It is exciting and diverse. It is changing quickly. It relies on the weather, uses an incredible

Table 2.2.1
Levels and nature of planning in the agribusiness

*Source: Presented by the Ministry of Agriculture
The planning process Six steps in the planning process provide structure to the process and are designed to provide management with as much information as is available when developing the strategic or tactical plan. These six steps follow:
1. Gather facts and information that have a bearing on the situation.
2. Analyze what the situation is and what problems are involved.
3. Forecast future developments.
4. Set performance objectives, the benchmarks for achieving strategic goals.
5. Develop alternative courses of action and select those that are most suitable.
6. Develop a means of evaluating progress, and readjust the plan as the process unfolds.
Gathering facts and information is the first step of the planning process. Although it should be noted that information gathering is a recurring part of the process. Its place as a first step is easily justified, since adequate information must be available to formulate or synthesize a problem or opportunity. Fact gathering is subdivided into two parts: gathering sufficient information to identify the need for a plan in the first place and systematic gathering of specific facts needed to make the plan work once it has been developed. Two challenges can limit fact gathering. First, some managers tend to skip or minimize this step because of the difficulty of gathering data. Instead of planning, they resort to a “seat of the pants” or “gut-feel” philosophy, which reduces the likelihood of success. Second, a manager should not become so engrossed in fact gathering that inaction results.

2.3.Economics for agribusiness managers

Macroeconomics focuses on the “big picture” view of the economic system. If you have taken a course in macroeconomics, you have studied topics like national income, gross domestic product, inflation, unemployment, and interest rates. The Federal Reserve System, or “the Fed,” can affect the economy by changing monetary policy, which focuses on interest rates and the supply of money to the economy. Likewise, Congress can impact the economic system through fiscal policy, which includes government spending and taxing programs.

Agribusinesses are greatly affected by macroeconomics because global demand for various food and fiber products is constantly changing. General economic conditions are influenced by such factors as weather, government policies, and international developments. Macroeconomics is concerned with how the different elements of the total economy interact. An individual firm has relatively little impact on the total economy. However, skill at anticipating and interpreting the macroeconomic environment is critical to the success of any agribusiness manager.
The Fed may use monetary policy to raise interest rates to fight inflation. Since interest rates have an important impact on purchases of tractors, combines, and other farm machinery, so farm equipment manufacturers pay close attention to interest rates. Food consumption patterns are also affected by the economy’s health. In a boom period, more expensive, luxury food items may sell well. However, during a recession, food purchasing habits may shift as incomes fall. Managers of food companies follow such developments very closely. Microeconomics is the application of basic economic principles to decisions within the firm. Every agribusiness faces tough questions when it comes to allocating its limited resources. Managers must decide the best way to use physical, human, and financial resources in the production and marketing of goods and services to meet customers’ needs and generate a profit.
Tools of economic analysis are essential to the manager who must make daily business decisions. In fact, most of the management tools developed in this book are based on fundamental microeconomic concepts. The successful agribusiness manager must assemble a variety of different types of information, and then use that information effectively to make the best possible decisions for the short- and long-run financial health of the firm. A few years ago, if a firm made less profit, it might mean the firm’s management had used poor judgment. In today’s extremely competitive marketplace, a poor decision may lead to failure of the firm. Thus, economics studies how individuals, firms, and society choose to combine scarce resources (land, labor, capital, and management) to satisfy unlimited wants and best meet consumer needs. These four scarce resources are often referred to as the factors of production, each of which must receive a payment or return. For example, labor is paid a wage, while management typically receives a salary. Likewise, returns to land are often referred to as rent and returns to capital are represented by interest payments. The way market forces work to allocate returns to these factors is at the heart of a capitalistic economy. Our book assumes that most students have some understanding of economics (although a review of your microeconomics may prove helpful). Yet many students find economic concepts difficult to understand. In part, this is due to examples used in economic classes; just what is a widget? In part, it arises because of confusing terminology and jargon. For example, inputs, factors of production, and resources all refer to the same thing. As such, the goal of this chapter is not to review a student’s knowledge of economics. Rather, in Chapter 2 we highlighted the importance of gathering information and facts when making decisions. A professional manager understands and uses economic concepts to interpret information, both to assess the broader marketplace, and to improve the effectiveness of their decision-making. Thus, in this chapter we will look at three key economic concepts and explain their relevance for agribusiness managers. We consider profit, supply and demand, market equilibrium, price, income, and cross price elasticities.
Profit is a term used by both accountants and economists. However, accounting profit and economic profit are different. The accountant looks at accounting profit as the net income that remains after all actual, measurable costs are subtracted from total revenue. Accounting profit is used as a performance measure about firm success. The economist agrees with the accountant that actual costs must be considered. Economists, however, go further to calculate economic profit by also examining the opportunity costs of alternative uses for resources within the firm. As such, economic profit provides insights about the long-run potential for an industry. If economic profits are positive, more firms will enter. If economic profits are negative, some firms will choose to exit the market to find more appealing (i.e., profitable) ventures. Thus, the key to understanding the difference between accounting and economic profit begins by classifying costs as being explicit or implicit. An explicit cost involves payments made to suppliers of resources, such as land, labor, materials, fuel, and the like. Explicit costs are usually measured by an accountant. But firms do not pay for all resources used in production. For example, a farmer does not write a rent check to himself or herself for land that they own. A new food business may not have to pay property taxes for five years as part of an economic development incentive provided by the county government. Since there was no cash outlay for use of the resource, economists access an implicit cost associated with that use. Since the accountant cannot precisely measure the expenditure of the opportunity cost, they do consider it in the calculation of accounting profit. Economists force an examination of both explicit and implicit costs. The economist feels in the long run all costs must be considered to analyze alternative courses of action.
Before investing sums of money in specific alternatives, managers must be able to estimate opportunity costs. This estimate helps managers to decide whether any given use for their resources of time and money is the very best opportunity available. However, some shortcomings of the economic profit concept should be recognized.