The Rural Development Centre

Summary:

A number of authors have proposed that the farm management discipline, which has developed an approach to farm planning and decision-making based on production theory and decision theory, has yielded decision aids that are of limited value in an environment as unpredictable and turbulent as farming. They argue that the modes of analysis that are employed in farm management do not reflect a proper appreciation of the nature of the operating environment of farm businesses. This suggests that the use of the more advanced planning aids that have been developed by the farm management discipline cannot necessarily be equated with 'better' management by farmers. The reasoning advanced by some authors also leads us to conclude that, despite the expectations of many, the continuing refinement of planning aids of the type that have been developed by the farm management discipline cannot necessarily be expected to lead to 'better' management by farmers and, therefore, to improved farm business performance.

Our aim in undertaking the research reported here was to explore the relationship between planning, performance and the use of decision aids in farming. The relevance of planning to farmers, and the type of planning undertaken by them depends on the extent to which they believe they can influence the performance of their farm businesses through their own actions. These beliefs are, themselves, a function of the degree to which farmers believe they can predict or anticipate changes in the operating environments of their farms and move to take advantage of opportunities and avoid hazards. Consequently, our focus in this study is on investigating the relationship between farmers' perceptions of their operating environment and the management of their farm businesses. Specifically, our objectives in this study were:

• (a) to assess farmers' perceptions of the extent to which they were able to exert control over the business performance of their farms through planning,

• (b) to relate differences in farmers' perceptions to differences in the use of planning aids, and

• (c) to relate differences in farmers' perceptions to differences in farm financial performance.

Farmers were classified into groups using cluster analysis on the basis of the pattern of their perceptions of control. Differences in the use of planning aids and farm performance between each of the groups were then analysed. Set correlation analysis was then employed to identify the relative impact of perceptions, farm characteristics and demographic characteristics on farm business performance as measured by equity.

The analysis revealed that farmers' perceptions of control were not uniform across all aspects of their farming operation and could be separated into four different dimensions or areas. These dimensions related to farm strategy and planning, enterprise mix, cost control and farm expansion. We concluded from the results of the factor analysis that, while virtually all farmers believed that they could influence production outcomes, many farmers believed that the performance of the farm business in other areas was subject to the influence of factors such as commodity prices, input costs and interest rates which were beyond their control.

Cluster analysis was employed to classify the sample of farmers into groups on the basis of their perceptions of locus of control with regard to theoretically salient elements in their operating environment. Six different types of farmers were identified. The farmers in the first and second clusters, which we described as 'prospectors', believed that they could influence the performance of their farm businesses through production planning and farm planning in terms of enterprise mix. The farmers in the first cluster differed from those in the second in that the latter believed that they cannot reduce costs by planning ahead. In our view, although the farmers in both of these clusters may be working to maintain a high level of efficiency, they may be undermining their efforts in this area by being too attentive to market signals and changing their farm plans too frequently and too substantially.

The farmers in the third and fourth clusters, which we termed 'analysers', also believed that they could influence the performance of their farm businesses through production planning. However, these farmers appeared to be rather cautious in terms of re-orienting enterprises and resources to take advantage of opportunities, preferring to wait until such opportunities are clearly established before committing themselves. The farmers in the third cluster differed from those in the fourth in that the latter believed that they could not reduce costs by planning ahead. The pattern of locus of control expressed by the farmers in the third group comes closest of all the groups to the pattern that we inferred was most consistent with the causal structure of the operating environment of broad-acre agriculture. The farmers in this group appear to be maintaining productivity through the adoption of new ideas and are able to reduce costs through planning. They appear to be relatively insensitive to annual variations in prices and make only marginal adjustments to their farm plans.

The farmers in the fifth and sixth clusters, which we termed 'defenders', believed that they could influence physical performance through production planning but they appeared to believe that the financial performance of the farm mostly depended on external factors in the operating environment. Since these farmers perceived the performance of the farm as being at the mercy of unpredictable and uncontrollable factors beyond the farm gate, we would expect them to regard farm planning, especially with regard to changes in enterprise mix, as problematic and irrelevant. Consequently, we believe that these farmers would not be disposed to employ formal planning aids, such aids being perceived as having little, if any, relevance.

We then analysed the differences between the clusters in terms of the frequency of use of gross margins, cash flow budgets and partial budgeting. The results supported our hypothesis that the use of planning aids depends on the degree to which farmers perceive that they can exert control over the performance of their farming operations. In the light of the characteristics of the farmers in each of the clusters, this finding led us to conclude that formal farm planning aids would probably only be truly attractive and relevant to farmers in the first cluster, the 'prospectors' who expressed an internal locus of control over costs. In our view, a heavy reliance on farm planning aids is inconsistent with the types of strategies that 'analysers' and 'defenders' appear to be following. Both of these types of farmers have, either explicitly or implicitly, recognised that market signals are often ambiguous and misleading, and should be ignored much of the time. Hence, it is inconsistent for these farmers to employ decision aids which implicitly treat market signals as persistently informative.

Our hypothesis that farm performance would not be superior for those farms where the manager expressed a belief that performance can be influenced by making frequent and substantive changes to farm plans was supported. The hypothesis that the performance of farms where the manager expresses an external locus of control with respect to costs is inferior to those farms where the manager expresses an internal locus of control with respect to costs was also supported. We were able to confirm, through the use of set correlation analysis, that farm strategy, as measured by cluster membership, did 'explain' variations in equity beyond that provided by other factors such as the type of farming operation, the age and education of the farm manager, and the farm manager's attitude towards debt.

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Last updated on 11/02/96.

ireeve@metz.une.edu.au

Copyright 1995 University of New England, Armidale 2351
New South Wales, Australia.