh.38 8.82 17.6h 15.81 15.60 Land 12.68 .82' 2.6h 2.11 3.66 August labor 9.h9 1.88 0 July labor .7b .91 2.00 April labor 1.07 0 September labor .93 0 October labor .39 61 Bushels 1000 CORN 5£LL l l ' ol- [Half l l | [/I Tons l I I r I 200 100 HAY BUYING I M O, .41 . l Ac es l I I I ' '7‘ 20 10 CA T5 Acres 60 / “0 HA Y-w 2: ...—w—PMfiQRE' Acres ' ..... -"'WINTER GRAIN 20"\/\/}'!EAT'§7 x --- ”w 10 . a [_j O | v I ' Acres 30 , 20$ CORN 10. 0 .! Number to 30 20 .. COWS Iii/Ill L1 .1 l 2000 hOOO 6000 8000 10,000 Amount of Operating Capital. _L.-__ Figure 3. Optimum.farm plans for 1&0 acres of land and 15 months of labor using loose housing 62 The two situations discussed above had the same resource restric- tions but differed in.1abor requirements for the dairy enterprise. The effects of incorporating new technology available in a loose housing system.increases the relative importance of the dairy enterprise as capital supplies are increased. ‘A loose housing system.is effective in reducing the labor requirements for the dairy herd. This reduction in labor is enough to enable the dairy herd to compete for labor and capital more effectively than the use of a stanchion housing system. In.both situations grain production.increased in importance relative to forage producing enterprises at higher capital levels. The use of improved production techniques and heavier fertilizer applicati ons would improve farm income substantially. Under the assumed production possibilities, forage production is an important limiting factor on increases in farm income. In.summary, two important effects of changes in operating capital on the farm organization are observed. At low levels of capital supplies, land is not fully'utilized. Farm Operators with severely limited operat- ing capital have the choice of spreading the available capital over a larger number of acres or leaving some acres underutilized and applying more capital on the acres that are utilized. The question of the best procedure to follow cannot be answered from.the results of this study because only one level of capital application was considered. Labor is also underutilized when.the supply of capital is limited. In the above situations, June labor is the most limiting labor resource. 63 Until capital supplies are increased, the supply of June labor and capital are effective in restricting returns. The use of a loose housing system.improves the utilization of labor as indicated.by a comparison of the final plan of the two situations. The restricting resources using a stanchion housing system.were June and July labor. For the loose housing system,.kpril, June, July, September and October labor are fully'utilized. The implications of this are examined.in a later section. Restrictions on operating capital result in the underutilization of other resources and.thus limits the maximum.possible return. The use of more operating capital allows a more adequate utilization of other resources and a higher return. Effects of Increasing_Farm.Size Farm size is a second limiting factor in enterprise organization and investment in land represents an important part of total farm investment. The livestock enterprise competes with cash crops for land to produce feed and for labor and operating capital supplies. The acquisition of additional land either through purchase or rent— ing is quite often one of the alternatives considered by the farm operator. Two important questions to be considered are: (1) what enterprise organization would maximize the returns if additional land were added, and (2) how much increase in returns would be realized? With the answer to these questions the Operator is in a better position to determine if it will pay to buy or rent additional land. - . . . . . . ' . ' ._ . . - _ - - . . . ' . ' I .. , . - _ . ' _ - '. ' '. C n- — ... . ' .. u ._ _ ' _ . _ -' . . - . I . I u . I. _ . I . . ' I ‘ . , . .' _ l u. I .. ' I I J- '- I . I. . . ‘ . I' - . . n _ _ . . . . _ . _ . . . . . 6h The farm.plans given in.Table 13 were computed for three different amounts of land (210, 280, and 350 acres), while holding the amount of labor constant at 27 months and using two capital levels of $8,600 and unlimiting capital. ‘5 stanchion housing arrangement is used in computing these plans. After studying the effect of changes in farm size using a stanchion housing system a loose housing system will be employed in determining the optimum.farm.plans to study the same set of relations ships. Relationships are expected to vary with changes in production possibilities. ‘When operating capital is limited to $8,600, the optimum.p1ans for different amounts of land give a different cropping program while the livestock program.is quite similar. (See Table 13). The number of cows changes slightly with cOW'numbers declining by only 1.6 units for the larger acreage. The important difference is in crap enter- prise organization. With $8,600 and 210 acres of land, crop production fully utilizes the total acres of land. The cropping program.includes 21 acres of wheat, 58.6 acres of corn, 95.2 acres of hay, h0.5 acres of winter grain, l.h acres of oats and 26 acres of pasture. Corn is produced ‘using both labor distribution alternatives and.using custom.harvesting for 35.8 acres of hay. The labor supply is fully utilized except for the months of May and October-November 18 labor. The Optimum farm plan with the addition of 70 acres of tillable land gave a quite different enterprise organization. The difference 65 is primarily in.the importance of individual craps already in the farm plan for 210 acres of land rather than the introduction or substitution.of’new enterprises. The livestock enterprise was reduced by 1.6 cows while the corn selling activity expanded.by' 953 bushels of grain sold. Table 13. Optimum farm plans for three different farm sizes of 210, 280, and 350 acres of land and 27 months of labor using stanchion housing. Acres of land Enterprise $8,600 Operating Capital Unlimiting Operating Capital ' 210 280 350 210 280 350 Cows - all hay ration 37.0 35.h 35.h 37.0 30.7 29.? ‘Wheat 21.0 28.0 35.0 21.0 28.0 35.0 Corn 1 11.6 68.2 h2.2 11.6 95.0 111.2 Corn 2 h7.0 2.8 29.1 h7.0 l7.0 Chopped.hay 59.h 88.8 88.7 59.h 7h.8 22.3 Custom.hay and pasture 35.8 35.8 72.8 Winter grain no.5 51.0 h0.5 51.5 57.2 Pasture 26.0 35.h 35.h 26.0 30.7 7.9 Corn selling (bu.) 3h79 5110 5059 3h?9 78h6 10,629 Idle or unused land (acres) 0 2.3 72.1 0 0 0 Amount of operating capital 8593 9698 11,209 Return.over variable cost 11,663 12,108 12,226 11,663 12,21u 12,7h5 Limiting resources land X XL X X April X X X X May X June X X X X X X July X X X X X X August X X September X X October-Nevember X X 66 Only one crop enterprise drapped out of the farm plan when land was increased from 210 acres to 280 acres. Custom hay harvesting is replaced and all hay is produced by the chopped hay enterprise. With land limited it was more profitable to keep an additional 1.6 cows and use custom harvesting of hay. With an increase in land for crop production a mare profitable utilization of resources resulted from reducing the number of cows and spreading the available labor over a larger number of crop acres. In comaring the two plans, the plan for 280 acres of land includes an increase of 7 acres of wheat, 12.11 acres of corn, 3 acres of hay and pasture, and 9.5 acres of winter grain for a total increase of 67.7 acres of crops. The shift is to a higher grain rotation when more land is available increasing the relative importance of grain crops. The distribution of labor between enterprises is changed when lmd resources are added. Using 210 acres of land, corn 2 enterprise with a labor requirement of 14.8 hours in May is used to produce the major portion of corn while the corn 1 enterprise (labor requirements of 1.6 hours in April and 3.2 hours in May) is used when land is not limiting. Utilization of labor is more critical with limiting supplies of capital and land. When the supply of land is not limiting, returns may be increased more by better utilization of the excess land supply than by more adequate utilization of labor. However, once labor for a given month and capital are limiting, any additional increase in returns must come from a more adequate utilization of labor in the 67 remaining month. This is shown by the limiting resources for each farm plan. For 210 acres of land only Hay and October-November 18 labor are in excess supply. With 280 acres of land all labor supplies except June and July labor are in excess supply. The change from 280 acres of land to 350 acres of land is now examined. With $8,600 operating capital and 350 acres of land, the optimum farm plan would be the same as the plan for 280 acres of land because land is not a limiting factor in either situation. However, requiring the plm to include wheat acreage at the maadnmm level allowed by law, a different farm plan is obtained. A comparison of the farm plans for 280 and 350 acres of land given in Table 13 illustrates the way in which optimum farm plans may change when one enterprise is changed. The major changes made in the new plan are substitution of cats for winter grain and a new distribution of corn production between corn 1 and corn 2. Cow numbers stay the same, total production of forage does not change and the total tillable acres is increased by .2 of an acre. The net result of producing 7 additional acres of wheat is to increase returns by $116 and to replace a winter grain with a spring grain. Also, April labor is fully utilized. Returns were increased from $11, 663 to $12,108 when 280 acres of land were used or an increase of $1416 for the 70 additional acres. This is a return of $6.35 an acre for land which is much below the reservation price of $25 per acre. The figures presented illustrate 68 that cultivation of more of a given type of land adds little to income. In a later section changes in labor, capital and technology in addition I to land will be allowed and the change in returns compared. In the three plans discussed above land resources were under- utilized in two of the plans. Operating capital was the limiting factor in the underutilization of land. The three farm plans given in Table 13 for unliniting operating capital do utilize the available land supply. These plans will be studied to determine the effect of increasing land when capital supplies are large enough to allow full utilization of the land resource. Increases in returns resulting from adding land and capital will come from the use of this additional capital and full utilization of land as well as a more adequate employ- ment of available labor. With unlindting capital and 27 months of labor, the Optimum farm plans for 210, 280 and 350 acres of land provide for the full use of land resources. (See Table 13). The number of cows declines as more land is used. in increase from 210 acres to 280 acres of land results in a 6.3 unit decrease in cow mmber. The addition of another 70 acres for a. total of 350 acres reduces cow numbers by only 1 unit, indicating a decreasing rate of change. The number of cows is about the same for the latter two plans but full use is made of the available land. As more land is used, cow numbers reach a maxim and then are reduced to a level of 30 cows. Under a stanchion housing system and high labor to land ratios, manmum returns are obtained with a larger number of 69 cows. With smaller labor to land ratios returns are higher where the number of cows is reduced and the labor used in crOp production. However, the number of cows will not drop to zero but remains at some level greater than zero. The optimum enterprise organization provides a more adequate use of available labor with both a limited livestock program and a high grain rotation. The important changes in the crOpping program as acres increases are increases in acres of corn, winter grain, custom hay and oats. Accompanying the decrease in cow numbers is a decrease in hay and pasture requirements. The use of custom.hay harvesting releases April, iMay, June, and July labor which is used to produce larger amounts of grain. The number of acres in grain for the three plans are 100.5 acres, lh6.5 acres, and 211.9 acres with corn production increasing in relative importance. Returns above variable cost for the plans with unlimiting capital are $11,663, $12,2lh, and $12,7h5 respectively; Even with increases in operation capital (see Table 13) the rate of return for increases in acres of land is low. The previous plans were derived for a stanchion housing system. The use of a loose housing system decreases the labor input coefficients for the dairy herd. This decrease in labor requirements increases the relative efficiency of the dairy enterprise in the use of these resources. The effects of changing the housing system.and land resources are examined in this section. Other assumptions and restrictions for the plans with loose housing are the same as those for stanchion housing. Optimum.farm.plans for a loose housing system are given in Table 1’40 These plans are computed for 210, 280, and 350 acres of land with 27 months of labor and two levels of operating capital of $8,600 and unlimiting capital. Table 1h. ‘Optimum farm.plans for three different farm sizes of 210, 280, and 350 acres of land and 27 months of labor using loose housing. 70 Acres of land Enterprise $8,600 Operating Capital Unlimiting Operating Capital ‘ 210 280 350 210 280 350 Cows - all hay ration h9.5 50.8 50.2 80.3 65.1 55.9 Wheat 21.0 28.0 35.0 21.0 28.0 35.0 Corn 1 h0.3 h.3 8.h 32.3 12.0 Corn 2 78.6 Baled hay 25.h 8.5 Chopped hay 73.8 86.1 89.5 33.0 5.6 Pasture h9.5 33.6 3h.8 79.5 23.h 21.1 Hay buying (ton) 63.h 396.0 lhh.8 1h2.3 Custom corn 2 33.2 Custom.hay and pasture 57.8 51.0 2.5 138.9 115.8 Oats 55.2 Sh.6 29.2 h8.9 Winter grain 10.0 2.h h2.8 50.6 Corn selling (bu.) 6293 Idle or unused land (acres) 0 5.0 7h.3 0 0 0 Amount of operating capital 19,632 13,779 15,83h Return above variable cost 12,357 13,hh3 13,55h 13,h70 13,893 lb,201 limiting resources Land, X X X X April labor X X X X May labor X June labor X X X X X X July labor X X X X September labor X X October-Nevember labor X 71 ‘Dairy is the major enterprise coming into the farm plans with capital supplies limited to $8,600 (see Table 1h). With 210 acres of tillable land the plan includes h9.5 cows, purchase of 63.h tons of hay and crops needed to support the livestock enterprise. The craps include 21 acres of wheat, h0.3 acres of corn, 99.2 acres of hay and h9.5 acres of pasture. Total acres of land were utilized with limiting factors of land, June labor and capital. The plan for 280 acres of land included 50.8 cows, 28 acres of wheat, h.3 acres of corn, 86.1 acres of chopped hay, 57.8 acres of custom hay, 55.2 acres of cats, 10 acres of winter grain, and 33.6 acres of pasture. With additional land all feed is produced on the farm, small grain acreage is substituted for corn and custom hay harvesting is employed. The restrictions on capital do not allow full utilization of land and 5 acres of land are unused. The limiting factors are April, June, and July labor. The plan for 350 acres of land is quite similar to the previous plan for 280 acres. The small differences are the result of in- creasing wheat to 35 acres. The limitations on capital do not make it feasible to use more land. ‘With capital limited to $8,600, 275 acres of land is all that is utilized. A comparison of the plans for 210 acres and 280 acres of land ' with $8,600 operating capital examines the effects on farm organization and returns of an increase in land. The major difference in farm organization is in grain and forage production. With limiting supplies 72 of land and capital, grain is produced by a corn enterprise and some forage is purchased. With additional land, a higher rotation of small grain.is used and custom harvesting of hay is employed and livestock numbers change only slightly. Returns above variable cost are greater with 280 acres of land. Going from 210 acres to 280 acres increases returns from.$l2,357 to $13,hh3 for a change of $1,086. This difference in.returns results from using a larger number of acres of land and a better utilization of labor. The use of additional land returns $15.51 fer each acre added. ‘With a limitation.on capital the dairy enterprise changes only slightly; However, when capital is unlimiting the optimum.plans for 210, 280, and 350 acres of land include quite different proportions of dairy and grain enterprises. These plans are given in Table 1h for 27 months of labor and unlimiting capital. For the three different acreages the number of dairy cows decreases as acres of land are added. Cow numbers are 80.3, 65.1 and 55.9 respectively. The decrease in cow numbers is at a decreasing rate. The results of changes in cow numbers with increased acres of land is reflected in grain and forage production. With smaller acreage a large amount of hay is purchased and fed to a larger number of cows. ‘With.increases in acreage, cow numbers are reduced and grain selling is substituted for cows. Grain production varies in the three plans. ‘With a limit of 210 acres of land, 65.5 acres of corn is produced with a total of 73 33.2 acres employing custom.harvesting. Increasing the total acres to 280, grain production changes drastically. Only 12 acres of corn is produced. The remaining requirement is produced‘by the cats and winter grain enterprise with 29.2 acres of cats and h2.8 acres of winter grain. Further, increasing the number of acres to 350, gives a quite different grain production program. Corn acreage is increased to 78.6 acres, cats to h8.9 and.winter grain increased to 50.6 acres. This plan includes the grain selling activity with 6,293 bushels of grain seld. Forage production varies quite widely in the three plans. With 210 acres of land, hay buying is a major activity with 396 tons of hay purchased. The remaining forage requirement is supplied'ay producing 8.5 acres of baled hay, 33 acres of chopped hay and 2.5 acres of hay using custom harvesting. The high investment in harvesting ‘ equipment makes it unfeasible to have both baling and chopping equip- ment, so chopping is suggested for the total acres of hay including the 2.5 acres of custom harvesting. With increased land more custom harvesting is employed and a larger part of the hay requirement is produced on the farm. 'With 280 acres of land, 138.9 acres of hay is produced using custom harvesting and 5.6 acres chopped. The 5.6 acres should be custom harvested to reduce investment in harvesting equipment. The plan for 350 acres of land.uses custom harvesting for all hay. As total acres are increased, cow numbers have been decreased and land needed for forage production has decreased. These acres have been 7h used to produce more grain and with 350 acres of land, grain selling comes into the plan. Capital requirements are greatest with 210 acres of land. The large ammmnt of capital is required to purchase hay. .Hith 280 acres of land, hay buying is reduced from 396 tons to 1hh.8 tons with a corresponding reduction in the capital requirement. The return above variable cost fer the plans with.unlimited capital increase at a decreasing rate. The additional return for an increase of the first 70 acres is $h23 and for the second 70 acres the additional return is $308. This increase in return comes from.a more adequate utilization of labor, additional acres of land and use of a larger amount of capital. Effects cf’Increasiggthe Labor Supply Labor is an important factor on dairy farms. The productivity of labor is not independent of the amounts of land and operating capital available for the farm Operation. The assumption that farm labor is available only in one man units is realistic. Situations 2-A and 3-A.for stanchion housing and 2-B and 3-B for loose housing will be referred to in studying the effects of increasing labor supplies. 1 Placing limits on the amount of labor for use on the farm is more difficult than it appears at first glance. In the study the supply of labor was computed on the basis of a 60-hcur week. This assumption about labor may held during normal periods but during rush 7S periods additional amounts of labor may be Obtained from.longer hours by the operator and his family and'hy'shifting labor from period to period. To a lesser degree than in the past, operators often exchange labor with their neighbor or relatives to solye bottle- necks in the labor supply during rush periods. An individual operator may also be able to hire additional labor in the amount and quantity necessary. However, this possibility seems unlikely for an.entire area. A number of labor alternatives are provided in the programming problem. First, two separate labor distributions were considered for corn.production. Second, both baled hay and chopped hay activities were included as alternative activities with different labor require- ments. And lastly, use of custom harvesting was considered as a possibility for all crap enterprises except pasture (see Appendix Table h) . In.this section.the effect of increasing the amount of labor will be examined. The limiting resources are 210 acres of land and $6,500 operating capital with the supply of labor at 15 months and 27 months . Labor is limited for the months of.April through November 19. Labor requirements for the dairy herd are reduced by'S percent when the labor supply is increased to 27 months to allow for an increase in livestock numbers which is expected to reduce the amount of time required for each animal (see Table 9). 76 Optimum farm plans are given in Table 15 for labor supplies of 15 and 27 months, 210 acres of land and $6,500 operating capital using stanchion housing. By comparing the two plans one can determine the effects of farm organization and profit when the amount of labor is changed. Table 15. 0ptimum.farm plans for two different labor supplies of 15 and 27 months of labor, 210 acres of land and $6,500 operating capital using stanchion housing. Months of Labor Ente rise rp 15 27 Cows - all hay ration. 17.0 hl.2 Wheat 21.0 21.0 Corn 1 66.5 h.9 Corn 2 6.6 12.6 Chopped m 103 . 3 Pasture h1.2 Winter grain 38.1 Corn selling (bu.) 617k Custom hay and pasture 58.5 Oats ' 27.0 Idle or unused land 19.3 0 Return above variable cost 7281 ll,h15 Limiting resources June labor X X July labor X September labor X The p1an.for 15 months of labor includes 17 cows, 21 acres of wheat, 73.1 acres of corn, 58.5 acres of hay using custom harvesting and 6,17h bushels of grain sold. Increasing the supply of labor by one full man unit has the effect of increasing cows to hl.2 with all grain fed on 77 the farm. Custom.harvesting of hay is discontinued and forage to meet feed requirements are produced by using farm labor. The best use of additional labor is made by keeping more cows and producing the feed for these cows. Again the interaction effect of different amounts of limited resources is evident. With labor limited to 15 months, grain production to be sold as a cash crcp is relatively as important as the dairy enter- prise. The use of more labor increases the relative and absolute impor- tance of the dairy enterprise. Also, a large number of acres of land is shifted from grain crops to forage crops. Producing grain to be sold required a total of 111.2 acres of corn and winter grain and only 58.5 acres of hay. The increase in importance of the dairy herd in the new plan reduced the amount of land in grain to hh.5 acres with 27 acres of this in cats. Thus, there is an entirely different crOpping program for the two situations. The results of these plans indicate that for a given acreage an increase in labor will be used to keep more cows. Also, the reduction of labor requirements per animal for a larger herd will allow a more efficient use of labor by the dairy enterprise and will have a tendency to increase the relative importance of the dairy enterprise. Land is not fully utilized with 15 months of labor. However, the farm.plan for 15 months of labor more fully utilizes the amount of labor than when 27 months of labor is available (see Table 15). In the first plan, June, July and September labor are fully utilized while only'June labor is fully utilized in the second plan. 78 There is a large increase in returns above variable cost. The plan.for 15 months of labor returns $7,281 and the plan for 27 months of labor returns $1l,h15. This is an increase of $h,13h when a second man is added. The cost of an additional full-time man is approximately $3,000 leasing $1,13h to cover fixed cost on additional cows, housing and storage facilities. The use of a loose housing system reduces the labor requirements for the dairy herd. Optimum.farm.p1ans for a loose housing system are given in Table 16. The restrictions on land, labor and capital are the same as those for the stanchion housing system except for changes in the labor coefficients in caring for the dairy herd. ‘With $6,500 capital returns are again maximized for 15 months of labor by a com- ibination of the dairy enterprise and selling grain. The farm.p1an includes 21.6 cows, 21 acres of wheat, 52.8 acres of corn, 38.5 acres of winter grain, 15.3 acres of cats, 7b.? acres of hay using custom harvesting and selling $h,625 bushels of grain. Land is not fully utilized with 8 acres remaining idle or unused. Increasing labor to 27 months gives a quite different farm plan. The number of cows increased to h3.7 with 21 acres of wheat, 35.6 acres of corn, 28.6 acres of baled hay, 81.1 acres of chopped hay and h3.7 acres of pasture. The most important changes are discontinuing grain selling and custom harvesting of hay. With additional labor it becomes more profitable to produce the feed using farm.labor and to milk more cows. Baled hay and chopped hay are both included in the farm plan. 79 To keep down the investment in harvesting equipment it is suggested that all hay be harvested as chopped hay. Table 16. Optimum farm plans for two different labor supplies of 15 and 27 months of labor, 210 acres of land and $6,500 operating capital using loose housing. Months of Labor Enterprise 15 27 COWS "' 83.1 W ration 2106 1‘30? 'Wheat 21.0 21.0 Corn 1 8.0 35.6 Corn 2 hh.5 Baled.hay 28.6 Chopped hay . 81.1 Pasture h3.7 Winter grain 38.5 Custom.hay and pasture 7h.7 Oats 15.3 Grain selling (bu.) h625 Idle or unused land (acre) 8 0 Return above variable cost 7700 12,116 Limiting resources may labor X June labor X X July labor X September labor X Only June labor is fully utilized when 27 months of labor are available. With labor more limited at 15 months, May, June, July and September labor is fully utilized. Thus the interaction between land and labor is such that for a given amount of capital and land, the use of additional labor may result in underutilization of some of the additional labor. d w. . .' - . . . . - _ I . -. ..---.. . . . .4 ..l. u.' : . .. .. '0'1' 1 _ ". L .I .- . _._ J I I.‘ \ . -. . , . . '. I _ .... . . . .. .1 ".... . _L. I . —- I . '. _,,- .- ' --‘ LL- " o .. . . ' ,. .5" _ . . J' L. I“... 3.:- .- . ._: a. :“ a- .'a'. 80 Effects of CW A.direct attempt has been made in the previous sections to avoid making comparisons based on the type of housing. Rather, the relation-' shipsunder discussion were examined with resPect to changes in capital, labor and land. The effects of changing the type of housing result from.changes in the labor requirements for caring for the herd. The effects of additional investments in buildings and milking equipment are not considered in the programming problem. However, additional capital investments must be considered in the overall decision to change housing systems and will be discussed for the plans in this section. There are numerous important considerations for the operator deciding on the kind and combination of buildings and equipment to install, Information of this kind is available in many'forms and is helpful in studying the various aspects of the problem. The Operator will find it most helpful to get additional observations on methods of handling particular operations, the merits of different types of equip- ment and building layouts and, perhaps most importantly, the coordina- tion and management difficulties that arise when employing a new technology such as loose housing. 0ptimnm.farm plans are given in Table 17 for lhO acres of land, 15 months of labor and two levels of operating capital for both a stanchion housing system.and a loose housing system. With $3,870 of operating capital the farm plans are quite similar for the two types 81 of housing. Grain and forage are produced and fed to the dairy herd and.returns are maximized by having the largest number of cows that can be fed from the feed supply. The number of cows is 23.6 and 2h.9 for stanchion and loose housing respectively; Grain is produced by the corn and winter grain enterprise under a stanchion system.and.by the corn enterprise alone when a loose housing system is used. The large change occurs when capital supplies are unlimiting. The optimum.plans are quite different with the use of more operating capital. In both cases the use of additional capital allows a more adequate use of land with a grain selling enterprise included in the plan. Selling grain is relatively more important when stanchion housing is employed. ‘When capital is unlimited the Optimum.plan includes 21.9 cows and 39.9 cows for stanchion and loose housing respectively. The feed required for the large number of cows in the case of loose housing cannot be most profitably produced on lhO acres of land and so 168.9 tons of high quality hay are purchased. This large expenditure for feed increases the operating capital requirement. The difference in operating capital required for the two plans is an increase of $5,717 ($h,277 versus $9,99h) for loose housing. The purchase of hay accounts for $5,067 of this increase in operating capital. Several other important alternatives were available for producing forage in corn silage and grass silage activities. However, these activities failed to come into the farm plan because of higher labor requirements. Custom harvesting of these activities was also considered. The results indicate 82 that purchasing hay and keeping a larger number of cows is the most profitable farm plan. Table 1?. Optimum farm plans for lhO acres of land.and 15 months of labor using stanchion and loose hous- ing systems and two levels of capital. Stanchion Housing Loose Housing Enterprise $3,670 of Uhlimiting $3,370 of Unlimiting Capital Capital Capital Capital Cows - all hay ration 23.6 21.9 2h.9 39.9 Wheat 15.0 15.0 15.0 15.0 Corn 1 21.6 20.3 Corn 2 6.2 28.8 Chopped hay 59.2 55.1 62.6 Custom.hay and.pasture h5.3 Pasture 23.6 21.9 2h.9 26.3 Winter grain 22.5 26.6 12.9 Oats 11.6 Hay buying (ton) 168.9 Corn selling (bu.) 1312 720 Return above variable cost $6,556 $6,668 $6,967 $7,398 Fixed cost .3,126 .3,126 .3,126 . 3,126 Net return 3,h30 3, SM 3, 387 3,798 Operating capital requirement h,277 9,99h Limiting resources hmeldmr X X X X July labor X X X April labor X September labor X October-November labor X Land X X Additional investment required for a loose housing system Parlor-pipeline milker $3,300 $3,300 Milking equipment 1,500 .1,500 Housing 2,000 2,000 Hay storage 500 Total $6,800 $7,300 n . . . . , , . 1 _ _ _ ( C l C C Q _ _ . a ‘ . Q C a o u _ u a . w a a ._ , . 4‘1. 83 A.more adequate utilization of fixed factor is obtained with a loose housing arrangement. Capital is not a limiting factor in the final plan and labor is fully utilized in.five of the seven months in which labor is limited. In addition, land is also fully utilized. In.contrast, only June labor, July labor and land is fully utilized in the plan for a stanchion arrangement. Thus, the interaction of a larger amount of operating capital and lower labor requirements in caring for the.dairy herd give a more adequate utilization of fixed factors. Returns above variable cost are higher for the loose housing system. 'With capital limited to $3,870 and the fixed cost subtracted, the net return for loose housing is $h3 less than the net return from a stanchion housing system. 'With.unlimiting operating capital the optimum.plan for a loose housing system has a return of $7,398 as compared to $6,668 for stanchion housing or a difference of $730. The net return is $258 greater after subtracting fixed cost. This amount is the payment for interest on investment in new buildings, equipment, livestock and Operat- ing capital. With land and labor limited, income is increased only by a small amount if the housing system.is changed and is even reduced if the amount of operating capital is limited. In.the following discussion complementary quantities of land.and labor will be increased to determine the profitability of adding these resources. Additional capital investments required to change to a loose housing system, while holding land and labor constant at lhO acres and 8h 15 months respectively, are given in Table 17. Although conditions will vary on farms of the same size, the additional investment will be in the range of $7,000 for a change to a loose housing system. It is assumed.that the existing buildings will be modified and a bulk milk tank is now in use on the farm. So an operator with 20-25 cows will need to inrest approximately $3,300 in a new building for a milking parlor and milkroom, $1,500 in.new parlor equipment and $2,000 for additional housing. These facilties have the capacity to allow for expansion to h0~50 cows with.an additional $2,000 investment in housing and $500 in hay storage. In.genera1, the results of the farm.plans considered above suggest that changing to a loose housing system.and holding constant the amount of land and labor will not give large increases in net return. The operator planning to begin an expansion program without additional land and labor may find it is not profitable. The previous discussions have indicated the way in which optimum farm plans are related to the supply of fixed resources of land, labor and operating capital for both types of housing. The most profitable organization of enterprises, or allocation of resources, will also depend upon the input-output relationships of crops and livestock. The change to a loose housing system.will change the labor requirements in caring for the dairy herd and will affect the most profitable combination of enterprises and the level of returns. Labor accomplishments will be higher with a milking parlor and loose housing. With a given supply of labor a larger number of cows and acres of land may be handled. Willi -II 85 Optimum farm plans are given in Table 18 fer both stanchion housing and loose housing systems with unlimited operating capital. Two levels of labor are combined.with 210 acres of land making the combinations of 210 acres of land and.15 months of labor and 210 acres of land and 27 months of labor. A different amount of operating capital is required for each combination of housing, land and.labor. These plans will be studied to determine changes in the number of cows, operating capital, returns and additional capital investment required for a loose housing system when compared to a stanchion housing system. ‘Hith 210 acres of land and 15 months of labor, the optimum plans for unlimiting capital are quite similar for the two housing systems. The number of cows differ by only 3.5 animal units with the higher number of 20.5 cows for the loose housing system. Custom.harvesting of hay is used in the hay producing activity. The small acreage in ch0pped hay should be combined with the custom hay harvesting activity. Oat production comes into the plan for loose housing with the grain selling activity relatively important in both plans. A total of 111.2 acres of feed grains are included in the Optimum.plan for stanchion housing while the other plan includes 118.3 acres of feed grains. With a stanchion system, 19.3 acres of land is unused or idle with the limited amount of labor being used more profitably by keeping more cows. The level of operating capital required is greater for a loose housing system. The amounts of Operating capital are $6,h6l and $6,678 for stanchion and loose housing respectively. The reduction 86 in labor requirements enables the operator to keep an additional 3.5 cows and cultivate the total 210 acres of cr0p land with the given amount of labor. By doing this the requirement for operating capital is increased. The additional investment required to change to a loose housing system.is $7,700. Of this, $3,300 is required for a building to house the milking parlor and milk room, $1,500 for additional milking equipment, $2,000 for housing and $900 for livestock. Existing buildings would have to be utilized for feed storage and housing. The additional investment of $7,700 represents the amount needed to make the change to a loose housing system and does not allow for housing and feed storage facilities to expand the herd size above 25 cows. However, the milking parlor and milking equipment have the capacity for handl- ing up to 50 cows. The return above variable cost for the two optimum plans are $7,281 for stanchion housing and $7,732 for loose housing. The net returnsafter deducting fixed costs are $3,932 and $3,981 reSpectively; Under the two plans the larger return above variable cost is earned with a loose housing system. However, the increase in fixed cost of repair and depreciation on the additional investment required for a loose housing system.more than offsets the increase in returns. Thus, the change to a loose housing system is not profitable for the farm operator with 210 acres of land and only 15 months of labor. Table 18. Comparison of optimum farm.plans for stanchion housing and loose housing systems with unlimited operating capital. Stanchion Hous‘ Loose Housin Enterprise Land-acres 210 210 210 210 Labor-months 15 27 15 27 Cows - all hay ration 17.0 37.0 20.5 80.3 Wheat 21.0 21.0 21.0 21.0 Corn 1 66.5 11.6 31.1 32.3 Corn 2 6.6 h7.o 32.u 33.2 ChOpped hay 1.9 59.h 2.3 hl.5 Custom.hay and.pasture 56.6 35.8 68.3 2.5 Pasture 26.0 79.5 Winter grain 38.1 no.5 h0.h Oats 1.h 1h.h Corn selling 617k 3h79 5h?l Hay buying 396 Operating capital $6,h6l $8,593 $6,678 $19,632 Return above variable cost 7,281 11,663 7,732 13,h70 Fixed cost 3,300 h,9h0 3,800 6,120 Net return 3,981 6,723 3,932 7,350 Limiting resources Land X X X April labor X IMay labor X X hmelflwr X X X X July labor X X X August labor X X September labor X X X OctOber—November labor X Additional investment required for a loose housing system as compared to a stanchion system for the same amounts of land and labor Parlor-pipeline milker Milking equipment Bulk tank Housing Hay storage Livestock Total $3,300 1,500 2,000 900 7,700 su,600 .3,000 1,500 5,000 2,800 23.29.92 28,900 88 The optimum farm plan for the operator using stanchion housing with 210 acres of land.and 27 months of labor is 37 cows, 21 acres of wheat, 58.6 acres of corn, 59.h acres of chopped hay, 35.8 acres of hay using custom.harvesting, 26 acres of pasture, and hl.9 acres of winter grain. Approximately 3,h80 bushels of grain would be sold, making grain production a relatively important enterprise. The optimum farm plan for loose housing uses limited labor most profitably by keeping a larger number of dairy cows. The number of cows increases from 37 to 80.3 for an increase of h3.3 cows. All crops except wheat are fed on the farm and an additional 396 tons of hay is purchased to meet feeding requirements. A total of 65.5 acres of corn is produced together with hh acres of hay, and 79.5 acres of pasture. The grain selling activity is not included in the optimum plan (see Table 18). The amount of operating capital required for the two plans is $8,593 for stanchion housing and $19,632 for loose housing. Of the latter amount, $11,880 is required to purchase additional hay at $30 a ton and $7,752 for crop and livestock expense. Since the purchase of hay can be made on a month-to-month basis during the winter months when the heavy feeding of hay occurs, the amount of Operating capital needed on the basis of a full year is greatly reduc- ed. With hay purchases spread over a 6-month period, approximately $2,000 a month is required for this purpose. Comparable operating capital requirement figures under the above considerations are thus 89 approximately $8,593 and $9,750, or $1,157 higher for the optimum plan using loose housing. Expanding to 80 cows means a large investment in a milking parlor, housing and feed storage. A total of approximately $29,000 would need to be made in new investments. A new parlor and milkroom will require $14, 600 for the building and $3,000 for additional milking equipment. A larger bulk tank will cost an additional $1,500 and housing and hay storage facilities require $7,800. The addition of h3 cows will increase investment in livestock by $12,000 or approximately $300 for a good quality cow. A comparison of returns above variable cost shows $11,663 and $13 ,h70 for stanchion and loose housing respectively or a difference of $1,807. After subtracting fixed costs the net returns for the two plans are $6,723 and $7,350 for a difference of $627. This increase in net income is small relative to the large amount of new capital investments required. For the Operator with 210 acres of land and 27 months of labor using a stanchion housing system, it appears that the returns to a loose housing system when the amount of land and labor are changed is relatively small. The list of new technologies available for incorporation into a 1008? housing system was outlined in Chapter 2. These changes included nilkfmg parlors, bulk tanks, loose housing, mechanized forage feeding operations including self-feeding of hay and bunker feeding of silage and other labor saving Operations. Artificial breeding is applicable to both stanchion and loose housing arrangements and is 9O mentioned because of its relative importance in both systems. All of these new technologies are of a labor saving character with the ex- ception of artificial breeding. Use of these technologies make possible an increased earning capacity for labor. Important capital outlays are required for their initiation in a farm operation. As pointed out in the introduction, many of these new developments in loose housing are not good complements with the Old technology in stanchion housing. Further complications come from.the fact that although the milking parlor and its ancillary equipment enable the farmer to complete his milking more rapidly than.before, it is difficult to increase net income by'a single change in the housing arrangement. This was demonstrated above in.the comparison of Opti- mum plans for lhO acres of land and 15 months of labor using stanchion and loose housing systems. Previous studies have suggested the possibility of improving labor income by making large investments in expansion of acres of crops and using technologies available in a loose housing system.'§/ To determine the possibilities fOr increasing labor income through expansion.and.increased.use of investment capital, a series of three ‘5/ Fuller, Earl, O . git. Trant, Gerald ., Institutional Credit and the Efficiengy of Selected Dai Farms, unpubliShed FhJU. thesis, Department of Igricultural Economics, Michigan State University, 1959. 91 situations were compared. For each situation the optimum.farm plan, returns and additional capital investments were determined and a comparison made of the new organization with the initial stanchion housing system. Table 19 gives the optimum farm.plans for stanchion and loose housing for three levels of land, labor and Operating capital supplies. The optimum.plan for 210 acres of land, 15 months of labor and um, limiting operating capital using stanchion housing will be used as the initial organization. Two new organizations will be studied and compared with the initial situation to determine the effects of an expansion‘program. The initial situation has 210 acres of land, 15 months of labor and $8,593 of operating capital. The farm.plan includes 17 cows, 21 acres of wheat, 73.1 acres of corn, 58.5 acres of hay and 38.1 acres of winter grain. A total of 6,17h bushels of grain is sold. The change to a loose housing system requires a capital invest- ment of $19,350 for a milking parlor, milking equipment, a larger bulk tank, additional housing, increased hay storage and a larger number of livestock. The major change in the optimum.plan was an increase in cows from 17 to h3.7 and discontinued sale of grain and use of custom harvesting of hay. The labor supplied by hiring an additional full-time man makes it feasible to harvest the hay crop using farm labor. A baled hay and a chopped hay enterprise come into the optimum.plan. To keep the capital investment required for new Table 19. 92 Comparison of optimum farm.plans for stanchion and loose housing with three different combinations of land, labor and operating capital. Stanchion Housing Loose Housing . Acres of land 210 210 h30 Enterprlse Months of labor 15 27 39 Operating capital $8,600 $6,525 $13,250 Cows - all hay ration 17.0 h3.7 80.2 Wheat 21.0 21.0 h2.0 Corn 1 66.5 35.6 10.3 Corn 2 6.6 Baled hay 28.6 Chopped.hay 81.1 lhl.6 Custom.hay and pasture 58.5 83.1 Pasture h3.7 55.3 ‘Winter grain 38.1 Oats 96.5 Corn selling 6,17h Return above variable cost 7,218 12,116 21,195 Fixed cost 3,300 h,000 6,600 Net return 3,981 8,116 1h,595 Labor cost above operator's labor 3,000 6,000 5% interest on capital / 2,729 3,59h 6,800 Return on operator's labor and management 1,252 1,522 1,795 Additional capital investment required for loose housing and expansion of land and livestock resources Land 0 uh,000 Livestock 8,000 15,000 Machinery 1,000 3,000 Milking parlor 3,600 h,600 Milking equipment 1,750 2,500 Bulk tank 1,500 1,500 Housing h,000 5,000 Hay storage 500 2,000 Total 20,350 77,600 Initial investment h6,000 h6,000 h6,000 Grand total h6,000 66,350 123,600 93 machinery as low as possible, all hay should be harvested as chopped hay. The winter small grain enterprise was also discontinued. The amount of capital required for the original situation using stanchion housing was $h6,000. This is broken down into $31,000 for land and buildings, $9,900 for machinery'and $5,100 for livestock. During the winter months feed and crop inventory would be approximately $5,000. However, since the time period of the investment is considerably less than a.year, this item was not included.under capital investment required for a full year. Changing to a loose housing system increases the amount of capital investment quite substantially. The number of cows in.the second.p1an of Table 19 includes h3.7 cows. The number of cows are increased as a result of changing to loose housing and hiring an additional man. The investment required for the plan with an inv creased number of cows and larger acreage was $20,350. The major item was an additional investment in livestock which required $8,000 or approximately'$300 each for 26.7 cows. Building and equipping a milking parlor and milk room required $5,350. Housing and hay storage requires another $h,500. And lastly, additional machinery for hay harvesting required $1,000 and a larger bulk tank cost an additional $1,500. The number of cows in the optimum.plan was h3.7. However, the new organization of buildings and equipment had the capacity to handle as high as 50 cows. The net return above variable cost increased from $7,281 to $12,116 for the new plan for 210 acres of land and 27 months of labor. 9h After subtracting the fixed cost of $3,300 and $h,000 respectively, the net return was $3,981 and $8,116. The net return represents the return for land, labor, capital and.management. An additional $3,000 would be required to hire the extra man. Thus, after subtracting the additional charge for labor and a 5 percent interest charge on the capital investment, the return to the operator for his labor and management for the two plans are $1,252 and $1,522 for a difference of $270. A further expansion to h30 acres of land and 39 months of labor was considered. Again, the comparison made is the new organization with the situation of 210 acres of land, 15 months of labor and.un~ limited operating capital using stanchion housing. The new Optimum farm plan includes 80.2 cows, h2 acres of wheat, 10.3 acres of corn, lhl.6 acres of chopped hay, 83.1 acres of hay using custom harvesting, 55.3 acres of pasture and 96.5 acres of cats. All feed is produced on the farm and fed to the dairy herd and custom harvesting of hay is used for approximately a third of the total acres of hay. The major change in the optimum farm.plan is discontinuation of corn selling and the production of less corn and more small grain by the substitution of a spring small grain cr0p for a winter small grain crop. Under this plan.the required major new structures include a milking parlor and loafing barn. Limited experience to date suggested that a "double-four" herringbone parlor would permit high labor 95 accomplishments for herd sizes ranging from 50 to 100 cows without costing much.more than some lower capacity milking plants. The investments in a.nilking parlor and equipment would amount to $7,100 for a milking system.for conveying milk from.the parlor to a bulk tank in the milk room. Housing and feed storage structure required in addition to those buildings which could be used would cost $7,000. A larger bulk tank would cost an additional $1,500. Land.purchases would amount to $hh,000 and the increase in cow numbers would require $15,000 additional investment. Additional forage equipment would require $3,000 new investment. The total of these purchases in addition to the initial investment in land, buildings, and equipment would total $123,000. Of this grand total, $77,600 would be new investment required for conversion to loose housing and eXpansion to h30 acres of land and 80 cows. Return above variable cost increases from $7,281 to $21,195. After subtracting fixed charges of $3,300 and $6,600 respectively, the net return totals $3,981 for the initial situation as compared with $lh,595 for the new organization and resource situation. After deducting an allowance of $6,000 for hired labor and a 5 percent interest charge on the total investment including operating expenses, the return for Operator's labor and management was $1,252 for the initial farm.p1an and $1,795 for the new farm.plan and resource situation. This gave an increase in returns to the operator's labor and management of $5h3. 96 The programming results indicate that changing to a loose housing system.requires large capital investments in a milking parlor, milk room, bulk tank, housing and feed storage and live- stock. Land purchases require very large amounts of additional capital investment. Within the resource limits for the situations studied, only small increases in income are possible even with increases in size of the farm operation. 97 CHAPTER V Summary and Conclusions The study of Southeronichigan dairy farms focused around types of adjustments required in dairy farm organization resulting from.the use of a loose housing system. IIntra-functional adjustment possibil- ities were explored in conjunction with a statistically fitted production function of the "Cobb-Douglas" type. Inter-functional adjustment possibilities of changes in the housing system.were explored in con- junction with a modified linear programming technique. The results of the functional analysis carried out for a total of uh Southern Michigan dairy farms suggest that the average dairy farm.is organized along the scale line. Further, increasing returns to scale are being realized for the sample farms with returns to the factors of production equal to their reservation prices. However, increasing returns to scale suggest that dairy farm operators should enlarge their farm operations, at least within the range of the data in the derived production function. The larger farms were organized around a combination of approximately 300 acres of land, 30 months of labor and milking approximately 50 cows. A modified linear programming technique was employed in studying farm organizational adjustments associated with the application of large amounts of labor saving technology. A variable resourse restriction on operating capital was applied in determining the 98 optimum farm organization when loose housing is employed with limited amounts of land, labor and variable amounts of operating capital. The derivation of optimum farm.plans for farms in an area where, except for capital, farms are fairly homogeneous, is simplified by the use of variable resource programming. Capital supplies vary widely among farms and designation of any single average or representative capital level is difficult. Using a modified procedure gives all of the optimum.plans for a varying supply of operating capital as it is allowed to vary continuously from zero to an.unlimiting amount. The study of relationships which exist for changes in the amount of limited resources of land, labor and operating capital gave the following results for both stanchion and loose housing arrangements. 1. Increasing the amount of Operating capital brought about a more adequate utilization of land and labor resources. 2. Increasing the amount of land increased the relative importance of the grain selling activity except for situations with a large number of cows and low labor requirements for the dairy herd. Also, it allowed for the discontinuation of the use of custom harvest- ing of hay which was generally employed when a relatively smaller ratio of land to labor existed. 3. Increasing the amount of labor effectively allowed for an increase in the relative importance of the dairy enterprise. With a given amount of land and Operating capital, increasing the supply of labor allowed an increase in the dairy enterprise. h. Important changes in the optimum farm.plan were suggested by changes in either land, labor or Operating capital. Labor allocation was an important consideration in all of the Optimum farm plans. While labor is a limiting resource under all situations 99 studied, seldom does the labor Of more than one or two months restrict the Optimum plan. Exceptions to this occur with relatively large amounts of Operating capital. June and July labor appeared to be the most critical months. The labor requirements, for most crops, include a requirement for June or July labor or both. The larger the number of enterprises with different seasonal requirements, the more adequate will be the use Of labor. Labor limitations in particular months have a direct effect on the enterprise combination to be selected for the optimum farm plan. In all plans a combination of corn, baled hay, pasture and dairy enter- prises provided the Optimum use of June labor at low levels of operating capital. However, these enterprises were Often either replaced or decreased in importance as more Operating capital'becomes available. Even though they made the most adequate use Of June labor, other enterprises allowed a more adequate use of the total supply of labor and thus came into the Optimum farm.plans as larger amounts Of Operating capital were made available. The use Of a loose housing system.resulted in the following changes for a given amount of land and labor resources: 1. Increased operating capital requirement. 2. A larger number of cows in the optimum farm.plan for a given level of Operating capital. 3. 'With unlimiting operating capital, the Optimum farm plan for all situations but one (210 acres of land and 15 months of labor) included the purchase Of large amounts of forage. 100 h. A minimum of $7,000 increase in investment capital in milking parlor, milking equipment and housing were required in converting to loose housing. 5. Only small increases in returns to land, labor, capital and management. The increase in the number of cows resulting from reduced labor requirements could have a number of important effects if loose housing is applied in a large area such as Southern.Michigan. The most important of these is a large increase in the output of milk and a resulting large decline in the price of milk. It is difficult to give an adequate appraisal of the quantative decline in the price of milk which would result under such circumstances because neither the price demand elasticity of milk nor the total population to which the results are applicable are known with any degree of cer- tainty. However, the price demand elasticity of milk and milk products is believed to be relatively inelastic and a large increase in the output of milk would decrease price by a large amount. A second important effect suggested by the programming results is the need for improved crOpping practices and improved forage harvesting methods. The Optimum farm plan for unlimiting Operating capital in five out of six situations required the purchase of large amounts of forage. If this were true for a large area then the area would: 1) become a forage deficient area or 2) have to forgo additional profit and adopt a more intensive forage program. 'In this present study, a much larger quantity of forage could be produced from a given acreage from either corn or grass silage production. 101 However, these enterprises do not allow profit maximization under present production possibility. The limiting factor appears to be high labor requirements for these enterprises especially for harvest- ing. Thus, effectively reducing labor requirements especially for harvesting would allow increased forage production in this area. Here again, the answer may be increased capital investment in larger machinery and equipment. However, adeption of improved cropping practices such as minimum tillage, weed control with sprays, use of better seed and increased fertilizer applications may be of some help. A third important effect is the large increase in capital invest- ment in.new technology. The lack of complementarity between old and new technologies, i.e., the conversion from a stanchion housing and loose housing means an increase in new investments when converting to loose housing because the facilities available in stanchion housing are not applicable for use with loose housing. Large investments in new labor saving technology include a milking parlor, pen-type housing and feeding arrangements which are necessary for the attainment of reasonably competitive levels of productivity of labor on dairy farms infiMichigan. This raises the problem of capital acquisition on dairy farms. The large amount of capital would probably have to come from the use of credit by a large proportion of the farm operators. In a study of institutional credit, Trant'i/concludes that the additional credit ;/ Op. cit. p. 80. 102 ' required is available under present institutional arrangements. However, despite the conclusion that enough credit is available for more efficient adjustments on the farms in his study, many farm operators did appear to be facing credit problems because of the lack of information on the part of the farm.0perator concerning credit and services available to them from existing credit institutions. One difficulty that exists in the programming problem is the practicality of the physical relationships assumed in the coefficients. This is of special concern when the implied organization represents a type of organization and technology that is relatively new. One of the neglected elements in the study has been management. An average level of management was assumed for the problem and was relevant in determining the value of the production coefficients for the problem. Important increases in the number of cows and use of labor resources occur as a result of changing the housing system. From this arises increased complexity of coordination and management decisions. The possible effects on efficiency must be taken into consideration when evaluating the total results of changing the housing system. The analysis of this study has shown how importantly the supply of limited resources can affect the optimum farm organization and possible returns. Overall farm production decisions ultimately should be based on more than partial analyses of separate enterprises, 103 resources or production possibilities. The farm operator formally or informally must decide the optimum combination of enterprises and optimum farm.plan from a consideration of all the interrelated factors influencing this decision. Linear programming and the proper application of the programming results provides a useful analysis for considering the interrelationships of the supply of resources, prices of products and resources, production possibilities and institutional factors. 101; APPENDIX A APPENDIX A Hay-Pasture Evaluation, 1958.1/ The values used in computing the investment in perennial forage stands were based on the estimated per acre cost of establishing the stands. Adjustments were made to take into account the quality and age of the stand as shown below. Hayapasture evaluation, 1958 105 Condition of stand Year or crop Excellent Good Fair Poor 1) Perennials: lst. $ 33.00 $ 33.00 $ 26.00 $ 19.00 2nd. 33.00 26.00 19.00 12.00 3rd. 33.00 19.00 12.00 12.00 hth. 26.00 19.00 12.00 5.00 5-6th. 19.00 19.00 12.00 5.00 7-8th. 19.00 12.00 12.00 5.00 2) Annuals: Red clover 2h.50 2h.50 23.50 10.00 Red clover-sweet clover mixture 2h.00 2h.00 23.00 10.00 June clover-sweet clover mixture 2b.00 2h.00 23.00 10.00 Sweet clover 23.50 23.50 22.50 10.00 Mammoth clover 23.50 20.00 19.00 10.00 Sudan grass 36.00 36.00 35.00 10.00 Rye 26.00 26.00 25.00 10.00 Oats 31.50 30.50 25.00 10.00 ‘l/ The values used in the 1958 hay-pasture evaluation were worked out by Ross Bolger with the assistance of Professor 0. R. Hoglund, Department of Agricultural Economics, Michigan State University. 106 Ordinary rough pasture was valued at five dollars per acre. Other pasture was valued in accordance with the quality of the stand, using the chart for the 1958 hay-pasture evaluation. Calculating Proportional Credits for Perennials Destroyed The following criteria were used in calculating proportional credits for perennials destroyed: l. 3. h. Proportional credit was computed only if the stand of perennials was destroyed (plowed down) on June 1 or thereafter. The beginning inventory value of alfalfa-brome was counted as an expense, if plowed down prior to June. Proportional credit was computed, if alfalfa—brome was plowed down after June 1. In addition, the beginning inventory value of the stand.ndnus the proportional credit was counted as an expense. Proportional credit was computed for alfalfa-brome plowed down in August or September for wheat, even if it was clipped or pastured during the summer. Proportional credit was computed for any good stand of pasture which was plowed down for corn or oats in the Spring. If a worthless stand of hay or pasture was plowed down, prOportional credit was not computed. 7. 107 Proportional credit was not computed for clover destroyed. First year clover was counted as an expense. Second year clover was considered as an investment at five dollars per acre. Biennial seeding such as June clover, sweet clover, etc., was considered as an expense, except if seeded in a perennial mixture. 108 APPENDIX TABLES 109 Appendix Table 1. Estimated daily labor requirements for cow and replacement - minutes per animal per day Stanchion.§/ Loose housing 4' n I°ed Number of cows _ 3o-ho 60 80 100 Feeding 2.7 2.0 1.5 1.2 1.0 Total milking 10.0 7.2 6.0 5.0 h.2 Total Cleaning & bedding 2.3 2.1 1.8 1.2 1.1 Moving cows 1.0 1.0 1.0 .8 .7 Miscellaneous 1.0 .8 .8 .8 .7 Total minutes per cow per day 17.0 13.1 11.1 9.0 7.7 Hours per month per cow 8.5 6.55 5.55 h.5 3.85 .3/ Efficient methods and arrangements including bulk tank. Modified from: Fuller, Earl I., Some Labor Efficient Dairy Farm Organizations Designed for Michigan Conditions, Ag. Econ. No. 690, Department of Agricultural Economics, Michigan State University, East Lansing, July 1957. Farm.Management Facts and Figures, Ag. Econ. No. 529, Department of Agricultural Economics, Michigan State College, East Lansing, October 1953. Brown, B. A., W}‘W. Snyder, C. R. Hoglund and J. S. Boyd, Labor Requirements for Herringbone and Other Milking Systems, Quarterly'Bulletin, Vol. bl, No. b, Michigan Agricultural Experiment Station, Michigan State University, East Lansing, May 1959, pp. 905-921. Appendix Table 2. Cows milked per hour and per man hour in four parlor types, standar for better than average milking performance E 110 NUmber of Number of cows Number of cows Parlor style milkers milked per hour milked per used average range man hour Herringbone Double 1: h 80 BS-hS 35~h5 Double 5 5 hh bO-SO h0-50 Double 6 6 h6 h2~52 b2-52 Double 6 6 52 h7~63 23-32 Double 8 8 75 70-80 BS-ho walk-through Double 2 2 2h 20~3O 20-30 Double 3 3 3S 30—bo 30.140 Double u h In uo-So 20-25 Side-Opening U 3 U 3 31 25-35 25—35 u U h 32 25-35 25-35 S U S 32 25-35 25—35 Side-Opening 3 in line 3 26 20-30 20-30 h in line b 28 20-35 20-35 Double 3 in line 6 50 hO-6O 20-30 Double h in line 8 52 h0-7O 20—35 a] Brown, B. A.,'W} w. Snyder, C. R. Hoglund, and J. S. Boyd, "Labor Requirements for Herringbone and Other Milking Systems", Bulletin, Michigan Agricultural Experiment Station, Michigan State University, East Lansing, vol. 81, No. h, May 1959, pp. 905-921. arter Appendix Table 3. Various expense items for craps E/ Corn Grass Item Corn oats Wheat Alfalfa Silage Silage Pasture Machine use 32/ $12.10 $ 7.60 $ 7.75 s 8.00 $18.10 $12.00 $ 1.35 Seed 1.50 2. 00 b.50 2.25 1.50 2.25 2.35 Lime 1.00 1. 00 1.00 1.50 1.00 1.50 1.50 Ferti- lizer 12.30 11.20 18.60 6.h0 12.30 6.h0 6.h0 Overhead 5.h0 h. to 6.h0 3.60 6.60 h.h0 2.30 Total 32.30 N6 38.25 21.75 39.50 26.55 13.90 a/ Custom rates for harvesting are silo filling at $1.70 a ton, hay baling at $.13 a bale, and corn picking at $5.50 an acre. b/TMachine use includes all variable cost connected with the use of machinery} Modified from: gas, oil, grease and maintenance. Robbins, Paul R., "What does it cost to raise corn?" Plant Food Review, National Plant Food Institute, Washington, D. C., Summer 1958, pp. 15-17. Robbins, Paul R., James L. Stallings, and A. J. Chlrogge, Crap Cost and Returns on the Major Soil Associations in Southwestern Indiana, 195D, Station Bulletin 6&7, Purdue Univer51ty Agricultural Experi- ment Station, Lafayette, Indiana, 1957. . -- u ._ . . - ....... . . . .. .. .. . .._-. _ . --. .... ' I . . - - I I. . _ n a o I ' o In. I . .... ' - ' . n u n . n o n . n . I . n . - n n u _n . - I n u c u . n - Q . I I I I Q I I -.- . - . . n . n . I - . . - . - -._. - ... _ .u -- .-. . . — _L._ . - . ' l' . r .‘I - .. .. - . u l . . ' ' l' . 1 . -_ n . ,. . - " . .‘ ' . 1 - -. ' -l - _ _. . . n . _ .' - . . I , .. ... . . _ . . . u I — ' n . n ' n . 1 a . . . - u - ' - o I ' . . -.- . _ - d I ‘ ... ... Ill. . - ‘ - . 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Crop yields and application rates of fertilizer Pounds of Pounds of Analysis Fertilizer Crap Unit Yield actual mixed of mixed cost per nitrogen fertilizer fertilizer acre 3/ Corn bu. 70 hO 250 5-20-10 12.30 Oats bu. 75 2O hOO 5-20-10 11.20 Winter grain bu. 80 20 h00 5-20-10 11.20 Wheat bu. hO 30 500 5-20-10 18.60 Alfalfa hay ton 2.8 -~ 200 0—20-20 6.h0 Corn silage ton 1h ho 250 5-20-10 12.30 Grass silage ton 10 -- 200 0—20-20 6.h0 Green chop ton 10 -- 200 0-20-20 6.h0 First cutting hay ton 2 -- 200 o-2o-2o 6.uo a/ Nitrogen priced at 12 cents a pound and P205 and.K20 priced at 8 cents a pound. Modified from: Hoglund, C. R., and.R. L. Cook, Eigyer Profits From Fertilizer and Improved Practices, Ag. Econ. ShS. Micfiigan Agricultural Experiment Station, East Lansing, Revised October 1956. Appendix Table 6. 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I n .I. . I I .I.I_I I "III III. I.III I. . . .III. I I... ..III. ..l. {II I II'II.III I.I I: I I I. I I IIIl. .II. II .II III. I I I I ...-.1 I I I.I II II I I I III I I I I I I I I I . I— I I— . a .u . ..I_. .I I. . I II I .. I II . o I c I a .II I I II I .I l . _- , . I l I I I I I I I I . I I .I.. I . I I I I I I I I I I _ I I I I . I I I . I I I I I I . I__ I. I I . I .I .I . II r I. I. I _ I I. I II . n. I. .I. . . . . _ I . I I»... ..I I I . I I I . .. I I I. I I II a I . .I _ I I 123 BI BIOGRAPHY Allen, R. G. D., Mathematical Economics, MadMillan and Co. Ltd., London, 1957. Boles, J. J., ”Linear Programming and Farm Management.Analysis," Journal of Farm Economics, Vol. 37, (February 1955) pp. lp2h. Bolger, William R., A Partial Evaluation of the Michi an Townshi Extension Program.in Denmark Township Over the Period 1933 to 1958, ;E§ing Cobb-Douglas Analysis, unpublished Master's thesis, Department of Agricultural Economics, Michigan State University, 1959. Bradford, Lawrence A. and Glenn L. Johnson, Farm Managggent Anggzgis, John Wiley and Sons, Inc., New York, 1953. Brown, B. 11., w. w. Snyder, o. R. Hoglund, and J. s. Boyd, "Labor Requirements for Herringbone and.0ther Milking Systems", Quarterly Bulletin, V01. hl, No. h, Michigan Agricultural ExPerimen ta on, Michigan.State University, East Lansing, May 1959, pp. 905-921. Brown, Lauren H. and E. M. Elwood, Farming Today, Michigan State University Cooperative Extension Service, Department of Agricultural Economics No. 752 (Areas 2, S, 6 and 7) 1959. Candler, Wilfred, "A.Modified Simplex Solution for Linear Programming with variable Capital Restrictions,n Journal of Farm Economics, Vol. 38 (November 1956) p. 9h0. Department of Agricultural Economics, Farm Nana ement Facts and Fi es, Agricultural Economics No. 529, Michigan State College, East LEEsIfig, Octdber 1953. Dorfman, R., R. A. Samuelson, and R. M. 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