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UBC Theses and Dissertations

An evaluation of the British Columbia financial management training project Pereira-Lunghu, Jacob 1983

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AN EVALUATION OF THE BRITISH COLUMBIA FINANCIAL MANAGEMENT TRAINING PROJECT by JACOBy^PEREIRA~ LUNGHU B.Sc., C u t t i n g t o n U n i v e r s i t y C o l l e g e , 1973 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE i n THE FACULTY OF GRADUATE STUDIES Department of A g r i c u l t u r a l E c o n o m i c s We a c c e p t t h i s t h e s i s as c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d THE UNIVERSITY OF BRITISH COLUMBIA November, 1983 © J a c o b P e r e i r a - Lunghu, 1983 / In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the requirements f o r an advanced degree a t the U n i v e r s i t y o f B r i t i s h Columbia, I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and study. I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the head o f my department o r by h i s o r her r e p r e s e n t a t i v e s . I t i s understood t h a t copying or p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be allowed without my w r i t t e n p e r m i s s i o n . Department of /WlLToU LVMK- trCjD^ ft|j'c ^ The U n i v e r s i t y of B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date 6 (3/81) i i ABSTRACT The o b j e c t i v e of t h i s t h e s i s i s t o a s s e s s t h e e f f e c t i v e n e s s o f a f i n a n c i a l management e x t e n s i o n program o f f e r e d t o f a r m e r s i n B r i t i s h C o l u m b i a . T h i s a s s e s s m e n t i s done w i t h two o b j e c t i v e s i n mind. F i r s t l y , i t c o u l d p e r m i t an improvement and r e v i s i o n of t h e c o u r s e f o r m a t , m a t e r i a l and p r e s e n t a t i o n . S e c o n d l y , t h e a s s e s s m e n t p r o v i d e s i n f o r m a t i o n t o p o l i c y makers as t o t h e v a l u e o f c o u r s e s and s u p p o r t t h a t s h o u l d be g i v e n t o t h i s form of a g r i c u l t u r a l t r a i n i n g . A f t e r r e v i e w i n g t h e l i t e r a t u r e on v a r i o u s methods used i n t h e e v a l u a t i o n o f e x t e n s i o n methods, a p r o f i t f u n c t i o n a p p r o a c h was c h o s e n as an a p p r o p r i a t e c o n c e p t u a l model. P r o f i t i s d e f i n e d as a f u n c t i o n of o u t p u t p r i c e s , v a r i a b l e i n p u t p r i c e s and f i x e d i n p u t s . V a r i a b l e i n p u t s i n t h e p r o d u c t i o n p r o c e s s i n c l u d e h i r e d l a b o r and n o n - l a b o r i n p u t s s u c h as f e r t i l i z e r , c h e m i c a l s , f e e d and c u s t o m work. The d a t a g a t h e r i n g component of t h e work i n v o l v e d c o m p l e t i o n of a q u e s t i o n n a i r e by 7 3 f a r m e r s . T h i s sample of farm o p e r a t o r s r e p r e s e n t e d d i f f e r e n t t y p e s of p r o d u c e r s : d a i r y p r o d u c e r s , beef p r o d u c e r s , g r a i n , n u r s e r y , o r c h a r d i s t s , bee p r o d u c e r s and o t h e r mixed e n t e r p r i s e s . D a t a a v a i l a b i l i t y r e s t r i c t e d t h e e m p i r i c a l model t o a s e l e c t e d number of i m p o r t a n t v a r i a b l e s : h i r e d l a b o r wage r a t e , a g g r e g a t e c a p i t a l ( d e e d e d and r e n t e d l a n d , b u i l d i n g s , m a c h i n e r y and equipment and l i v e s t o c k ) , o p e r a t o r ' s l a b o r on t h e farm, e d u c a t i o n , and f i n a n c i a l management s k i l l s . A C o b b - D o u g l a s f u n c t i o n a l form was u s e d f o r t h e e s t i m a t i o n of t h e p a r a m e t e r s . B e c a use of t h e d i v e r s e n a t u r e of t h e p r o d u c e r s some a g g r e g a t i o n p r o b l e m s were e n c o u n t e r e d . A t t e m p t s t o a l l e v i a t e t h i s p r o b l e m i n v o l v e d t h e use of dummy v a r i a b l e s f o r s e l e c t e d homogeneous commodity g r o u p s i n t h e s a m p l e s . The most s u c c e s s f u l s t r a t e g y r e l i e d on p o o l i n g o f a l l o b s e r v a t i o n s . R e s u l t s i n d i c a t e t h a t on a v e r a g e t h e f i n a n c i a l management i n p u t i s i m p o r t a n t i n p r o d u c t i o n . The e s t i m a t e d m a r g i n a l r e t u r n t o f i n a n c i a l management i s $968. At t h e farm l e v e l 56 f a r m e r s out of a sample of 73 have a p o s i t i v e m a r g i n a l v a l u e p r o d u c t t o f i n a n c i a l management. In o r d e r t o a s s e s s t h e impact of t h e p r o gram e x - a n t e , an e v a l u a t i o n was c a r r i e d out t h r o u g h a p r e d i c t i o n e q u a t i o n . The e x p e c t e d impact o f t h e program i s p o s i t i v e f o r 51 f a r m e r s out o f a p o p u l a t i o n o f 73. The e x p e c t e d a v e r a g e change i n v a r i a b l e p r o f i t t h r o u g h p a r t i c i p a t i o n i n t h e c o u r s e i s $2089 p e r y e a r , r e p r e s e n t i n g a 3% p e r c e n t improvement i n t h e i r p r o f i t s . iv TABLE OF CONTENTS C h a p t e r I INTRODUCTION 1 1.1 H i s t o r y of F i n a n c i a l Management Programmes i n B r i t i s h C o l u m b i a 5 1.2 The O b j e c t i v e of The S t u d y 10 1.3 O r g a n i z a t i o n of t h e T h e s i s 12 II THE THEORETICAL FRAMEWORK FOR ASSESSING RETURNS TO HUMAN CAPITAL 14 2.1 L i t e r a t u r e Review 14 2.2 The Economic Model 21 2.2.1 O p t i m a l C o m b i n a t i o n of R e s o u r c e s . 22 2.2.1a The c o n s t r a i n e d O u t p u t S i t u a t i o n . 22 2.2.1b The C o n s t r a i n e d C o s t S i t u a t i o n ... 23 2.2.1c P r o f i t M a x i m i z a t i o n 24 2.3 C h o i c e and D e r i v a t i o n of t h e C o n c e p t u a l M odel 25 2.4 Summary 29 I I I ECONOMIC MODEL, DATA AND FUNCTIONAL FORM 30 3.1 The Economic Model 30 3.2 D a t a S o u r c e s 34 3.2.1 V a r i a b l e I n p u t s C o s t s 36 3.2.2 P r i c e s and C o s t s 37 3.2.3 F a m i l y L a b o r 38 3.2.4 E d u c a t i o n 38 3.2.5 F i n a n c i a l Management A b i l i t i e s 39 3.2.5a C a s h Flow Management S k i l l s 40 3.2.5b Tax P l a n n i n g Management S k i l l s ... 41 3.2.6 T o t a l R e c e i p t s 42 3.2.7 C a p i t a l S t o c k 43 3.2.7a C a p i t a l S e r v i c e s 44 3.2.8 D a t a C o l l e c t i o n P r o b l e m s 46 3.3 F u n c t i o n a l Forms 49 3.3.1 L i n e a r Form 51 3.3.2 C o n s t a n t E l a s t i c i t y of S u b s t i t u t i o n 51 V 3.3.3 Cob b - D o u g l a s 52 3.3.4 F l e x i b l e F u n c t i o n a l Forms 52 3.3.4a G e n e r a l i z e d L e o n t i e f P r o f i t 53 3.3.4b V a r i a b l e P r o f i t F u n c t i o n 53 3.4 I m p l i c a t i o n f o r E s t i m a t i o n 54 3.4.1 V a r i a t i o n i n I n p u t L e v e l s 55 3.4.2 M u l t i c o l l i n e a r i t y of I n p u t s 56 3.4.3 S p e c i f i c a t i o n B i a s 56 3.4.4 L e f t Out V a r i a b l e s 57 3.4.5 Non-Response E r r o r s 59 3.5 Summary 59 IV ESTIMATING THE RETURNS TO EDUCATION AND FINANCIAL MANAGEMENT 61 4.1 The E s t i m a t i o n o f R e t u r n s t o E d u c a t i o n . . . 62 4.1.1 E s t i m a t i n g S t r a t e g y . 65 4.1.2 R e s u l t s of Revenue and P r o f i t E q u a t i o n s 67 4.2 E s t i m a t i o n of R e t u r n s t o F i n a n c i a l Management 75 4.2.1 R e s u l t s o f F i n a n c i a l Management... 76 4.2.2 The M a r g i n a l V a l u e P r o d u c t Per Farm 86 4.2.3 P r e d i c t i n g E x p e c t e d Changes i n P r o f i t s 88 V SUMMARY, CONCLUSIONS AND IMPLICATIONS FOR FUTURE RESEARCH 94 5. 1 Summary 94 5.2 C o n c l u s i o n s 98 5.3 I m p l i c a t i o n s f o r F u t u r e R e s e a r c h 99 BIBLIOGRAPGHY 105 APPENDIX A 111 APPENDIX B 113 APPENDIX C 115 v i APPENDIX D 119 APPENDIX E 123 APPENDIX F 134 v i i LIST OF TABLES 3.1 L o c a t i o n , Commodity Type and Number of Farmers Attending F i n a n c i a l Management Workshops 35 3.2 Hi r e d Labor Wage Rates, H i r e d Labor Expenditures and Operator's Education, Labor and F i n a n c i a l Management S k i l l s 37 3.3 S i n g l e Questions of F i n a n c i a l Management -Cash Flow and Tax Pla n n i n g : P r i o r to and A f t e r • the Course - Pooled Sample 41 3.4 T o t a l Revenue, P r o f i t and C a p i t a l (000's $) 43 4.1 Revenue Function to Measure the Marginal P r o d u c t i v i t y of Education 69 4.2 V a r i a b l e P r o f i t F u n ction to Measure the Marginal P r o d u c t i v i t y of Education 70 4.3 Estimates of the Marginal Value Products f o r the T o t a l Revenue Model 72 4.4 Estimates of the Marginal Value Products f o r the V a r i a b l e P r o f i t Model 72 4.5 V a r i a b l e P r o f i t F u n c t i o n to Measure the Marginal P r o d u c t i v i t y of F i n a n c i a l Management 79 • 4.6 Estimates of the Marginal Returns - P r o f i t Equation with F i n a n c i a l Management V a r i a b l e 81 4.7 Huffman's Estimates of Returns to Extension in the U. S. A 83 4.8 Huffman's New Estmates of Returns to Extension in the U. S. A. - 1964 Data Set 84 4.9 Summary S t a t i s t i c s on Marginal Return per Farm by V a r i a b l e P r o f i t Group 88 4.10 Summary S t a t i s t i c s on Test Scores and V a r i a b l e P r o f i t Groups 92 4.11 Summary S t a t i s t i c s on Expected P r o f i t due to the Program 93 LIST OF APPENDICES B. 1 P r o f i t , C a p i t a l Flows and Wage Rate -1980 Data i n 1981 D o l l a r Value 114 C. 1 M a r g i n a l Return per Farm $300-$9000 Group 116 C.2 Ma r g i n a l Return per Farm $ 10000-$20000 Group 117 C.3 Marginal Return per Farm $30000-$40000 Group 117 C.4 Marginal Return per Farm $50000-$90000 Group 118 C. 5 Marginal Return per Farm $ 1 00000-$400000 Group 118 D. 1 Expected Change i n P r o f i t Due to T r a i n i n g Program $300-$9000 Group 120 D.2 Expected Change i n P r o f i t due to T r a i n i n g Program $ 1 0000-$20000 Group 121 v i i i D.3 E x p e c t e d Change i n P r o f i t due t o T r a i n i n g P r o gram $30000-$20000 Group 121 D.4 E x p e c t e d Change i n P r o f i t due t o T r a i n i n g P r o gram $50000-$90000 Group 122 D.5 E x p e c t e d Change i n P r o f i t due t o T r a i n i n g P rogram $ 1 00000-$400000 Group 122 i x ACKNOWLEDGEMENTS I w i s h t o e x p r e s s my s i n c e r e t h a n k s and a p p r e c i a t i o n t o Dr. R. B a r i c h e l l o , my t h e s i s s u p e r v i s o r . D r . B a r i c h e l l o i s a c k n o w l e d g e d f o r h i s encouragement and c o n c e p t u a l i z a t i o n of the p r o b l e m , m e t h o d o l o g y and s u p e r v i s i o n of t h e t h e s i s u n t i l h i s d e p a r t u r e t o Y a l e . Dr. John Graham i s a c k n o w l e d g e d f o r h i s v a l u a b l e g u i d a n c e and a s s i s t a n c e i n the l a t e r s t a g e s o f t h i s t h e s i s a f t e r Dr. B a r i c h e l l o ' s d e p a r t u r e . Acknowledgement must be e x t e n d e d t o o t h e r members of t h i s t h e s i s c o m m i t t e e : Dr. Ken W h i t e , Dr. George Kennedy and D r . Tom Sork f o r p r o v i d i n g t h e i r t i m e and v a l u a b l e comments on t h e d r a f t . Thanks a r e due t o t h e M i n i s t r y of A g r i c u l t u r e f o r t h e p r o v i s i o n of f i n a n c i a l and r e s e a r c h s u p p o r t . I am i n d e b t e d t o a l l t h e workshop i n s t r u c t o r s who made p o s s i b l e t h e c o l l e c t i o n of t h e d a t a f o r t h i s r e s e a r c h . I w i s h a l s o t o a c k n o w l e d g e t h e s u p p o r t and d e d i c a t i o n of Mrs. C a r o l C l a r k and Mr. R i c k Lymer , i n t h e Department of A g r i c u l t u r a l E c o n o m i c s . 1 CHAPTER I INTRODUCTION T r a d i t i o n a l l y , economic growth models have been b u i l t on t h e a s s u m p t i o n t h a t o u t p u t i s a f u n c t i o n of a g g r e g a t e q u a n t i t i e s of c a p i t a l and l a b o r u s e d i n p r o d u c t i o n . In t h e Harrow-Domar (1940) g r o w t h model, f o r example, e q u i l i b r i u m g r o w t h s i m p l y r e q u i r e s t h a t b o t h l a b o r and c a p i t a l s t o c k (measured i n a g g r e g a t e q u a n t i t i e s ) be f u l l y employed as t h e economy grows. However, i n t h e e a r l y 1950's e m p i r i c a l r e s u l t s b a s e d on U n i t e d S t a t e s d a t a i n d i c a t e d t h a t c a p i t a l and l a b o r i n p u t s , as t h e y were c u r r e n t l y b e i n g measured, e x p l a i n e d l i t t l e of t h e change i n p r o d u c t i v i t y . In r e c o g n i t i o n of t h i s f a c t , t h e u n e x p l a i n e d c h a n g e s i n t o t a l f a c t o r p r o d u c t i v i t y have been g i v e n s u c h l a b e l s as " t h e r e s i d u a l " o r " t h e measure of i g n o r a n c e . " Some of t h e s e s t u d i e s t h a t a t t e m p t t o measure f a c t o r p r o d u c t i v i t y a r e d i s c u s s e d below. Solow (1958) i n t r o d u c e d i n t o t h e p r o d u c t i o n f u n c t i o n a t i m e v a r i a b l e as a p r o x y f o r t e c h n i c a l c h a n g e . T h i s v a r i a b l e a c c o u n t e d f o r slowdowns and speedups of t h e economy, improvements i n t h e e d u c a t i o n of t h e l a b o r f o r c e , and o t h e r f a c t o r s . Solow a p p l i e d t h e model t o U n i t e d S t a t e s d a t a f o r t h e y e a r s 1909-49 and c o n c l u d e d t h a t g r o s s o u t p u t p e r worker hour d o u b l e d o v e r t h a t i n t e r v a l , w i t h 87.5 per c e n t o f t h e i n c r e a s e b e i n g a t t r i b u t a b l e t o t e c h n i c a l change or a d v a n c e i n knowledge. The r e m a i n i n g 12.5 p e r c e n t was a t t i b u t a b l e t o an i n c r e a s e i n t h e l e v e l of c a p i t a l u s e d . 2 J o r g e n s o n and G r i l i c h e s ( 1 9 6 3 ) , u s i n g 1945-65 d a t a f o r t h e U n i t e d S t a t e s economy, c o n c l u d e d t h a t i n c r e a s e d i n p u t use i n i t i a l l y e x p l a i n s 52.4 p e r c e n t of t h e r a t e of g r o w t h of o u t p u t . However, a f t e r c o r r e c t i n g f o r q u a l i t y c h a n g e s i n t h e l a b o r and c a p i t a l s t o c k , t h e r a t e of g rowth of i n p u t use e x p l a i n e d 96.7 p e r c e n t of t h e r a t e of g rowth of o u t p u t change and c h a n g e s i n t o t a l f a c t o r p r o d u c t i v i t y e x p l a i n s t h e r e s t . In t h e same y e a r , K e n d r i c k and S a t o (1963) c o n c l u d e d t h a t t h e o b s e r v e d d e c l i n e i n t h e s a v i n g r a t i o f o r t h e U n i t e d S t a t e s economy, between 1919— 60, h o l d s o n l y i f t h e d e f i n i t i o n of s a v i n g s i s l i m i t e d t o t a n g i b l e c a p i t a l . They a r g u e d t h a t i f t h e s a v i n g s a s s o c i a t e d w i t h i n t a n g i b l e i n v e s t m e n t s i n r e s e a r c h and d e v e l o p m e n t and i n p e r s o n s - p a r t i c u l a r l y f o r h e a l t h , e d u c a t i o n and t r a i n i n g - a r e i n c l u d e d w i t h c o n v e n t i o n a l l y d e f i n e d s a v i n g and i n v e s t m e n t , t h e n i t i s d o u b t f u l t h a t t h e n e t s a v i n g r a t i o f e l l a t a l l . T h e i r c o n c l u s i o n was b a s e d on t h e f a c t t h a t , d e s p i t e t h e d e c l i n e i n t h e n e t t a n g i b l e i n v e s t m e n t r a t i o a f t e r 1919, t h e a c c e l e r a t i o n i n p r o d u c t i v i t y advance a f t e r 1919 i s i n d i r e c t l y c o n f i r m e d by t h e i n t a n g i b l e i n v e s t m e n t r a t i o w h i c h grew s u b s t a n t i a l l y a f t e r 1919. N e l s o n (1964) i n a c r i t i c a l r e v i e w o f p a s t work, l o o k e d a t t h e s o u r c e s of i n t e r a c t i o n between e d u c a t i o n , t e c h n i c a l change and i m p r o v e d a l l o c a t i o n d e c i s i o n s . N e l s o n a r g u e d t h a t t h e e f f e c t s upon GNP of t h e t h r e e p r i n c i p a l c o n t r i b u t o r s t o growth - t e c h n o l o g i c a l c h a n g e , improved 3 e d u c a t i o n a l standards and l e v e l s , and improved a l l o c a t i v e e f f i c i e n c y - should not be viewed as independent. He w r i t e s , 1 Educated people, p r i n c i p a l l y s c i e n t i s t s and engineers, are c r i t i c a l input to the r e s e a r c h and development process; thus the rat e at which t e c h n o l o g i c a l understanding i s i n c r e a s e d i s s t r o n g l y r e l a t e d to the number of educated people a p p l i e d to that purpose.... New t e c h n o l o g i c a l developments need to be e v a l u a t e d by people in management who can understand them and who can understand the nature of the market for them. Information about new products needs to be communicated from the f i r m that develops them to the p o t e n t i a l market by s a l e s men who can d e s c r i b e the product and i t s uses and can answer q u e s t i o n s . In the e a r l i e r stages of p r o d u c t i o n before the techniques become r o u t i n i z e d , h i g h l y t r a i n e d people are r e q u i r e d to deal with the problems that i n v a r i a b l y a r i s e . . . . F i n a l l y , to c l o s e the c i r c l e , one of the important l e s s o n s we have lea r n e d from experience with depressed areas and i n d u s t r i e s and with t r a i n i n g and r e t r a i n i n g programs i s that b a s i c l i t e r a c y i s almost a p r e r e q u i s i t e for both l e a r n i n g of a new job and l e a r n i n g to do a new job. Denison (1967) s t u d i e d the growth of the United S t a t e s economy for the p e r i o d s of 1909-57. He a l s o a p p l i e d the same technique of a n a l y s i s to nine c o u n t r i e s in the 1950-62 p e r i o d and 1950-55 and 1955-62 subperiods. Denison's f i n d i n g s i n d i c a t e that an i n c r e a s e i n the education of the labor f o r c e r a i s e d the average q u a l i t y of labor enough to c o n t r i b u t e 50 percentage p o i n t s to the R. R. Nelson, "Aggregate Production F u n c t i o n . " American  Economic Review (September, 1964) pp. 591-592 4 United States growth rate from 1950 to 1962, the amount was 40 percent i n Belgium and I t a l y , 30 percent i n France and the United Kingdom, 20 percent in the Netherlands and Norway, and only 10 percent i n Denmark and Germany. A general c o n c l u s i o n that f o l l o w s from these s t u d i e s i s that the e f f e c t of input use on output growth i n c l u d e s the e f f e c t of p h y s i c a l q u a n t i t i e s of inputs and a l l q u a l i t i e s . Q u a l i t y changes come from the e x i s t e n c e of t e c h n i c a l progress in the form of improvements in management, improvements in c a p i t a l goods, and improvements in l abor due to e d u c a t i o n . For the purpose of the present study, we are a l s o concerned with improvements in the labor f o r c e which may come about as a r e s u l t of education through an extension program. T h i s improvement in t e c h n i c a l and a l l o c a t i v e e f f i c i e n c y w i l l a f f e c t c h o i c e s farmers make. Evidence from the seminal work on a g r i c u l t u r a l r e s e a r c h and extension p r o d u c t i v i t y by G r i l i c h e s (1958) on h y b r i d corn i n the U.S.A., i n d i c a t e s that there are p a y o f f s a s s o c i a t e d with extension programs to farmers and to consumers. In g e n e r a l , the value of a g r i c u l t u r a l extension i n c l u d e s d i r e c t b e n e f i t s , such as i n c r e a s e d y i e l d , reduced c o s t s of p r o d u c t i o n and improved q u a l i t y . In a d d i t i o n , higher incomes are earned by some farmers and consumers face lower food p r i c e s . Many c o u n t r i e s around the world today devote a l a r g e p a r t of t h e i r developmental e f f o r t s to p r o v i d i n g extension s e r v i c e s of d i f f e r e n t types and forms to 5 d i f f e r e n t g r o u p s or s e c t o r s of t h e i r e c o n o m i e s . E x p e n d i t u r e s on a g r i c u l t u r a l e x t e n s i o n programs i n C a n a d a , 2 were 21.6 m i l l i o n ($U.S.) i n 1959, 36.0 m i l l i o n d o l l a r s i n 1971 and 36.6 m i l l i o n d o l l a r s i n 1974. 1.1 H i s t o r y of F i n a n c i a l Management Programmes  i n B r i t i s h C o l u m b i a The h i s t o r y o f t h e f i n a n c i a l management t r a i n i n g p rogram t o be e v a l u a t e d i n t h i s s t u d y d a t e s t o 1974 when Canada and t h e p r o v i n c e of B r i t i s h C o l u m b i a s i g n e d a G e n e r a l Development A g r e e m e n t . 3 The f e d e r a l and p r o v i n c i a l g o v e r n m e n t s a g r e e d on a new d e v e l o p m e n t program t h a t would i n c l u d e s e l e c t e d a g r i c u l t u r e and r u r a l d e v e l o p m e n t programs t h e r e b y i m p r o v i n g t h e economic p o t e n t i a l of r u r a l - r e g i o n s i n B r i t i s h C o l u m b i a . As a r e s u l t of t h e agreement t h e r e has been i n B r i t i s h C o l u m b i a , f o r t h e p a s t f i v e y e a r s (197 9-8 3 ) , a s p e c i a l i z e d c o u r s e i n t h e b a s i c p r i n c i p l e s of f i n a n c i a l management. T h i s F i n a n c i a l Management T r a i n i n g P r o j e c t , " w h i c h i s e s p e c i a l l y d e s i g n e d f o r t h o s e f a r m e r s w i t h l i m i t e d s k i l l s i n f i n a n c i a l management, has been d e l i v e r e d t h r o u g h t h e a u s p i c e s of t h e M i n i s t r y of A g r i c u l t u r e and Food t o f a r m e r s , as p a r t of what i s known 2 Boyce and E v e n s o n , T a b l e 1.1, 1.2, 2.1, and 2.2 i n W. E. Huffman, " R e t u r n s t o E x t e n s i o n : An A s s e s s m e n t , " R e s e a r c h  and E x t e n s i o n P r o d u c t i v i t y i n A g r i c u l t u r e , e d . A. A. A r a j i , pp. 101-140. Moscow: U n i v e r s i t y of Idaho, 1980 3 M i n i s t r y o f A g r i c u l t u r e , A g r i c u l t u r e and R u r a l Development (Canada - B r i t i s h C o l u m b i a , J u l y 8, 1977) p. 2 " M i n i s t r y o f A g r i c u l t u r e and Food, 1982 A n n u a l R e p o r t ( P r o v i n c e o f B r i t i s h C o l u m b i a ) , p. 15 6 as a S u b s i d i a r y Agreement on A g r i c u l t u r e and R u r a l Development (ARSDA) f u n d e d Farm Management T r a i n i n g P r o j e c t . The p r o j e c t i s t h e r e s p o n s i b i l i t y of a management committee r e p r e s e n t e d by members of t h e U n i v e r s i t y o f B r i t i s h C o l u m b i a , t h e B r i t i s h C o l u m b i a F e d e r a t i o n of A g r i c u l t u r e and t h e M i n i s t r y of A g r i c u l t u r e and Food and o t h e r s . T h e r e i s a mandate t o e v a l u a t e the e f f e c t i v e n e s s of t h i s e x t e n s i o n program. The need f o r a p r o j e c t of t h i s n a t u r e i s n o t e d by S c o t t i n h i s "Notes on F i n a n c i a l Management f o r A g r i c u l t u r a l P r o d u c e r s " . He w r i t e s , 5 T h e s e workshops on f i n a n c i a l management r e c o g n i z e t h e c h a n g e s t h a t have t a k e n p l a c e i n a g r i c u l t u r e i n t h e l a s t 40 y e a r s , and t h e n e c e s s i t y f o r t h e f a r m e r s t o have a h i g h d e g r e e of s k i l l i n f i n a n c i a l management. S i n c e 1940, th e a v e r a g e i n v e s t m e n t i n farms has i n c r e a s e d f o r t y t o f i f t y t i m e s . T h i s f a c t r e q u i r e s f a r m e r s t o borrow huge amounts of c a p i t a l t o i n v e s t i n t h e farm b u s i n e s s . O r i g i n a l l y t h i s money c o u l d be b o r r o w e d on t h e b a s i s of s e c u r i t y but t h a t i s not s u f f i c i e n t anymore. Now a b o r r o w e r a l s o r e q u i r e s a d e m o n s t r a t e d a b i l i t y t o manage d e b t and p r o d u c e a p r o f i t from owners i n v e s t m e n t w i t h b a c k i n g of t h e l e n d e r . F a r m e r s t o d a y g e n e r a t e a l o t of c a s h but i n p u t s a r e e x p e n s i v e and n e t p r o f i t from t h e s a l e s d o l l a r has shrunk from 65% t o a b o u t 18% or l e s s i n 1979.Because of th e narrow m a r g i n s f a r m e r s must p r e p a r e a c c u r a t e b u d g e t s , c o n t r o l c o s t s and c o n t r o l t h e f l o w of c a s h . 5 H. A. S c o t t , "Notes on F i n a n c i a l Management f o r A g r i c u l t u r a l P r o d u c e r s " ( B r i t i s h C o l u m b i a F i n a n c i a l Management P r o j e c t , 1981), p. 1 (Mimeographed) 7 At the f e d e r a l and p r o v i n c i a l l e v e l s , the o b j e c t i v e s of the ARDSA agreement are to : (a) i d e n t i f y , r e s e a r c h , plan and pursue new or u n e x p l o i t e d p r o j e c t s r e l a t e d to the development op p o r t u n i t y ; (b) expand employment in those e x i s t i n g aspects of the a g r i c u l t u r e i n d u s t r y and food p r o c e s s i n g i n d u s t r y in B r i t i s h Columbia which demonstrate pr o d u c t i o n and market p o t e n t i a l , and (c) improve the v i a b i l i t y of the e x i s t i n g i n d u s t r i e s to s u s t a i n growth Under t h i s agreement, the province of B r i t i s h Columbia i s to undertake: (a) r e s e a r c h , p l a n n i n g , t r a i n i n g and market promotion to h e l p i d e n t i f y and develop new o p p o r t u n i t i e s f o r the p r o v i n c e ' s a g r i c u l t u r a l and f o o d - o r i e n t e d i n d u s t r i e s (b) c o o r d i n a t e resource management - with the c o - o p e r a t i o n of other resource users - to develop the g r a z i n g p o t e n t i a l of Crown rangelands which are best s u i t e d f o r l i v e s t o c k (c) primary resource development with funds being a l l o c a t e d f o r i r r i g a t i o n and drainage p r o j e c t s and other p r o j e c t s (d) support s e r v i c e s and community developments to a s s i s t secondary food p r o c e s s o r s and a s s i s t i n a g r i c u l t u r a l support s e r v i c e s 8 which are needed to improve r u r a l economic s t a b i l i t y and to c r e a t e jobs In terms of the o b j e c t i v e s of the p r o j e c t , Scott in h i s "Notes on F i n a n c i a l Management f o r A g r i c u l t u r a l P r o d u c e r s " 6 w r i t e s about the program in the f o l l o w i n g way : The o b j e c t i v e of the [ F i n a n c i a l Management T r a i n i n g P r o j e c t ] i s to give' a general understanding of the purpose of f i n a n c i a l management and what i s i n v o l v e d in that f u n c t i o n f o r owner-operated farm b u s i n e s s . In doing so, [the course conveys . the necessary] i n f o r m a t i o n r e q u i r e d f o r f i n a n c i a l management purposes and how t h i s i n f o r m a t i o n i s assembled i n t o statements that permit the manager to : make b e t t e r investment d e c i s i o n s ; monitor and c o n t r o l o p e r a t i o n s f o r p r o f i t ; manage cash; determine e f f e c t ahead of time on p r o f i t and cash flow of changes i n o p e r a t i o n s , f i n a n c i n g or investment p o r t f o l i o ; analyze the business f o r st r e n g t h s and weakness; and analyze the business f o r growth i n a s s e t s and e q u i t y . The p r o j e c t c o n s i s t s of courses of two to four days i n d u r a t i o n o f f e r e d on a commodity b a s i s at three d i f f e r e n t l e v e l s : beginning, intermediate and advanced l e v e l s of understanding. These enable a farm manager to progress from an i n t r o d u c t o r y l e v e l , d e a l i n g with the b a s i c s of f i n a n c i a l management, to an intermediate l e v e l concerned with the a p p l i c a t i o n of f i n a n c i a l management t o o l s and an advanced l e v e l which covers more s p e c i f i c t o p i c s in d e t a i l such as investment a n a l y s i s , farm business a n a l y s i s , business o r g a n i z a t i o n a l t e r n a t i v e s and marketing. 6 I b i d . , p. 1 9 U n l i k e other extension programs, which are o f t e n based on a v i s i t system, the present extension e f f o r t i s being d e l i v e r e d i n a classroom s i t u a t i o n . A s k i l l s t e s t p r i o r to and a f t e r the t r a i n i n g i s given to each p a r t i c i p a n t . Another important f e a t u r e of the p r o j e c t i s the scheduling of courses throughout the pro v i n c e of B r i t i s h Columbia, o f t e n at remote l o c a t i o n s . In t h i s 4-day course at l e v e l I, which i s the i n t e r e s t of the present study, farmers are taught techniques of keeping c o s t s of production worksheets, income and expense statements, cash flow statements, balance sheets, net worth statements, p a r t i a l budgeting, and tax and e s t a t e p l a n n i n g . According to experts i n the farm management area a d d i t i o n a l income b e n e f i t s to producers are l i k e l y to r e s u l t from'the i n c r e a s e d use of cash flow, and tax and es t a t e p l a n n i n g concepts. In order to make e f f e c t i v e d e c i s i o n s the f i n a n c i a l manager or farmer needs a flow of accurate i n f o r m a t i o n p e r t a i n i n g to the f i n a n c i a l p o s i t i o n and a c t i v i t i e s of t h e i r b u s i n e s s . T h i s flow of info r m a t i o n w i l l a s s i s t them in e v a l u a t i n g the f i r m ' s f i n a n c i a l p o s i t i o n r e l a t i v e to i t s o b j e c t i v e s , i t w i l l allow them to assess the economic performance of the farm and c o n t r o l the d a i l y r o u t i n e of o p e r a t i o n of farm, and evaluate a l t e r n a t i v e s t r a t e g i e s f o r c o n t r o l l i n g r e s o u r c e s . Tax and es t a t e p l a n n i n g techniques, on the other hand, are extremely important i n a s s i s t i n g a producer's choice of business o r g a n i z a t i o n i n order to r e c e i v e maximum b e n e f i t s 10 from e x i s t i n g tax and e s t a t e t r a n s f e r laws. 1.2 The O b j e c t i v e of the Study The o b j e c t i v e of the present study i s to assess the e f f e c t i v e n e s s of the f i n a n c i a l management extension program on farm production and incomes f o r those who have taken the course and more g e n e r a l l y f o r farmers in B r i t i s h Columbia. There are two reasons f o r the e v a l u a t i o n e x e r c i s e : F i r s t , the assessment of the course c o u l d encourage an improvement and r e v i s i o n of the course format, m a t e r i a l and p r e s e n t a t i o n . Secondly, the b e n e f i t s from p r o d u c t i o n o r i e n t e d extension a c t i v i t i e s are i n most cases measured through changes i n a g r i c u l t u r a l p r o d u c t i v i t y and si n c e such a c t i v i t i e s use scarce resources, p o l i c y makers are keen to know whether i t pays to in v e s t i n extension a c t i v i t i e s . T h erefore, another aspect of the e v a l u a t i o n e x e r c i s e i s to provide i n f o r m a t i o n to p o l i c y makers as to the value of such courses and how much support should be given to t h i s present form of a g r i c u l t u r a l t r a i n i n g program. I f the present t r a i n i n g program proves to y i e l d s a t i s f a c t o r y r a t e s of r e t u r n , then a d d i t i o n a l funding to such a c t i v i t i e s would prove p r o f i t a b l e to s o c i e t y and lessons l e a r n e d from t h i s program can then be g e n e r a l i z e d . T h i s i s p a r t i c u l a r l y important when, w i t h i n the A g r i c u l t u r a l M i n i s t r y , e xtension budgets have to compete with other programs such as a g r i c u l t u r a l p r i c e s u b s i d i e s 11 and other s e r v i c e s . Outside a g r i c u l t u r e these a l l o c a t i o n s must compete with other budgetary c a t e g o r i e s such as highways, t r a n s p o r t a t i o n , tourism, f o r e s t r y , education, h e a l t h s e r v i c e s and s o c i a l w e l f a r e . In the l i g h t of the above d i s c u s s i o n , the f o l l o w i n g hypothesis i s p o s t u l a t e d : s k i l l s i n f i n a n c i a l management have a s i g n i f i c a n t e f f e c t on p r o d u c t i o n , incomes and p r o f i t s of the farmers i n B r i t i s h Columbia. More s p e c i f i c a l l y , these s k i l l s may be l e a r n t through extension programmes and t h e i r s k i l l l e v e l may be judged p r i o r to and a f t e r a f i n a n c i a l management t r a i n i n g programme. S t a t i s t i c a l l y , the n u l l hypothesis may be s t a t e d as Ho : B = 0 where B i s a parameter measuring the e f f e c t of the f i n a n c i a l management s k i l l on p r o f i t . In other words, the n u l l h ypothesis i s that f i n a n c i a l management s k i l l s do not have any s i g n i f i c a n t e f f e c t on p r o d u c t i o n and incomes. The a l t e r n a t i v e h ypothesis becomes Ha : B > 0; which i s e q u i v a l e n t to saying that f i n a n c i a l management s k i l l s do have a s i g n i f i c a n t e f f e c t on p r o d u c t i o n and incomes. In the a n a l y s i s that f o l l o w s the s i g n i f i c a n c e of t h i s parameter i s judged. 1 2 1.3 O r g a n i z a t i o n of the T h e s i s In the present chapter we have attempted to d e f i n e the purpose of t h i s t h e s i s by d i s c u s s i n g improvements in the labor f o r c e which may come about as a r e s u l t of being b e t t e r educated through an extension program. These improvements in education w i l l l ead to improvements in p r o d u c t i v e e f f i c i e n c y by a f f e c t i n g the technology which farmers s e l e c t . The o r i g i n s and o b j e c t i v e s of the t r a i n i n g programs in general and of the Farm F i n a n c i a l Management T r a i n i n g i n p a r t i c u l a r i n B r i t i s h Columbia are noted. The economic importance of a t r a i n i n g program i n f i n a n c i a l management was a l s o noted. In Chapter 2 a review of the l i t e r a t u r e on e v a l u a t i o n methods of education and extension programs i s presented. A review of the theory of p r o d u c t i o n p r o v i d e s a b a s i s for the conceptual model to be d e r i v e d . In Chapter 3, data used i n t h i s study are presented in terms of i t s source, c o l l e c t i o n problems and the measurement of v a r i a b l e s . In subsequent s e c t i o n s , the p o s s i b l e choice of f u n c t i o n a l forms for the t h e o r e t i c a l model developed in Chapter 2 are d i s c u s s e d and the i m p l i c a t i o n s f o r e s t i m a t i o n are c o n s i d e r e d . In Chapter 4, the t e c h n i c a l and a l l o c a t i v e e f f e c t s of education on p r o f i t s are measured and the r e s u l t s compared with past s t u d i e s . In t h i s chapter the r e s u l t s on formal education are d e r i v e d for two d i f f e r e n t data s e t s . The data are a l s o pooled i n an attempt to d e r i v e more r e l i a b l e estimates and the e m p i r i c a l model i s extended to i n c o r p o r a t e the 1 3 f i n a n c i a l management v a r i a b l e . The r e s u l t s o b t a i n e d a r e t h e n u s e d i n p r o j e c t i n g t h e e x p e c t e d e f f e c t of t h e p r e s e n t t r a i n i n g i n f i n a n c i a l management on farm p r o f i t s i n B r i t i s h C o l u m b i a . In C h a p t e r 5 a summary o f f i n d i n g s and recommendations i s p r o v i d e d . 1 4 CHAPTER II THE THEORETICAL FRAMEWORK FOR ASSESSING RETURNS TO HUMAN CAPITAL The purpose of the present chapter i s to develop a general framework for a s s e s s i n g r e t u r n s to investment i n human c a p i t a l e i t h e r i n the form of formal education or non-formal education such as extension a c t i v i t i e s or on-the-job- t ra i n i ng . The f i r s t s e c t i o n of t h i s chapter reviews the l i t e r a t u r e on attempts to evaluate education and ext e n s i o n . The second s e c t i o n , i n order to h i g h l i g h t the general nature of the pr o d u c t i o n process, reviews b r i e f l y some aspects of the theory of pro d u c t i o n and d i s c u s s e s producer behaviour in the l i g h t of output maximization, cost m i n i m i z a t i o n and p r o f i t maximization o b j e c t i v e s . F i n a l l y , a conceptual model to s u i t the purpose of t h i s study i s d e r i v e d . 2.1 L i t e r a t u r e Review Formal e d u c a t i o n a l programs and extension type education programs may both be viewed as a form of l e a r n i n g and as such expected to improve the s k i l l s of a p a r t i c i p a n t in these programs. As such they are complementary to each other and the e f f e c t i v e n e s s of some of these programs are examined i n t h i s s e c t i o n . Models a s s e s s i n g the impact of education and extension programs abound and w i l l c e r t a i n l y d i f f e r 1 5 depending on the type, form of e x t e n s i o n , e v a l u a t i o n o b j e c t i v e s and to a l a r g e extent on the a v a i l a b i l i t y of s u i t a b l e data f o r e m p i r i c a l a n a l y s i s . Such models range from the simplest to h i g h l y s o p h i s t i c a t e d approaches. Probably the most t r a d i t i o n a l approach to a s s e s s i n g extension programs i s the ' f o l l o w - up' approach. T h i s c o n s i s t s of f i n d i n g out whether c e r t a i n approved p r a c t i c e s (e.g. adoption of c e r t a i n t e c h n o l o g i e s ) are being adopted by the farmers a f t e r a c e r t a i n lapse of time between the extension a c t i v i t y and the e v a l u a t i o n . T h i s procedure has been implemented by many r e s e a r c h e r s . Brunner e t . a l . (1949); Phipps e t . a l . (1954); and Benor e t . a l . (1977) followed t h i s approach through o b s e r v a t i o n , and without the use of q u e s t i o n n a i r e s . Opare (1976) c o r r e l a t e d p r o d u c t i o n p a t t e r n s with the adoption of recommended p r a c t i c e s . Smith e t . a l . (1982) used q u e s t i o n n a i r e s a f t e r d i s s e m i n a t i o n of extension news, and A r n o t t (1982) conc e n t r a t e d on Bennett's (1977) h i e r a r c h y of e v a l u a t i o n . His e v a l u a t i o n c o n c e n t r a t e d on the r e a c t i o n s , knowledge and the s k i l l l e v e l s . Within the context of developing c o u n t r i e s , Harker(l974) r e p o r t s on a few case s t u d i e s by i n v e s t i g a t o r s , such as A. S. Murphy, who r e p o r t e d a zero-order c o r r e l a t i o n of 0.36 between the number of years of s c h o o l i n g completed and the adoption of new p r a c t i c e s among 180 Indian farmers i n West Godavary. Prodipo e t . a l . r e p o r t e d the same c o r r e l a t i o n of 0.36 f o r 680 Indian 16 farmers. In a study of 222 farmers from three v i l l a g e s i n the Union T e r r i t o r y of D e l h i , V. S. Sanharan Potty found that the v i l l a g e with the lowest p r o p o r t i o n of i l l i t e r a t e farmers and the highest p r o p o r t i o n of farmers with primary or higher s c h o o l i n g was the most adoptive of new p r a c t i c e s . Shiva Nath Singh's work r e p o r t s the same r e s u l t s i n 1969 for 90 Indian farmers from s i x v i l l a g e s i n the Union T e r r i t o r y of D e l h i . His r e s u l t s showed a very strong r e l a t i o n s h i p between education and adoption. Another method f r e q u e n t l y used i s to count and c o r r e l a t e , or use a frequency d i s t r i b u t i o n t a b l e between the number of c o n t a c t s that farmers have had with extension agents (Akinbode, 1969; Asmar, 1975) and r e l a t e t h i s c o ntact to p r o d u c t i o n . An a l t e r n a t i v e method i s to evaluate both the c l i e n t e l e and the extension s t a f f simultaneously through q u e s t i o n n a i r e s . Responses to p a r t i c u l a r q u e s t i o n s are r a t e d . Uwakah (1975) eva l u a t e d a g r i c u l t u r a l extension s t a f f using group means, standard d e v i a t i o n s , t - t e s t s and other c o r r e l a t i o n techniques. Opeke (1977) assessed the e f f e c t i v e n e s s of the e x t e n s i o n agents through t h e i r c l i e n t e l e using d e s c r i p t i v e s t a t i s t i c s and c o r r e l a t i o n a l a n a l y s i s to assess f a c t o r s a f f e c t i n g p r o d u c t i o n . Oakley (1981) assessed extension s t a f f through c o n v e r s a t i o n and o b s e r v a t i o n and Ojoko (1979) assessed the e x t e n s i o n s t a f f and the program through q u e s t i o n n a i r e s submitted to both extension s t a f f and the c l i e n t e l e . Mean scores on the r a t i n g s by each group were compared through a n a l y s i s of 1 7 v a r i a n c e . Ranter (1982) and Young (1977) c a r r i e d out t h e i r a n a l y s i s by comparing the mean scores on r a t i n g s of the program by both the extension s t a f f and the c l i e n t e l e ; and Hagle (1972) evaluated both c l i e n t e l e and the agencies i n v o l v e d i n the extension program through ranking techniques. In examining the B. C. F i n a n c i a l Management T r a i n i n g P r o j e c t C a h i l l (1981), using the scores obtained from t e s t s given to farmers p r i o r to and a f t e r the extension course, t e s t e d f o r s i g n i f i c a n c e of change i n s k i l l s in f i n a n c i a l management as r e f l e c t e d by the change in the t e s t s c o r e s . Haddow (1979) used a c o s t and b e n e f i t a n a l y s i s approach in attempting to evaluate the B r i t i s h Columbia F i n a n c i a l Management T r a i n i n g P r o j e c t . He was able to q u a n t i f y the d i r e c t c o s t s of c a r r y i n g out the extension program but h i s study was handicapped by the f a c t that he c o u l d not q u a n t i f y the expected long-run b e n e f i t s of the p r o j e c t . A j a r i (1980) a p p l i e d cost and b e n e f i t a n a l y s i s i n an attempt to estimate the r e t u r n s to investment in c u r r e n t and f u t u r e r e s e a r c h and extension programs for s e v e r a l a g r i c u l t u r a l commodities (sheep, v e g e t a b l e s , potatoes, and cotton) and analyzed the impact of c o o p e r a t i v e extension on research e f f e c t i v e n e s s in the Western Region of the United S t a t e s . A j a r i concluded that the p a y o f f s from res e a r c h without e x t e n s i o n are lower than those with e x t e n s i o n . An a l t e r n a t i v e method of a s s e s s i n g the e f f e c t s of 18 e d u c a t i o n and e x t e n s i o n i s t h e i n t r o d u c t i o n o f an e d u c a t i o n v a r i a b l e as a n o t h e r i n p u t of a p r o d u c t i o n f u n c t i o n . Huffman ( 1 9 7 7 ) , Fane (1975) and K h a l d i (1975) have f o l l o w e d a two-s t e p p r o c e d u r e . F i r s t , a p r o d u c t i o n f u n c t i o n i s e s t i m a t e d t o d e t e r m i n e t h e optimum i n p u t a n d / o r c o s t l e v e l s . Then, i n a s e c o n d s t a g e , t h e e f f e c t of e d u c a t i o n i n r e d u c i n g t h e d i s c r e p a n c y between optimum and o b s e r v e d l e v e l s i s measured. Huffman ( 1 9 7 4 ) , i n h i s s t u d y of U.S.A. Corn B e l t , c o n c l u d e d t h a t e x t e n s i o n ( d a y s , a v e r a g e f o r 1958 and 1960, a l l o c a t e d t o c r o p s by a g e n t s d o i n g p r i m a r i l y a g r i c u l t u r a l work) and e d u c a t i o n a r e s u b s t i t u t e s t o n i t r o g e n f e r t i l i z e r i n h y b r i d c o r n p r o d u c t i o n . He a l s o (Huffman,1976) a r r i v e d a t t h e c o n c l u s i o n t h a t e x t e n s i o n a g e n t d a y s a l l o c a t e d 3 y e a r s e a r l i e r t o c r o p s and l i v e s t o c k a c t i v i t i e s by a g e n t s d o i n g p r i m a r i l y a g r i c u l t u r a l work, c o n t r i b u t e d s i g n i f i c a n t l y t o t h e l e v e l of a g r i c u l t u r a l p r o d u c t i o n . Huffman (1980) r e p o r t s s e v e r a l s t u d i e s t h a t have used a p r o d u c t i o n f u n c t i o n a p p r o a c h and have measured t h e e x t e n s i o n v a r i a b l e i n d o l l a r e x p e n d i t u r e p e r e x t e n s i o n a c t i v i t y , t i m e e x p e n d i t u r e p e r e x t e n s i o n a c t i v i t y , number of c o n t a c t s w i t h e x t e n s i o n a g e n t s or dummy v a r i a b l e s . These a r e r e v i e w e d below. P a t r i c k e t . a l . (1973) c o n d u c t e d a s t u d y i n E a s t e r n B r a z i l and c o n c l u d e d t h a t e x t e n s i o n , number of d i r e c t c o n t a c t s o f f a r m e r s w i t h e x t e n s i o n a g e n t s d u r i n g t h e s t e a d y y e a r , had p o l i t i c a l b u t g e n e r a l l y not a 19 s t a t i s t i c a l l y s i g n i f i c a n t e f f e c t on value added in farm p r o d u c t i o n . Evenson e t . a1. (1973), in I n d i a , found that extension and the index of maturity of the extension program c o n t r i b u t e s s i g n i f i c a n t l y to a g r i c u l t u r a l p r o d u c t i v i t y change only through i n t e r a c t i o n with r e s e a r c h programs. Mooch (1976,1978), in a study i n Kenya, found that extension c o n t a c t s with farm operators during the year c o n t r i b u t e d s i g n i f i c a n t l y to corn y i e l d s ; that extension and education are s u b s t i t u t e s , and that extension i n t e r a c t s p o s i t i v e l y with the rate of n i t r o g e n f e r t i l i z e r a p p l i c a t i o n on farms. Halim (1977), in the P h i l l i p i n e s , found that an index of extension c o n t a c t with the farmer, d e r i v e d by weighting frequency of c o n t a c t over previous 5 y e a r s , c o n t r i b u t e d p o s i t i v e l y and s i g n i f i c a n t l y to a g r i c u l t u r a l p r o d u c t i o n , with an i m p l i e d r e l a t i v e l y high marginal r e t u r n . The e f f e c t of s c h o o l i n g was s u b s t i t u t e d by the extension e f f o r t s in the l e s s developed b a r r i o s , while i n the developed b a r r i o s , s c h o o l i n g and extension were found to complement each other i n i n c r e a s i n g r i c e p r o d u c t i o n . F i n a l l y , a l s o using a p r o d u c t i o n f u n c t i o n approach, Chaudhuri (1974) found that 65 to 75 percent v a r i a t i o n i n output i n Indian a g r i c u l t u r e i s e x p l a i n e d by education alone. In reviewing the l i t e r a t u r e ..on education and extension e v a l u a t i o n i t i s noted that the procedures range from simple "follow-up" techniques, c o r r e l a t i o n a n a l y s i s , cost and b e n e f i t a n a l y s i s to the use of production 20 f u n c t i o n s . Each technique has advantages and disadvantages. For example, the "follow-up" technique may not r e q u i r e c o l l e c t i o n of hard data. The simultaneous e v a l u a t i o n of both extension s t a f f and the c l i e n t e l e i s commendable because i t acknowledges the f a c t that the success of an extension program does not only depend on the c l i e n t e l e but a l s o the s t a f f that plans and implements the program. The use of c o s t and b e n e f i t a n a l y s i s c o u l d be u s e f u l because i t i n c o r p o r a t e s the d i r e c t c o s t s i n c u r r e d in the extension a c t i v i t i e s , such as s a l a r i e s , and c a p i t a l o u t l a y s and a l s o some s o c i a l c o s t s and b e n e f i t s i n c u r r e d . The use of p r o d u c t i o n f u n c t i o n s can be u s e f u l because a f u n c t i o n can be f i t t e d without the e x p l i c i t i n c l u s i o n of r e s e a r c h or extension as an independent v a r i a b l e . In doing so i t has been assumed that the unexplained r e s i d u a l captures the impact of e x t e n s i o n . However, the f o l l o w i n g c r i t i c i s m a p p l i e s to some of these s t u d i e s : to the extent that an extension program may complement or s u b s t i t u t e f o r the e x i s t i n g knowledge of the farmers, none of these s t u d i e s , except C a h i l l (1981), attempts to measure the e f f e c t of an extension program through an index of accumulation of human c a p i t a l due to t r a i n i n g . The approach adopted i n t h i s study uses t e s t scores on f i n a n c i a l management s k i l l s and these t e s t scores are c o r r e l a t e d with p r o d u c t i o n and incomes f o r a sample of farmers. The parameters w i l l be t e s t e d f o r s i g n i f i c a n c e . Hence, we want to i n v e s t i g a t e the p o s s i b l e e f f e c t of f i n a n c i a l management s k i l l s p r i o r to and a f t e r 21 the t r a i n i n g on farmers' p r o d u c t i o n and incomes. 2 . 2 The Economic Model Any p r o d u c t i o n process r e q u i r e s a v a r i e t y of inputs such as l a b o r , m a t e r i a l s and c a p i t a l . Some of these inputs are v a r i a b l e and others are f i x e d . I t i s u s u a l l y assumed then that the v a r i a b l e inputs can be combined i n d i f f e r e n t p r o p o r t i o n s with the f i x e d inputs to produce v a r i o u s q u a n t i t i e s of output. By d e f i n i t i o n , f i x e d inputs are those whose q u a n t i t i e s cannot r e a d i l y be changed i n response to a c e r t a i n d e s i r e d l e v e l of output. The assumption of f i x e d inputs recognizes t h a t , i n the short run, i t i s not economic f o r a number of reasons to change the l e v e l of t h e i r use. B u i l d i n g s , machinery and equipment, and managerial personnel g e n e r a l l y f a l l i n t o t h i s category. On the other hand, v a r i a b l e inputs are those whose q u a n t i t y , in the sh o r t - r u n , may be changed at low cost i n response to d e s i r e d changes. Examples of these are many types of labor s e r v i c e s and m a t e r i a l i n p u t s . In the present study i t i s assumed that the producers, who c o n s t i t u t e our sample, are concerned with short-run d e c i s i o n s , thus combining d i f f e r e n t q u a n t i t i e s of v a r i a b l e inputs with a s p e c i f i c q u a n t i t y of f i x e d input in order to produce v a r i o u s q u a n t i t i e s of a g r i c u l t u r a l output. In p r o d u c t i o n theory, a producer i s assumed to operate in 22 stage two of the three d i s t i n c t stages of p r o d u c t i o n . In the f i r s t stage, the marginal p h y s i c a l product of f i x e d inputs i s negative while that of the v a r i a b l e input i s p o s i t i v e and i n c r e a s i n g . In the second stage, the marginal p h y s i c a l products of both f i x e d and v a r i a b l e inputs are p o s i t i v e but d e c r e a s i n g . In the t h i r d stage, the marginal p h y s i c a l product of the v a r i a b l e inputs i s n e g a t i v e . Thus, the only e f f i c i e n t economic region i s the second stage. In t h i s study i t i s assumed s u c c e s s f u l producers operate in the second stage, i n e f f i c i e n t producers may operate in stages one, two or t h r e e . 2.2.1 Optimal Combination of Resources In t h i s s u b s e c t i o n we b r i e f l y d i s c u s s the optimal manner in which an i n d i v i d u a l producer should combine re s o u r c e s . A producer to achieve an optimal resource use may: (1) maximize output f o r a given c o s t , (2) minimize c o s t s u b j e c t to a given output, (3) maximize p r o f i t s . 2.2.1a The C o n s t r a i n e d Output S i t u a t i o n A producer maximizing output s u b j e c t to a given cost faces the f o l l o w i n g problem : max F(K,L) - X(rK + wL- C) (2.1) 23 where F(K,L) i s the pro d u c t i o n f u n c t i o n with c a p i t a l K and labor L as inputs and C i s a given cost expenditure, r i s the p r i c e of c a p i t a l and w the wage r a t e . Maximum output i s a t t a i n e d when the e q u i l i b r i u m f i r s t - o r d e r c o n d i t i o n s are being met: (3F/3L)/(3F/3K) = w/r. (2.2) In other words, in e q u i l i b r i u m , the necessary c o n d i t i o n s r e q u i r e that the marginal product per d o l l a r ' s worth of input must be the same f o r each input. The s u f f i c i e n t c o n d i t i o n s r e q u i r e that the q u a d r a t i c form a s s o c i a t e d with the Hessian determinant ( i = 1,...,1) 0 4 ?L *k F k k F k l (2.3) a & L FJJL be negative d e f i n i t e . 2.2.1b The Co n s t r a i n e d Cost S i t u a t i o n If the o b j e c t i v e of the producer i s to minimize cost s u b j e c t to a given l e v e l of pr o d u c t i o n then the problem becomes: min rR + wL - X( F(R,L) - Q ) (2.4) 24 To meet t h i s g o a l, the requirements are the same as in the case of maximizing output subject to a given c o s t . 2.2.1c P r o f i t Maximization For p r o f i t maximization, consid e r the general case where P = f(Q) i s the demand f u n c t i o n f a c i n g the producers , Qf(Q) i s the t o t a l revenue, and C = A + g(Q) the t o t a l c o s t f u n c t i o n . P r o f i t , (ir) , i s t h e r e f o r e d e f i n e d as Tr = Qf (Q) - A - g(Q) . (2.5) P r o f i t i s maximized when dn/dQ = f(Q) - g'(Q) = 0 (2.6) and the second order c o n d i t i o n s r e q u i r e that 9 2TT/9Q 2 = -g' ' (Q)<0. (2.7) In other words, p r o f i t s are maximized when marginal revenue equals m a r g i n a l ' c o s t , and the s u f f i c i e n t c o n d i t i o n s r e q u i r e a p o s i t i v e l y sloped marginal c o s t curve. These c o n d i t i o n s may be evaluated i n the e m p i r i c a l work where the marginal value product of v a r i o u s inputs and i t s r e l a t i o n to input c o s t s are examined. In the present study, i t i s assumed that i n o r g a n i z i n g production the producers in our sample are attempting to be p r o f i t maximizers yet are c o n s t r a i n e d 25 by many f a c t o r s . 2.3 Choice and D e r i v a t i o n of the Conceptual Model On t h e o r e t i c a l and e m p i r i c a l grounds a r e s t r i c t e d or v a r i a b l e p r o f i t f u n c t i o n i s chosen f o r use i n t h i s study. The advantages of using a p r o f i t f u n c t i o n f o r a study of t h i s nature are many. Welch (1970) has shown that the marginal product of education on a value added f u n c t i o n (gross s a l e s minus t o t a l v a r i a b l e expenses) c o n s i s t s of three important components, the f i r s t p art thereof being the "own" value of the marginal product of education (he terms t h i s the worker e f f e c t ) , the second component r e f e r s to gains from a l l o c a t i n g f a c t o r s (education, s u p p l i e d inputs and purchased inputs) e f f e c t i v e l y between competing uses, and the l a s t component to " a l l o c a t i v e g a i n s " from s e l e c t i n g the ' r i g h t ' q u a n t i t y of purchased i n p u t s . In other words, the gross s a l e s l e s s expenditure on purchased v a r i a b l e inputs no longer i n c l u d e s the l e v e l of purchased inputs as independent v a r i a b l e s and hence measures the ret u r n s to s c h o o l i n g i n c l u d i n g the 'worker' e f f e c t and the gains to be made from choosing the optimum l e v e l of purchased i n p u t s . But, i n the case of a pr o d u c t i o n f u n c t i o n , the e f f e c t of education on s e l e c t i n g the a p p r o p r i a t e l e v e l of t h i s input would be l o s t . In other words, a pr o d u c t i o n f u n c t i o n with gross revenue as the dependent v a r i a b l e i n c l u d e s only the 'worker' e f f e c t and the e f f e c t of a l l o c a t i n g f a c t o r s between competing uses but the e f f e c t of s e l e c t i n g the r i g h t q u a n t i t i e s of other 26 inputs i s l o s t . An advantage of using a p r o f i t f u n c t i o n (Yotopoulos e t . a l . , 1972) i s that through Shepard's Lemma we can d e r i v e a system of supply and f a c t o r demand f u n c t i o n s without having recourse to an e x p l i c i t l y s p e c i f i e d p r o d u c t i o n f u n c t i o n . The'system i s d e r i v e d under the assumption that p r o f i t maximization occurs under p e r f e c t c o m p e t i t i o n . The independent v a r i a b l e s in the system of supply and d e r i v e d demand f u n c t i o n s are exogenous to the behaviour of the farm firms because they are determined by market f o r c e s and the simultaneous equations bia s problem that i s u s u a l l y a s s o c i a t e d with production f u n c t i o n s does not a r i s e . In d e r i v i n g a p r o f i t f u n c t i o n model f o r the present study, we note that a g r i c u l t u r e i s a multipr o d u c t i n d u s t r y and that farms are o f t e n m u l t i p r o d u c t f i r m s . Thus, s t a r t by l e t t i n g Y be a vecto r of 1 > 1 f i n a l products, X be a vecto r of m v a r i a b l e inputs (m > 1) and Z be a.vector of f i x e d inputs or endowments, i n c l u d i n g human c a p i t a l v a r i a b l e s . A mu l t i p r o d u c t t r a n s f o r m a t i o n f u n c t i o n i s d e f i n e d as: G(Y,,...,Y x; X,,...,Xm; Z ZJ = 0 (2.8) Th i s t r a n s f o r m a t i o n f u n c t i o n may be used to d e s c r i b e the general r e l a t i o n s h i p between i n p u t s , e x t e n s i o n and f i n a l p r oducts. For e s t i m a t i o n purposes, however, the production 27 f u n c t i o n must be separable ( H a l l ; 1973), i n the sense that the i m p l i c i t p r o d u c t i o n f u n c t i o n can be separated i n t o two p a r t s : H(Y 1,...,Y 1) = F(X,,...,X m; Z,,...,Z n) (2.9) where H i s a f u n c t i o n of f i n a l products, and F a f u n c t i o n of v a r i a b l e inputs and other f i x e d i n p u t s . Since our i n t e n t i o n i s to focus on a technology in which some inputs are f i x e d i n the short run, F i s assumed to s a t i s f y the r e g u l a r i t y c o n d i t i o n s (Diewert; 1973). In other words, F i s assumed to e x h i b i t d i m i n i s h i n g marginal r a t e s of t r a n s f o r m a t i o n of outputs f o r in p u t s , i n c r e a s i n g marginal r a t e s of s u b s t i t u t i o n of outputs for outputs, and d i m i n i s h i n g marginal r a t e s of s u b s t i t u t i o n of inputs f o r i n p u t s . F i s a continuous from above f u n c t i o n and a proper concave f u n c t i o n . On the assumption that the t y p i c a l producer of our sample i s a co m p e t i t i v e p r o f i t maximizer, then for a given v e c t o r of p r i c e s of v a r i a b l e inputs (while other inputs are f i x e d ) , the producer i s assumed to choose a f e a s i b l e p r o d u c t i o n plan which maximizes p r o f i t s . The r e s u l t i n g maximum p r o f i t depends not only on the vecto r of v a r i a b l e input and output p r i c e s but a l s o on the vecto r of f i x e d i n p u t s . These r e s u l t s however are o b t a i n a b l e only i f the p r o f i t f u n c t i o n i s (1) l i n e a r homogeneous i n p r i c e s , (2) i s convex and continuous in p r i c e s , (3) i s n o n i n c r e a s i n g i n f i x e d inputs f o r every 28 f i x e d p r i c e and (4) i s concave and continuous i n f i x e d inputs f o r every f i x e d p r i c e and assumes l i n e a r homogeneity in f i x e d i n p u t s . In other words i t i s assumed, as MacFadden (1971) has shown, that there i s a one-to-one correspondence between the set of concave pr o d u c t i o n f u n c t i o n s and the set of convex p r o f i t f u n c t i o n s . Or,as Diewert (1973) has shown, i f G(.) i s w e l l behaved and farm firms face exogenous p r i c e s and maximize p r o f i t s , then by d u a l i t y a well behaved p r o f i t f u n c t i o n e x i s t s that r e l a t e s maximized p r o f i t to the p r i c e s of input c h o i c e s and the f i x e d f a c t o r s . In the l i g h t of the above c o n s i d e r a t i o n s , p r o f i t ( d e f i n e d as revenues l e s s t o t a l v a r i a b l e c o s t s ) can be w r i t t e n as Tr = PF(X, , . . . ,Xm; Z Z n) - ECjXj (2.10) where P i s a vect o r of output p r i c e s , and C the u n i t p r i c e of v a r i a b l e input j . Assume that the marginal c o n d i t i o n s are being met as given by p(9F(X; Z)/3Xj) = Cj , j= 1 , . . . , m (2.11) Equation (2.11) can be sol v e d f o r the optimal q u a n t i t i e s of v a r i a b l e i n p u t s , X*, as a f u n c t i o n of the p r i c e s of v a r i a b l e inputs and the q u a n t i t i e s of f i x e d i n p u t s , X.* = F*'(C, Z) j = 1, ...,m (2.12) 2 9 B y s u b s t i t u t i n g ( 2 . 1 2 ) i n t o ( 2 . 1 0 ) w e o b t a i n a p r o f i t f u n c t i o n 7r* = fi*(P-;,...,Pj^;Ci,..., C J H ; Zi,... fZu) ( 2 . 1 3 ) S i n c e p r o f i t f u n c t i o n s a r e l i n e a r h o m o g e n e o u s i n p r i c e s , a n o r m a l i z e d p r o f i t f u n c t i o n c a n b e o b t a i n e d b y d i v i d i n g p r o f i t a n d a l l p r i c e s o f v a r i a b l e i n p u t s i n c l u d i n g t h e p r i c e o f o u t p u t b y a s i n g l e p r i c e . T h i s s i n g l e p r i c e c a n e i t h e r b e a n o u t p u t p r i c e o r a p r i c e o f o n e o f ' t h e v a r i a b l e i n p u t s ( L a u , 1 9 7 6 ) . 2 . 4 S u m m a r y I n t h i s c h a p t e r , w e h a v e r e v i e w e d t h e l i t e r a t u r e o n e d u c a t i o n a n d e x t e n s i o n o n t h e a s s u m p t i o n t h a t e d u c a t i o n a n d e x t e n s i o n p l a y a c o m m o n r o l e i n p r o d u c t i o n . A b r i e f r e v i e w o f t h e t h e o r y o f p r o d u c t i o n a n d p r o d u c e r ' s b e h a v i o u r h a s b e e n c a r r i e d o u t i n o r d e r t o m a k e a c h o i c e o f t h e m o s t a p p r o p r i a t e c o n c e p t u a l m o d e l t h a t m e e t s t h e g o a l o f t h i s s t u d y . I n t h i s p r o c e s s , a p r o f i t f u n c t i o n w a s c h o s e n . 30 CHAPTER III ECONOMIC MODEL, DATA AND FUNCTIONAL FORM The f i r s t s e c t i o n of t h i s chapter expands upon the economic model. The second s e c t i o n d i s c u s s e s data sources used in t h i s study and d i s c u s s e s the conceptual and e m p i r i c a l measurement of v a r i a b l e s . The problems a s s o c i a t e d with the c o l l e c t i o n of data are noted. V a r i o u s f u n c t i o n a l forms f o r the e m p i r i c a l model are d i s c u s s e d and on t h i s b a s i s a choice regarding form i s made. Some of the i m p l i c a t i o n s of t h i s form f o r e s t i m a t i o n are d i s c u s s e d . 3.1 The Economic Model The economic model developed i n Chapter 2 allows one to d e f i n e v a r i a b l e s to be i n c l u d e d in the e m p i r i c a l model. In t h i s s e c t i o n t h i s economic model i s d i s c u s s e d i n more d e t a i l and consequently some of the data needs of the model are noted. In s e c t i o n 3.2 the procedure followed i n c o l l e c t i n g t h i s data i s examined. In Chapter 2 a p r o f i t f u n c t i o n model was chosen as the a p p r o p r i a t e approach to be used in t h i s study. Since a g r i c u l t u r e i s a m u l t i p r o d u c t i n d u s t r y and farms are o f t e n m u l t i p r o d u c t firms a m u l t i p r o d u c t t r a n s f o r m a t i o n f u n c t i o n was d e f i n e d as f u n c t i o n of v a r i a b l e inputs and f i x e d inputs or endowments, i n c l u d i n g human c a p i t a l v a r i a b l e s . For a given v e c t o r of input p r i c e s (while other i n p u t s are f i x e d ) the t y p i c a l producer i s assumed to choose a f e a s i b l e 31 p r o d u c t i o n p l a n w hich m a x i m i z e s p r o f i t s . The c o n c e p t u a l model i s t h e r e f o r e d e f i n e d as 7r = fi(P,C;Z) (3.1) where 7r = p r o f i t P = v e c t o r of o u t p u t p r i c e s C = v e c t o r of v a r i a b l e i n p u t p r i c e s Z = v e c t o r of f i x e d i n p u t s . P r o f i t i s d e f i n e d as t h e d i f f e r e n c e between c u r r e n t r e v e n u e l e s s c u r r e n t t o t a l v a r i a b l e c o s t s . R e c e i p t s from s a l e s of c r o p s and l i v e s t o c k a r e r e q u i r e d and v a r i a b l e c o s t s i n c l u d e e x p e n d i t u r e s on l a b o r and o t h e r i n p u t s . O t h e r i n p u t s i n c l u d e hay, g r a i n , mixed f e e d s , c o n c e n t r a t e s , b r e e d i n g f e e s , f e r t i l i z e r , c h e m i c a l s , c u s t o m work, e t c . F e e d i n g of l i v e s t o c k i s n e c e s s a r y f o r t h e g r o w t h and f e r t i l i t y o f l i v e s t o c k . A l t h o u g h t h e s e i n p u t s a r e t r e a t e d as " v a r i a b l e " , o n l y some a r e t r u l y o p e r a t i n g d e c i s i o n v a r i a b l e s . F o r example, t a x e s on f arm p r o p e r t y o f t e n shown under a n n u a l e x p e n d i t u r e s , y e t i t i s not an o p e r a t i n g d e c i s i o n v a r i a b l e . O n l y t h o s e v a r i a b l e s c o n s i d e r e d t o be o p e r a t i n g d e c i s i o n v a r i a b l e s w i l l be r e t a i n e d . T h e s e i n c l u d e f e r t i l i z e r , c h e m i c a l s , f e e d , c u s t o m work and h i r e d l a b o r e x p e n s e s . T h e o r e t i c a l l y , t h i s model i n c l u d e s o u t p u t and v a r i a b l e i n p u t p r i c e s . B e c a u s e of t h e p e r f e c t c o m p e t i t i o n 32 assumption farmers in the sample are assumed to face the same price for a given commodity in a single production period. Our sample, being cross sectional, does not always offer output price v a r i a b i l i t y across farms. The model further assumes that farm firms are multiproduct producers and a vector of prices for di f f e r e n t commodities is required. Unfortunately, output prices are generally d i f f i c u l t to obtain since products are sold at di f f e r e n t time periods and vary by q u a l i t y . An attempt to generate output prices was discontinued because of lack of s u f f i c i e n t information on the physical amount sold in many situations. The same d i f f i c u l t y arose for prices of other inputs and hence the only price variable is that of hired a g r i c u l t u r a l labor. A wage rate for both unskilled and s k i l l e d labor is used. Capital as a fixed input often includes land, buildings, machinery, equipment and livestock. Land a v a i l a b i l i t y often becomes a l i m i t i n g factor to the size of the operation and may determine the size of livestock on a farm and the amount of crops produced. Livestock c a p i t a l , as an input, also has the a b i l i t y to produce offspring that increase the size of livestock inventory for dairy and beef producers. Data on land i s in the form of deeded or rented land and acres c u l t i v a t e d . Both deeded and rented glands are measured in d o l l a r terms since this measure is considered to be better than acres. This measure has the a b i l i t y to capture other s o i l c h a r a c t e r i s t i c s , such as f e r t i l i t y , 33 through i t s market values. Machinery , building and equipment and livestock c a p i t a l are in dollar units. Other fixed inputs considered include years of education, the experience of the farm operator in farm operation and the age of the operator, spouse and children. Often farm operators are not the only decision makers. A spouse may complement or act as substitute for the operator's role. The role of education on productivity has already been discussed in the previous chapters. On-farm work represents the time an operator puts into the da i l y work on the farm. Experience gained i s assumed to affect decisions that farm operators make. Farm operators who start as poor managers may often improve their s k i l l s through their work experience. Collinear'ity between an operator's characteristics(education, age and on-farm work) and those of the spouse is expected and therefore only the operator i s considered in the empirical model. In addition, there i s the operator's f i n a n c i a l management s k i l l s variable. This variable is probably the most important to be included in the estimating model. It is expected to capture the a b i l i t y of the operator to make a good investment decisions, to control operations, to control debt and to make p r o f i t and proper tax decisions. Data on this variable consist of test scores on questions of cash flow and tax planning management. In summary, the empirical model to be presented w i l l retain the following variables: hired labor wage rate, 34 c a p i t a l , o p e r a t o r ' s education, labor and f i n a n c i a l management s k i l l s . 3.2 Data Sources Two sets of data are used in the present study(Table 3.1). A sample of 31 o b s e r v a t i o n s p e r t a i n i n g to the 1980 p r o d u c t i o n year was c o l l e c t e d through a take-home q u e s t i o n n a i r e given to farmers a t t e n d i n g workshops on f i n a n c i a l management. In 1982, a new sample of 54 o b s e r v a t i o n s f o r the 1981 p r o d u c t i o n year was a l s o c o l l e c t e d . Farmers p a r t i c i p a t i n g p rovide two b a s i c s e t s of i n f o r m a t i o n , one p e r t a i n i n g to t h e i r business and i t s o p e r a t i n g c h a r a c t e r i s t i c s and another i s a s k i l l t e s t p e r t a i n i n g to t h e i r f i n a n c i a l management and tax management a b i l i t i e s . Copies of the p r o d u c t i o n i n f o r m a t i o n q u e s t i o n n a i r e used and s k i l l q u e s t i o n s on f i n a n c i a l management are presented in the Appendices C and D. The 1981 q u e s t i o n n a i r e i s intended to be an improvement upon that of 1980 as f a r as format and p r e s e n t a t i o n are concerned. It i s worth noting that these o b s e r v a t i o n s do not cover a l l the attendants at a p a r t i c u l a r course nor a l l courses o f f e r e d d u r i n g a given year. Some o b s e r v a t i o n s were excluded because of the d i f f i c u l t i e s i n matching the production data q u e s t i o n n a i r e and f i n a n c i a l management s k i l l s t e s t s f o r c e r t a i n farmers. A l s o excluded were those who attended but were j u s t beginning to farm and those who 35 d i d not complete a q u e s t i o n n a i r e s a t i s f a c t o r i l y . These workshops were attended by s e v e r a l d i f f e r e n t types of farm producers: bee, mushroom, vegetable, beef, g r a i n , d a i r y , orchards, n u r s i n g , c a t t l e and egg producers. Workshops were h e l d i n Vernon, Saanich, Pemberton, C e c i l Lake, Montney, C l o v e r d a l e , Summerland, P i t Meadows, Abbotsford, Vanderhoof, Kelowna and Okanagan(Table 3.1). These items are expanded when in the s e c t i o n s that f o l l o w . Table 3.1 : L o c a t i o n , Commodity Type and Number of Farmers Attending F i n a n c i a l Management Workshops Region Main Number of Commodity Farmers 1980: Vernon bee 8 Saan i c h mushroom and vegetable 7 Pemberton beef 5 C e c i l Lake beef and g r a i n 7 Montney g r a i n ' 6 1981: C l o v e r d a l e d a i r y 5 C l o v e r d a l e bee 5 Summerland orchards 5 C l o v e r d a l e nursing 5 P i t Meadows dai ry 7 Abbotsford da i ry 6 Vanderhoof c a t t l e 4 Kelowna orchards 4 Okanagan c a t t l e 3 Abbotsford egg 6 36 Data on land use (both deeded and rented), farm b u i l d i n g s , machinery and equipment and l i v e s t o c k c a p i t a l , expenditures on h i r e d a g r i c u l t u r a l labor and non-labor inputs, h i r e d a g r i c u l t u r a l wage rate (for both s k i l l e d and u n s k i l l e d ) , family labor and schooling (operator, spouse and c h i l d r e n ) and gross r e c e i p t s were c o l l e c t e d . F i n a n c i a l management s k i l l s were evaluated through a t e s t given p r i o r to and a f t e r the workshops. The t e s t i s d i v i d e d i n t o two se c t i o n s : s e c t i o n one has 6 questions on cash flow management s k i l l s and s e c t i o n two has 7 questions on tax and estate planning management s k i l l s . These data are discussed i n the s e c t i o n that f o l l o w s . The mean and standard d e v i a t i o n of these v a r i a b l e s are noted and t h e i r measurement discussed. 3.2.1 V a r i a b l e Input Costs V a r i a b l e inputs are c r u c i a l to the operation of a farm since these allow the operator-manager to e i t h e r expand or contract production. V a r i a b l e inputs measured include cash wage paid to h i r e d a g r i c u l t u r a l labor and expenditures on non-labor i n p u t s . Non-labor inputs include feed purchases, breeding fees, v e t e r i n a r y and medicine, bedding, custom or contract work, commercial f e r t i l i z e r , a g r i c u l t u r a l chemicals such as i n s e c t i c i d e s , h e r b i c i d e s and f u n g i c i d e s , d i s i n f e c t a n t s and p e s t i c i d e s and crop expenses such as seed, baler and twine. The average expenditure on 37 h i r e d labor i s about $6700 per year, that on non-labor expenses amounts to $35600 per year f o r the pooled data(Table 3.2). Table 3.2 : H i r e d Labor Wage Rates, H i r e d Labor Expenditures, Non-labor Expenditures and Operator's Education, Labor and F i n a n c i a l Management S k i l l s 1980* 1981 Pooled Var i a b l e Mean S. D. Mean S. D. Mean S. D. Educat i on (yrs.) 11.6 1 .7 11.6 3 .0 11.6 2.6 Op. Labor (OOO's h r s / y r ) 1 .6 0.7 1 .7 1 .0 1 .7 0.9 Wage rate ($/day.) 36.0 7.0 38.0 9 .0 42. 4 8.9 Lab. Expend. (OOO's $/yr) 3.0 6. 1 8.8 . 1 2 .5 6.7 11.0 Non-L. Exp. (OOO's $/yr.) 13.0 17.5 48. 1 67 .7 35.6 57.6 Cash Flow Sc.** 5.0 2.4 4.6 1 .5 4.8 1 -9 Tax Plan Sc. 4.9 1 .9 5.2 1 .8 5. 1 1 .8 T o t a l Scores 10.0 3.3 9.9 2 .6 10.0 2.9 * The pooled data are i n 1981 d o l l a r value ** F i n a n c i a l Management t e s t scores before the Course 3.2.2 P r i c e s and Costs I t was noted e a r l i e r that the only input f o r which a p r i c e c o u l d be d e r i v e d was that f o r the wage rate p a i d to h i r e d l a b o r . The average wage r a t e i s about $36 per day f o r the 1980 sample, $38 per day f o r the 1981 sample (Table 3.2). I t i s assumed i n t h i s study that there i s enough v a r i a t i o n i n wages between d i f f e r e n t farmers in B r i t i s h Columbia to allow f o r a s a t i s f a c t o r y measure of t h i s v a r i a b l e . T h i s lack of p r i c e data w i l l cause 38 m i s s p e c i f i c a t i o n problems which should be addressed i f t h i s •work i s to be c a r r i e d f u r t h e r . 3.2.3 Family Labor Aside from h i r e d l a b o r , f a m i l y labor i s another source of on-farm l a b o r . The amount of on-farm family labor s u p p l i e d i s dependent upon the amount of work r e q u i r e d on the farm and upon o f f - f a r m job o p p o r t u n i t i e s . Farm operato r s may seek o f f - f a r m o p p o r t u n i t i e s when the o f f - f a r m wage rate i s g r e a t e r than the a g r i c u l t u r a l wage rate and v i c e v e r s a . In general however, f a m i l y labor i s an important component of farm labor for o p e r a t i o n and management. Two s e t s of data' on f a m i l y labor are a v a i l a b l e i n t h i s study. Family labor i s measured as hours worked per week, and weeks worked per year. A l t e r n a t i v e l y on the assumption that farmers work a maximum of 300 days per year, the o p e r a t o r ' s labor may be d e f i n e d as the d i f f e r e n c e between 300 days and the days of o f f - f a r m work. T h i s l a t t e r measure was not very s a t i s f a c t o r y and the f i r s t measure was adopted(Table 3.2). 3.2.4 Education In measuring education three components are important: (1) whose education i s being measured, (2) the education measure i t s e l f and (3) how the measure i s 39 expressed. I t i s p o s s i b l e to measure the e d u c a t i o n a l l e v e l f o r the p r o d u c t i o n u n i t by measuring the education l e v e l of the operator alone or measure an aggregate f o r a l l f a m i l y members, or an aggregate of the education l e v e l of a l l farm workers. Since our i n t e r e s t i s i n the operator's performance, the operator's education alone i s c o n s i d e r e d , although these other components are of importance. The q u a n t i t y of education i s d e f i n e d as the sum of the highest grade achieved at secondary school p l u s years of post secondary t r a i n i n g . As i n d i c a t e d i n Table 3.2 11 years represent an average fo r the pooled data. 3.2.5 F i n a n c i a l Management A b i l i t i e s Management may be c o n s i d e r e d as an a b i l i t y to p e r c e i v e c o n d i t i o n s and make proper d e c i s i o n s . T h i s reasoning process generates s k i l l s t h a t , when combined with other i n f o r m a t i o n , r e s u l t s i n b e t t e r d e c i s i o n s . An a b i l i t i e s t e s t score may serve as an instrument f o r measurement of these management s k i l l s . T e s t s may take many d i f f e r e n t forms, f o r example, essay type, o b j e c t i v e ( s h o r t - answer, t r u e - f a l s e and m u l t i p l e c h o i c e ) and the matching type. An essay type t e s t may measure s k i l l s but a l s o the a b i l i t y to o r g a n i z e , r e l a t e and communicate. An o b j e c t i v e t e s t has the advantage of a l l o w i n g wider sampling of m a t e r i a l because i t takes l e s s time to answer. The matching t e s t i s a combination of both t r u e - f a l s e and m u l t i p l e c h o i c e . In t h i s study measurement 40 of the f i n a n c i a l management v a r i a b l e was c a r r i e d out through an o b j e c t i v e t e s t combining t r u e - f a l s e and m u l t i p l e c h o i c e types of q u e s t i o n s . The weights of i n d i v i d u a l q u e s t i o n s are d i s c u s s e d below. 3.2.5a Cash Flow Management S k i l l s Cash flow as a concept i s important f o r making e f f e c t i v e f i n a n c i a l d e c i s i o n s . I t e n t a i l s , among other t h i n g s , the c o n t r o l of d a i l y flow of cash i n the business, debt s e r v i c i n g , budgeting and the assessment of investment c o s t s . The sample s t a t i s t i c s f o r t h i s v a r i a b l e are reported in Table 3.3. For f i n a n c i a l management s k i l l v a r i a b l e s , there are s i x q u e s t i o n s on cash flow management s k i l l s . The f i r s t q u e s t i o n on debt s e r v i c i n g i s worth 4 p o i n t s . The second que s t i o n which i s on c o s t s i n c u r r e d through investment i n machinery i s worth 1.5 p o i n t s . The t h i r d q u e s t i o n on budgeting techniques to determine the break even c o s t per u n i t of s a l e a b l e product i s worth 1.5 p o i n t s , the f o u r t h on f i n a n c i a l statements (1 p o i n t ) , t h e f i f t h on income and expense statements as they r e l a t e to tax purposes (1 p o i n t ) and the l a s t on p r e p a r a t i o n of budgets r e q u i r e d f o r an operat i n g loan i s worth 2 p o i n t s . The average t o t a l score obtained was about 4.8 p o i n t s p r i o r to t a k i n g the course and 5.2 p o i n t s a f t e r the course was taken. 41 Table 3.3 : S i n g l e Questions of F i n a n c i a l Management - Cash Flow and Tax Pla n n i n g : P r i o r to and A f t e r the Course - Pooled Sample CASH FLOW TEST SCORES Before A f t e r Var i a b l e Mean S.D. Mean S.D. Quest ion 1 1 .0 1 . 3 1 .0 1 .3 Quest ion 2 0.6 0.3 0.8 0.4 Quest ion 3 0.9 0.5 0.8 0.5 Quest ion 4 0.5 0.1 0.7 0.5 Quest ion 5 0.6 . 0.5 0.9 0.3 Quest ion 6 1 .0 0.5 1 . 1 0.6 T o t a l 4.8 1 .9 5.2 2.3 TAX PLANNING TEST SCORES Quest ion 1 0.6 0.5 0.7 0.5 Quest ion 2 0.6 0.5 0.8 0.4 Quest ion 3 0.6 0.4 0.8 0.4 Quest ion 4 0.5 0.5 0.8 0.4 Question 5 1 .6 0.9 2.3 0.9 Quest ion 6 0.5 0.5 0.7 0.6 Quest ion 7 0.7 0.5 1 .0 0.5 T o t a l 5. 1 1 .8 6.9 2.9 3.2.5b Tax Planning Management S k i l l s Tax pla n n i n g i s concerned with business o r g a n i z a t i o n in order to r e c e i v e maximum b e n e f i t from e x i s t i n g tax laws. I t i n v o l v e s , among other t h i n g s , knowledge of tax r a t e s and s t r a t e g i e s f o r minimizing tax 42 i n c i d e n c e on taxable income. For tax p l a n n i n g s k i l l s q u e s t i o n one r e l a t e s to marginal tax r a t e s (1 p o i n t ) . Question two on taxable c a p i t a l gains c a r r i e s 1 p o i n t . Question three on the v a l i d i t y of a w i l l which i s not p r o p e r l y witnessed in B r i t i s h Columbia i s worth 1 p o i n t . Question four i s on recaptured c a p i t a l c ost allowance (1 p o i n t ) . Question f i v e i s on a s s e t s that can be r o l l e d over to a c h i l d from a farmer who i s a c t i v e l y engaged in farming (3 p o i n t s ) and q u e s t i o n s i x on the d i f f e r e n c e s between d e p r e c i a t i o n and c a p i t a l gains i s worth 1 p o i n t . Question seven on the p o s s i b l e amount that can be taken out of c a p i t a l c o s t allowance each year weights 1 p o i n t . The average t o t a l score was before the course 5.1 and 6.9 a f t e r the course. 3.2.6 T o t a l R e c e i p t s Farm r e c e i p t s may be i n cash or kind. Cash r e c e i p t s i n c l u d e income from s a l e of a g r i c u l t u r a l products, from o f f - f a r m employment and government support programmes. Th i s study only i n c l u d e s cash r e c e i p t s from s a l e of a g r i c u l t u r a l products and government s u b s i d i e s . Crop s a l e s i n c l u d e wheat, b a r l e y , oats, o i l s e e d s , Canadian Wheat Board Payments r e c e i v e d , hay, other fodder crops, potatoes,seed crops, v e g e t a b l e , and vegetable seeds, t r e e f r u i t s , greenhouse and nursery, cut flowers and Government crop payments such as Crop Insurance Payments, Farm Income Assurance and other small items. L i v e s t o c k and p o u l t r y 43 s a l e s i n c l u d e proceeds from d a i r y , hogs, sheep and lambs i n c l u d i n g wool, b r o i l e r s and other p o u l t r y , eggs, milk and cream, other a g r i c u l t u r a l products such as honey and government l i v e s t o c k payments such as Farm Income Insurance. Average t o t a l r e c e i p t s amount to $100800 per year f o r the pooled data (Table 3.4). 3.2.7 C a p i t a l Stock T o t a l investment on a farm i s an aggregate of i t s investment in land, b u i l d i n g , machinery, equipment, and l i v e s t o c k . Land investment i s measured in terms of c u r r e n t market value and b u i l d i n g s ( e x c l u d i n g the value of the farm house) are a l s o measured in d o l l a r v a l u e s . Machinery Table 3.4 : T o t a l Revenue, P r o f i t and C a p i t a l ( 0 0 0 ' s $) 1980* 1981 Pooled Mean S.D. Mean S.D. Mean S.D. Sales 56.8 61 .6 125.2 1 44.6 1 00. 8 125.6 P r o f i t 40.7 47 . 2 68.2 84.4 60. 2 75.2 Land: in v . 446.7 457.7 497.5 871 .0 499. 3 759.4 flow 8.4 8.6 9.3 16.4 9. 4 14.3 Bldg: i n v . 25.4 29.4 1 04. 3 113.1 77. 3 99.4 flow 2.4 2.7 10.3 11.2 7. 6 9.8 Mach: in v . 85. 1 T44.0 64.8 54. 1 75. 8 88. 3 flow 15.2 20.4 11.6 9.7 13. 5 15.8 L v s t : i n v . 14.5 26.4 65.9 82.7 48. 3 72.4 f low 1 .3 2.4 6.2 7.8 4. 5 6.8 T o t a l : i n v . 57. 1 57.8 73.3 981 .0 700. 8 874.0 f low 27.4 30.3 37 .0 34.5 35. 2 34.6 * The pooled data are in 1981 d o l l a r value 44 i n c l u d e s the c u r r e n t value of motorized machinery, t i l l a g e and seeding machinery, h a r v e s t i n g machinery and other s p e c i a l i z e d equipment such as m i l k i n g equipment, honey e x t r a c t i n g equipment, and so f o r t h . L i v e s t o c k c a p i t a l measures the d o l l a r value of the number of females in the breeding herd. The average c a p i t a l investment i s $700800 per year f o r the pooled o b s e r v a t i o n s (Table 3.4). 3.2.7a C a p i t a l S e r v i c e s One measure of c a p i t a l and labor s e r v i c e s i s to assume that c a p i t a l and labor s e r v i c e s are p r o p o r t i o n a l to stocks of labor and c a p i t a l , r e s p e c t i v e l y . However, s i n c e c a p i t a l goods are bought in one p e r i o d and used over time, t h i s stock measure of c a p i t a l does not provide a d i r e c t , measurement of the flow of s e r v i c e . In view of the above argument, an a l t e r n a t i v e measure of c a p i t a l s e r v i c e s i s the r e n t a l r a t e which takes i n t o account the ra t e of u t i l i z a t i o n of c a p i t a l . There are three components which c o n s t i t u t e the r e n t a l rate of c a p i t a l good to i t s owner in each p e r i o d of the l i f e of that c a p i t a l good. There i s the i n t e r e s t c o s t of the c a p i t a l good, which i s the o p p o r t u n i t y c o s t i n c u r r e d by t y i n g up funds. There i s the amount the good d e p r e c i a t e s i n each p e r i o d , or a l t e r n a t i v e l y a p p r e c i a t e s i n each p e r i o d . Thus the most a p p r o p r i a t e approach i s to t r a n s l a t e these stock values i n t o s e r v i c e flows. F o l l o w i n g Jenkins (1972) who analyzed r a t e s of r e t u r n from c a p i t a l i n Canada, a r e a l 45 i n t e r e s t r a t e of 6 percent was used. Given the p r e v a i l i n g income tax allowances i n Canada (Farmer's Income Tax Guide, 1980-81) on d e p r e c i a t i o n r a t e s , the s e r v i c e flow from c a p i t a l or machinery was c a l c u l a t e d at 18 percent of i t s stock value; the s e r v i c e flow from l i v e s t o c k at 9 percent of i t s stock value; that of land at 2 percent of i t s stock value and that of b u i l d i n g s at 9 percent of i t s stock v a l u e . Any r a t e of a p p r e c i a t i o n was s u b t r a c t e d from the r e a l i n t e r e s t r a t e and the d e p r e c i a t i o n r a t e was added to the r e a l i n t e r e s t r a t e . For machinery, a zero rate of a p p r e c i a t i o n and 13 percent d e p r e c i a t i o n r a t e were assumed. For l i v e s t o c k , a 4 percent rate d e r i v e d as a d i f f e r e n c e between a p p r e c i a t i o n and d e p r e c i a t i o n r a t e s were assumed. For b u i l d i n g s , a zero r a t e of a p p r e c i a t i o n and 4 p e r c e n t d e p r e c i a t i o n r a t e were assumed. For land, a zero r a t e of d e p r e c i a t i o n and 4 percent a p p r e c i a t i o n r a t e s were assumed. The formula used in these c a l c u l a t i o n s was $ = [ r-p+5/l+r ].[ K ] (3.2) where $ i s s e r v i c e flow, p i s the a p p r e c i a t i o n r a t e of the a s s e t , 6 i s the d e p r e c i a t i o n r a t e of the a s s e t and K i s c a p i t a l stock. F i n a l l y , f o l l o w i n g G r i l i c h e s (1957), on the assumption that the u n d e r l y i n g p r o f i t f u n c t i o n i s of the form of the Cobb-Douglas f u n c t i o n , we have chosen, in order 46 to minimize b i a s , geometric sums (e.g.products) i n aggregating the c a p i t a l components. Thus, logarithms of each c a p i t a l component were summed to a r r i v e at the aggregated c a p i t a l s e r v i c e flow v a r i a b l e . 3.2.8 Data C o l l e c t i o n Problems There are, however, problems a s s o c i a t e d with t h i s data and the manner in which i t was c o l l e c t e d . More missing i n f o r m a t i o n i n the 1981 ( v i s a v i s 1980) p r o d u c t i o n data q u e s t i o n n a i r e was noted. In 22 cases out of 54 n e i t h e r s c h o o l i n g or f a m i l y labor i n f o r m a t i o n was r e p o r t e d . T h i s was p a r t i c u l a r l y true of c h i l d r e n ' s education and operator's l a b o r . Some of the missing i n f o r m a t i o n had to be inputed. To give the reader a b e t t e r i n s i g h t i n t o the problem, in 1980 the q u e s t i o n on s c h o o l i n g , as phrased in the q u e s t i o n n a i r e s , c o n s i s t e d of two p a r t s : (1) "The highest grade achieved at an elementary or secondary s c h o o l . " (2) "Years of u n i v e r s i t y , c o l l e g e or i n s t i t u t e of technology attended." But, i n 1981 t h i s q u e s t i o n was rephrased to read : "Years of s c h o o l i n g . " T h i s allows respondents to i n c l u d e repeated years at school (due to year f a i l u r e ) in a d d i t i o n to the highest grade achieved. T h i s s i t u a t i o n can cause n o i s e . With regard to f a m i l y l a b o r , the 1981 q u e s t i o n n a i r e i s more d e t a i l e d than that of 1980. The 1981 q u e s t i o n n a i r e asks fo r hours worked per week and weeks worked per year f o r both r e g u l a r and summer schedules. In 47 a d d i t i o n to t h i s , there i s a q u e s t i o n on the number of o f f -farm week days. Since more d e t a i l was r e q u i r e d respondents d i d not always provide t h i s i n f o r m a t i o n . One of the reasons c o u l d simply be that they d i d not keep records of time or that people cannot a f f o r d the time r e q u i r e d to f i l l out a long q u e s t i o n n a i r e . Some o b s e r v a t i o n s were excluded from the sample f o r t h i s reason. Another problem a s s o c i a t e d with the data i s the l i k e l i h o o d of having c h i l d r e n a t t e n d workshops and take the f i n a n c i a l management s k i l l t e s t s , as i f they were the o p e r a t o r . There are at l e a s t seven cases that f a l l i n t h i s category f o r the 1981 data. T h i s a l s o r e s u l t e d in some respondents being excluded. Another aspect that c o u l d be a problem in both data s e t s , given the present support programs in Canadian a g r i c u l t u r e , or in p a r t i c u l a r in B.C. through the Farm Income Assurance Program, may be that some farm p r i c e s are determined i n part by some d e f i n i t i o n of farm c o s t s . There may be some i n c e n t i v e to o v e r s t a t e c o s t s which may r e s u l t in higher p r i c e s . T h i s s i t u a t i o n may a l s o b i a s our r e s u l t s . Those completing the q u e s t i o n n a i r e were assured that t h e i r answers would be used fo r t h i s r e s e a r c h only. Another aspect as f a r as aggregation and choice of f u n c t i o n a l forms are concerned , i s the f a c t that our samples are not homogenous with respect to commodity type. A bee producer and a g r a i n producer w i l l use d i f f e r e n t t e c h n o l o g i e s and yet, our e m p i r i c a l model, as a p p l i e d i n 48 t h i s study, i s developed as i f a l l farmers i n our sample face the same technology. During e s t i m a t i o n , attempts were made to d i s t i n g u i s h between d a i r y and l i v e s t o c k producers using a dummy v a r i a b l e . A grouping i n t o vegetable and l i v e s t o c k producers was a l s o t r i e d as w e l l as that of p o o l i n g the whole sample. Complications which may a r i s e from aggregating gross income r e g a r d l e s s of e n t e r p r i s e or from aggregating inputs and investments i s evidenced by a study of 34 m u l t i p l e e n t e r p r i s e farms by Johnson(1969). 7 Johnson i n c l u d e d tobacco, popcorn, and l i v e s t o c k farmers i n the sample. C o e f f i c i e n t s were i n c o n s i s t e n t with estimates for other l i v e s t o c k farms and with a general knowledge of a g r i c u l t u r e i n the area. Trant (1952) 8 found that Cobb-Douglas f u n c t i o n s f i t t e d to m u l t i p l e - e n t e r p r i s e farms gave unreasonable r e s u l t s . His land and labor c o e f f i c i e n t s were negative while other c o e f f i c i e n t s were u n r e l i a b l e i n r e l a t i o n to each other and a f t e r m u l t i p l e - e n t e r p r i s e farms were d i s c a r d e d from the sample more reasonable r e s u l t s were obtained. Huffman (1980), in a study of 276 c o u n t i e s i n Iowa, North C a r o l i n a and Oklahoma, has r e c e n t l y noted the s e n s i t i v i t y of marginal value products of m u l t i p r o d u c t f u n c t i o n s . Huffman obtained marginal value products f o r extension programs ranging between $2000 and $8000 per day 7 E a r l y 0. Heady, Glenn L. Johnson, and Lowel S. Hardin (ed.), Resource P r o d u c t i v i t y , Returns to S c a l e , and Farm  S i z e (The Iowa State C o l l e g e Press - Ames,Iowa, U.S.A., 1969), pp. 106-113 8 I b i d . 49 of e x t e n t i o n a c t i v i t i e s . Sample s e l e c t i v i t y i s another problem. Through advertisement of the f i n a n c i a l management course farmers with an i n t e r e s t in updating t h e i r s k i l l s r e g i s t e r for the course. Both samples were c o l l e c t e d from t h i s group. However, there, was a l i m i t of twelve p a r t i c i p a n t s for a p a r t i c u l a r course. Courses below f i v e were c a n c e l l e d . T h i s l i m i t on the number of p a r t i c i p a n t s per course i s p l a u s i b l e on grounds of e f f i c i e n c y of h a n d l i n g small c l a s s e s but l i m i t s our sample s i z e . In p o o l i n g the data two d i f f e r e n t p e r i o d s are c o n s i d e r e d . One p o s s i b i l i t y i s to pool the data under the assumption of s t a b l e parameters between years. An a l t e r n a t i v e i s to pool the data but to t e s t f o r p o s s i b l e d i f f e r e n c e s i n the two s e t s . These r e s u l t s are noted l a t e r . With these shortcomings in mind, the r e s u l t s should be i n t e r p r e t e d a c c o r d i n g l y . 3 . 3 F u n c t i o n a l Forms In s e a r c h i n g f o r a f u n c t i o n a l form, the g u i d i n g p r i n c i p l e i s that to every p r o f i t f u n c t i o n there i s an u n d e r l y i n g technology. Consider the case of a Cobb-Douglas technology, and assume that the producers i n our sample c o u l d be maximizing p r o f i t s s u b j e c t to a Cobb-Douglas technology. Assume the farm i s o p e r a t i n g with two inputs, X, and X 2, and f a c t o r X 2 i s c o n s t r a i n e d i n the short run at 50 l e v e l K. The r e s t r i c t e d p r o f i t f u n c t i o n can be found by s o l v i n g the f o l l o w i n g problem: max p.Q - (w,X, + w2K) (3.3) subject to X^ K""^  Q S u b s t i t u t i n g the Cobb-Douglas c o n s t r a i n t i n t o the p r o f i t equation the problem becomes e q u i v a l e n t t o : max px\rf*- w,X, - w2K (3.4) Assuming that the producers in our sample are s a t i s f y i n g the f i r s t order c o n d i t i o n s , then a - l l - a paX,K - w, = 0 (3.5) Th i s r e s u l t can be sol v e d i n terms of demand f o r f a c t o r X. as l/a-1 X, = [w,/a.p] K (3.6) When the demand f u n c t i o n i s s u b s t i t u t e d back i n t o the p r o f i t equation, a Cobb- Douglas p r o f i t f u n c t i o n i s def ined. Using the same technique, depending on the a c t u a l technology being used by the producers, f u n c t i o n a l forms 51 f o r p r o f i t f u n c t i o n s may be d e r i v e d . Other p o s s i b l e t e c h n o l o g i e s are the l i n e a r p r oduction f u n c t i o n , the constant e l a s t i c i t y of s u b s t i t u t i o n production f u n c t i o n and the L e o n t i e f p r o d u c t i o n f u n c t i o n . T h e i r merits and demerits are considered below. 3.3.1 L i n e a r Form T h i s form in the case of two inputs may be represented as There are some t h e o r e t i c a l drawbacks a s s o c i a t e d with t h i s form." I t s marginal products are constant and t h e r e f o r e i t does not allow for d i m i n i s h i n g r e t u r n s . Being a f i x e d -c o e f f i c i e n t f u n c t i o n , t h i s form p r e c l u d e s any i n t e r a c t i o n between i n p u t s . On account of these drawbacks, t h i s f u n c t i o n i s not c o n s i d e r e d . 3.3.2 Constant E l a s t i c i t y of S u b s t i t u t i o n In the case of two v a r i a b l e s t h i s f u n c t i o n has the f o l l o w i n g form, The main drawback of t h i s form i s i n the d i f f i c u l t y i n Q = aX, + bX 2 (3.7) Q = g[ax, + ( 1 - a ) x 2 ] (3.8) 52 i n c l u d i n g more than one independent v a r i a b l e . In a d d i t i o n , the f u n c t i o n does not l i n e a r i z e when transformed l o g a r i t h m i c a l l y and an approximation must be used when e s t i m a t i n g i t . On account of these d i f f i c u l t i e s i t was not c o n s i d e r e d . 3.3.3 Cobb-Douglas T h i s form, although very popular among re s e a r c h e r s , has been c r i t i c i z e d on the grounds of r e s t r i c t i o n s p l a c e d on the parameters, p l u s the f a c t that i t does not allow f o r second order approximation of a f u n c t i o n . The f u n c t i o n however i s g e n e r a l l y w e l l accepted as a f u n c t i o n a l form f o r e v a l u a t i n g farm p r o d u c t i v i t y (Yotopoulos, 1972). One of the v i r t u e s of t h i s f u n c t i o n i s that i t i s simple and p r a c t i c a l . It i s a l s o probably the best f u n c t i o n that allows the researcher to see how the c o l l e c t e d data behave in terms of m u l t i c o l l i n e a r i t y and other problems. On t h i s b a s i s , the form i s c o n s i d e r e d to have many advantages. 3.3.4 F l e x i b l e F u n c t i o n a l Forms The t e c h n o l o g i e s d i s c u s s e d above, however, are t h e o r e t i c a l l y s u i t e d to handle cases of s i n g l e , homogeneous output o n l y . Diewert (1973), i n t u r n , has s p e c i f i e d a s e r i e s of f l e x i b l e f u n c t i o n a l forms that can handle m u l t i p l e output s i t u a t i o n s . F l e x i b l e f u n c t i o n a l forms are 53 a l s o supposed to b e t t e r handle the j o i n t n e s s of the inputs through the i n t e r a c t i o n terms s i n c e i t allows for second order approximation of a f u n c t i o n . An obvious d i f f i c u l t y , however, i s that they r e q u i r e much data and may pose m u l t i c o l l i n e a r i t y problems because of the i n t e r a c t i o n terms when the f u n c t i o n i s estimated d i r e c t l y . The t h e o r e t i c a l preference f o r f l e x i b l e f u n c t i o n a l forms stems from the f a c t that they do not impose any a p r i o r i r e s t r i c t i o n s i n our model. Hence no r e s t r i c t i o n s on h o m o t h e t i c i t y , s e p a r a b i l i t y and e l a s t i c i t y of s u b s t i t u t i o n . Several members of the f l e x i b l e family are reviewed below : 3.3.4a G e n e r a l i z e d L e o n t i e f P r o f i t . These f u n c t i o n s take the form o f : 7r(q) = Z Z B y Q i V ' Q j V- 2, BjjBjj. (3.9) M-fn where Q m= p r i c e of output m f o r m = 1 ,2, ... . M and q = W = p r i c e of input n f o r n = 1 ,2 , N. T h i s form r e q u i r e s p r i c e s of s e v e r a l outputs and i n p u t s . Since our data i s not r i c h enough to s a t i s f y these requirements the f u n c t i o n i s not s u i t a b l e . I t i s a l s o not a v a r i a b l e p r o f i t f u n c t i o n . 3.3.4b V a r i a b l e P r o f i t F u n c t i o n . Among the v a r i a b l e p r o f i t f u n c t i o n s the most popular i s the t r a n s l o g . I t takes the form of 54 l n 7 r ( p , x ) = AD+ lnl> + 1/2Z Z B ^ n ^ InPn + Z ICijlnPi lnXj+ ZDjlnXj + 1/2Z Z G ^ l n X j l n X k (3.10) where Bjh=Bhiand G$c= Gkj. Since most used of f l e x i b l e forms, Another p o s s i b l e candidate i s t h i s f u n c t i o n seems to be the i t i s co n s i d e r e d as candidate, for a v a r i a b l e p r o f i t f u n c t i o n 7 r(p,v) = Z Z Z Z(Aih+Bjk) d / 2 P i P i + l/2PnP h) V M - V j ) 1 / 2 ( - V k ) +Z ZCijPi( -Vj) ; Aih=Ahi; Bjk=Bkj; AiL=0; Bjj=0. (3.11) where p= (P : , . . . , P j.) denote a v e c t o r of p o s i t i v e p r i c e s f o r v a r i a b l e outputs and in p u t s , and v = ( V V j ) denote a vector of n o n p o s i t i v e f i x e d i n puts In our a n a l y s i s two f u n c t i o n a l forms were co n s i d e r e d and attempted : the t r a n s l o g and the Cobb-Douglas. The Cobb- Douglas seemed to respond f a i r l y w e l l to the data and was t h e r e f o r e chosen. Thus, the t h e o r e t i c a l model d e r i v e d i n Chapter 2 was estimated as a l o g - l i n e a r v a r i a b l e p r o f i t f u n c t i o n . 3.4 I m p l i c a t i o n s for E s t i m a t i o n In our economic model a number of assumptions concerning producer's behaviour were made. The producer was 55 assumed to be or attempting to operate at the most e f f i c i e n t economic p o i n t with respect to v a r i a b l e i n p u t s . In so doing however, b i a s i n t o the p r o d u c t i o n parameters may occur due to lack of v a r i a t i o n in input l e v e l s , high m u l t i c o l l i n e a r i t y and s i m u l t a n e i t y of i n p u t s . These problems are noted in the f o l l o w i n g s e c t i o n s . 3.4.1 V a r i a t i o n i n Input L e v e l s Despite the p r o f i t maximization assumption i t i s recognized that producers' economic resources are scarce and l i m i t e d . Thus even though each input w i l l be used to i t s optimum l e v e l , enough v a r i a t i o n should e x i s t to allow f o r e s t i m a t i o n . Another reason fo r input v a r i a t i o n under e q u i l i b r i u m c o n d i t i o n s concerns product and input p r i c e v a r i a t i o n s between d i f f e r e n t r e g i o n s . In t h i s study, fo r example, workshops were h e l d in 15 d i f f e r e n t r e g i o n s . It i s expected that lack of s u f f i c i e n t i n f o r m a t i o n on p r i c e s a c c r o s s these regions generates c e r t a i n p r i c e d i f f e r e n t i a l s . A l s o , because of d i f f e r e n t p r i c e e x p e c t a t i o n s among farmers, farmers w i l l tend to vary t h e i r input l e v e l s . Tables 3.2 and 3.4 show c o n s i d e r a b l e v a r i a t i o n i n some of these input l e v e l s . Another reason may r e l a t e to a lack of knowledge of the marginal product of c e r t a i n i n p u t s , a problem compounded by the l a r g e number of v a r i a b l e s i n f l u e n c i n g p r o d u c t i o n . 56 3.4.2 M u l t i c o l l i n e a r i t y of Inputs Given the nature of a production process, i t i s a l s o expected that some degree of c o l l i n e a r i t y w i l l e x i s t between c e r t a i n v a r i a b l e s . T h i s may occur between c a p i t a l and labor v a r i a b l e s s i n c e the s i z e of c a p i t a l c o u l d i n f l u e n c e the amount of labor needed and v i c e - v e r s a . There a l s o c o u l d be a r e l a t i o n s h i p between education and l a b o r . Highly educated farm operators may supply l e s s labor to the farm o p e r a t i o n because of o f f - f a r m job o p p o r t u n i t i e s and consequently h i r e more l a b o r . 3.4.3 S p e c i f i c a t i o n Bias S t u d i e s that have used a s i n g l e equation e s t i m a t i o n procedure with a Cobb-Douglas technology assume that the input d e c i s i o n s are based on an a n t i c i p a t e d output l e v e l . Hock(1958,1962) assumes that input d e c i s i o n s are based on the maximization of the mathematical e x p e c t a t i o n of p r o f i t . The i m p l i c a t i o n of such an assumption i s that p r o d u c t i o n inputs are chosen as a part of a one-period d e c i s i o n problem. In a g r i c u l t u r e however, both short run and long run production d e c i s i o n s are o f t e n a m u l t i p e r i o d , dynamic o p t i m i z a t i o n problem because inputs are not a l l chosen or u t i l i z e d s i m u l t a n e o u s l y ( A n t l e , 1 9 8 3 ) . For example, in the f i r s t stage of p r o d u c t i o n , a producer may choose the amount ^of labor to be used, and d u r i n g that stage the crop i s p l a n t e d and grown. Random events such as weather change 57 occur during p l a n t growth. The f i r s t - s t a g e output i s the mature, unharvested crop. In the second production stage the crop i s harvested using other i n p u t s . Adverse weather may a f f e c t harvest and f i n a l output i s a f u n c t i o n of these d i s t u r b a n c e s and input d e c i s i o n s at a l l stages. In other words, d e c i s i o n makers may feed back info r m a t i o n about e a r l y stage p r o d u c t i o n to l a t e r input d e c i s i o n s . Despite these c o m p l i c a t i o n s , i n the present study i t i s assumed that d e c i s i o n makers do not feed back in f o r m a t i o n about e a r l y stages' p r o d u c t i o n to l a t e r input d e c i s i o n s . I t i s assumed the e r r o r s in the e f f i c i e n c y are due to c l i m a t i c v a r i a t i o n s , divergence of the expected output p r i c e from the a c t u a l output p r i c e , and due to imperfect knowledge of the t e c h n i c a l e f f i c i e n c y parameter of the farm. 3.4.4 L e f t Out V a r i a b l e s In a p p l i e d econometrics, i f two independent v a r i a b l e s i n t e r a c t and one of them i s l e f t out, the c o e f f i c i e n t s of the i n c l u d e d v a r i a b l e w i l l be bi a s e d . The b i a s w i l l be upward i f the two v a r i a b l e s i n t e r a c t p o s i t i v e l y and v i c e v e r s a . Some v a r i a b l e s are excluded because a c o r r e c t measure of that v a r i a b l e may be d i f f i c u l t to o b t a i n . A proxy v a r i a b l e may sometimes s u f f i c e . A v a r i a b l e known to cause p o s s i b l e b i a s i n production a n a l y s i s i s , f o r example, the management input because i t i s d i f f i c u l t to measure. Since b e t t e r managers make b e t t e r economic d e c i s i o n s , b e t t e r managers o b t a i n higher marginal 58 r e t u r n s from inputs and t h e r e f o r e use more of them in order to maximize p r o f i t . As a r e s u l t there i s a p o s i t i v e i n t e r a c t i o n between management l e v e l s and the l e v e l s of other i n p u t s . A b i a s w i l l be imparted to other c o e f f i c i e n t s i f management i s l e f t out i n the e s t i m a t i n g equation. In t h i s study an important l e f t out v a r i a b l e i s a b i l i t y . According to G r i l i c h e s (1977), a b i l i t y " i s an observed l a t e n t v a r i a b l e that d r i v e s people to get r e l a t i v e l y more s c h o o l i n g and earn more income, given s c h o o l i n g , and perhaps a l s o enables and motivates people to score b e t t e r on v a r i o u s t e s t s . " 9 In other words, a b i l i t y may have an independent p o s i t i v e e f f e c t on earnings and beyond i t s e f f e c t on the amount of s c h o o l i n g . I d e a l l y i t i s most a p p r o p r i a t e to attempt to measure a b i l i t y by an IQ t e s t or a s i m i l a r t e s t score measure developed by p s y c h o l o g i s t s . T h i s was not done in t h i s study f o r lack of f a c i l i t i e s and data. Since the e s t i m a t i n g equation used i n t h i s t h e s i s uses education of the farm operator and f i n a n c i a l management t e s t scores as independent v a r i a b l e s without the i n c l u s i o n of a b i l i t y , an upward b i a s to the c o e f f i c i e n t s of education and f i n a n c i a l management s k i l l s v a r i a b l e s i s expected. Other l e f t out v a r i a b l e s that may have some r e p e r c u s s i o n on the estimated parameters c o u l d i n v o l v e the spouse's and c h i l d r e n ' s labor and education. These v a r i a b l e s were not i n c l u d e d i n the e s t i m a t i n g 9 Zvi G r i l i c h e s , " E s t i m a t i n g the Returns to S c h o o l i n g : Some Econometric Problems, Ecometrica, V o l . 48(Jan.1977), p.7 59 equation. 3.4.5 Non-response E r r o r s In t h i s study, we a l s o face a s i t u a t i o n i n which non-response i s a problem. Some e d i t i n g f o r c o n s i s t e n c y and i n p u t a t i o n of the missing values has been necessary. T h i s was done,for example, on ope r a t o r ' s education f o r 1981 production data, f a m i l y l a b o r , r e c e i p t s , c o s t s of production and some other i n f o r m a t i o n . T h i s i n p u t a t i o n e x e r c i s e has problems and as a consequence estimates may be biased and i n c o n s i s t e n t ( J o h n s t o n , 1 9 6 0 ) . We, t h e r e f o r e , expect some b i a s c o u l d a r i s e through i n p u t i n g m i s s i n g informat i o n . 3.5 Summary In t h i s chapter the economic model i s presented. Data sources, data c o l l e c t i o n problems and the measurement of b a s i c v a r i a b l e s are d i s c u s s e d . Given our data the e m p i r i c a l model i s r e s t r i c t e d to a number of s e l e c t e d v a r i a b l e s . S e v e r a l f u n c t i o n a l forms were reviewed and the Cobb-Douglas chosen as being s u i t a b l e . P o s s i b l e e s t i m a t i o n problems due to lack of v a r i a t i o n in input l e v e l s , high m u l t i c o l l i n e a r i t y , s i m u l t a n e i t y of in p u t s , l e f t out v a r i a b l e s and non-response e r r o r s are noted. The next chapter d e a l s with the e m p i r i c a l model. The p r e s e n t a t i o n and i n t e r p r e t a t i o n focus on the e f f e c t s of education and 6 0 f i n a n c i a l management s k i l l s on v a r i a b l e p r o f i t s . 61 CHAPTER IV ESTIMATING THE RETURNS TO EDUCATION AND FINANCIAL MANAGEMENT The u n d e r l y i n g theme of t h i s study i s that the B r i t i s h Columbia f i n a n c i a l management t r a i n i n g p r o j e c t i s a form of education. U n l i k e other extension programs which are o f t e n based on a v i s i t system, the f i n a n c i a l management t r a i n i n g program i s d e l i v e r e d i n a classroom s i t u a t i o n . A t e s t p r i o r to and a f t e r t r a i n i n g i s given to each p a r t i c i p a n t . Thus as a prelude to e s t i m a t i o n of re t u r n s to f i n a n c i a l management s k i l l s l e a r n t in t h i s course, the present chapter attempts f i r s t to estimate r e t u r n s to formal education alone under a l t e r n a t i v e s p e c i f i c a t i o n s . In a subsequent s e c t i o n of t h i s chapter the b e n e f i t s of the f i n a n c i a l management t r a i n i n g program and i t s s u b s t i t u t e r e l a t i o n s h i p to formal education are measured. Increased education may simply permit a worker to accomplish more with the resources at hand (Welch,1970). T h i s i s sometimes known as the "worker e f f e c t " . Increased education may a l s o enhance a worker's a b i l i t y to a c q u i r e and decode in f o r m a t i o n about c o s t s and p r o d u c t i v e c h a r a c t e r i s t i c s of other inputs (Welch.1980). The l a t t e r i s known as the " a l l o c a t i v e e f f e c t " of education on p r o d u c t i o n ( S c h u l t z , 1975). Increased education i s a l s o expected to induce f a s t e r adjustments in the a l l o c a t i o n of resources due to any changes in p r i c e s or other changes which generate d i s e q u i l i b r i a c o n d i t i o n s . The e f f e c t of education i n c r e a s e s 62 the producer's speed to adapt to changing economic c o n d i t i o n s . T h i s a b i l i t y to deal with d i s e q u i l i b r i a has been i n v e s t i g a t e d and found to be economically important by Fane (1975); K h a l d i (1975); Huffman (1977 ) and Petz.el ( 1 978) . The f i r s t s e c t i o n of t h i s chapter presents the e s t i m a t i n g equations, a p r o d u c t i o n f u n c t i o n and a v a r i a b l e p r o f i t f u n c t i o n . The second s e c t i o n d i s c u s s e s the e s t i m a t i n g s t r a t e g y adopted. In the t h i r d s e c t i o n the r e s u l t s of the pro d u c t i o n f u n c t i o n and v a r i a b l e p r o f i t equations are d i s c u s s e d . T h i s b a s i c model ( p r o f i t f u n c t i o n ) i s extended to i n c o r p o r a t e the f i n a n c i a l management v a r i a b l e . R e s u l t s of the f i n a n c i a l management p r i o r to t r a i n i n g are d i s c u s s e d . In the l a s t s e c t i o n , an estimate of the expected changes i n the p r o f i t s by farmers who attended the program i s pro v i d e d . 4. 1 The E s t i m a t i o n of Returns to Education F i r s t l y , a Cobb-Douglas t o t a l revenue f u n c t i o n i s estimated as: lnY = InA + alnK + |31nH + 7lnN + 0lnL + 01nS + u (4.1) where Y = gross value of a g r i c u l t u r a l products s o l d ; 63 K = s e r v i c e flow flow c a p i t a l which i s equal to l n ( 0 . 0 l 8 8 7 * v a l u e of land) + In(0.0943*value of b u i l d i n g ) + In(0.09434*value of l i v e s t o c k ) + In(0.1792*value of machinery and equipment); H = h i r e d labor measured in '000 $; N = purchased v a r i a b l e inputs ( f e r t i l i z e r , chemical, feed and custom work; measured i n '000 $); L = farm o p e r a t o r ' s labor measured in hours per year ; S = years of s c h o o l i n g of the farm operator measured as primary, secondary and u n i v e r s i t y educat i o n . Secondly, the t h e o r e t i c a l model (2.13) s p e c i f i e d in Chapter 2 i s estimated as l o g - l i n e a r v a r i a b l e p r o f i t funct i o n : ln?r = InB + alnW + j31nK + 7lnL + c6lnS + u (4.2) where 7r = v a r i a b l e p r o f i t d e f i n e d as gross value of a g r i c u l t u r a l products s o l d l e s s expenditures on purchased v a r i a b l e inputs which i n c l u d e s f e r t i l i z e r , chemicals, feed, and custom work l e s s expenditure on h i r e d l a b o r ; W = wage rate p a i d per day to h i r e d a g r i c u l t u r a l labor which i n c l u d e s s k i l l e d and u n s k i l l e d 64 la b o r ; K = s e r v i c e flow from c a p i t a l which i s equal to ln(0.0 l 8 8 7 * v a l u e of land) + ln(0.0943*value of b u i l d i n g ) + ln(0.09434*value of l i v e s t o c k ) + ln(0.1792*value of machinery and equipment); L = farm operator's labor measured i n hours per year; S = years of s c h o o l i n g of the farm operator. A p r i o r i , one would expect the signs to education, operator's l a b o r , c a p i t a l , h i r e d labor and non-h i r e d labor expenditures to be p o s i t i v e on t o t a l revenue and p r o f i t . H i r e d labor wage r a t e , being an input p r i c e , i s expected to have a negative s i g n . The " estimated parameters of these equations are e l a s t i c i t i e s or percentage changes i n the p r o f i t f o r a one percentage change i n the independent v a r i a b l e . Thus, f o r example, the marginal p r o d u c t i v i t y of s c h o o l i n g i s obtained by p a r t i a l l y d i f f e r e n t i a t i n g equation (4.2) as 97T/3S = 0[ TT/S ] (4.3) and evaluated at the geometric means of p r o f i t s and education. 65 4.1.1 E s t i m a t i n g S t r a t e g y As a e s t i m a t i n g s t r a t e g y e f f o r t s were made to d e r i v e r e s u l t s for both the 1980 and 1981 sample data. Many problems arose during the i n i t i a l stages of t h i s e s t i m a t i o n e x e r c i s e . A p e r s i s t e n t l y wrong sign to the education parameter f o r the 1981 data set was obtained. Disaggregated c a p i t a l components had wrong s i g n s to land and b u i l d i n g s , and l i v e s t o c k and parameters were g e n e r a l l y i n s i g n i f i c a n t . In an attempt to circumvent some of these problems a dummy v a r i a b l e was t r i e d f o r l i v e s t o c k producers i n the samples in an e f f o r t to capture the e f f e c t s f o r the most homogeneous commodity group. S i m i l a r l y , an attempt was made to i d e n t i f y d a i r y producers only and to use extraneous i n f o r m a t i o n on the education parameter. A l s o , an attempt was made to aggregate the c a p i t a l v a r i a b l e by grouping machinery and equipment and l i v e s t o c k . Since most of these s t r a t e g i e s proved u n s a t i s f a c t o r y they were d i s c o n t i n u e d . An a l t e r n a t i v e s t r a t e g y that gave promising r e s u l t s c o n s i s t e d of aggregating a l l the c a p i t a l components and p o o l i n g both samples and grouping both samples i n t o two somewhat homogeneous commodity types: h o r t i c u l t u r a l producers and l i v e s t o c k and g r a i n producers. The l a t t e r approach was not as s a t i s f a c t o r y as p o o l i n g the whole sample. Thus, the r e s u l t s r e p o r t e d in t h i s study are mainly concerned with the pooled data. P o o l i n g of the two samples i s an attempt to o b t a i n more r e l i a b l e e s t i m a t e s . In p o o l i n g data however 66 common r e l a t i o n s h i p s f o r the e n t i r e data can be e s t a b l i s h e d i f and only i f such r e l a t i o n s h i p s are s t a b l e ; that i s , the c o e f f i c i e n t s are s t a b l e over the per i o d s in which the data were c o l l e c t e d . Thus the n u l l hypothesis i s that there i s no marked d i f f e r e n c e i n the c o e f f i c i e n t s of the r e l a t i o n s h i p . In other words, the r e l a t i o n s h i p i s s t a b l e . The a l t e r n a t i v e hypothesis i s that there i s d i f f e r e n c e in the r e l a t i o n s h i p ; that i s , the r e l a t i o n s h i p i s un s t a b l e . The Chow t e s t was used to t e s t f o r s t a b i l i t y of the c o e f f i c i e n t s across both s e t s of data. The c a l c u l a t e d F s t a t i s t i c 1 0 was obtained from the f o l l o w i n g formula: F = [ (RRSS - URSS)/k +1 ] / [URSS/(N,+N 2-2k-2) ] (4.4) where RRSS = the r e s t r i c t e d r e s i d u a l sum of squares obtained from the pooled data; URSS = sum of the u n r e s t r i c t e d r e s i d u a l sum of squares of both years; k = number of estimated parameters; N, = 1980 sample s i z e ; N 2 = 1981 sample s i z e . The c a l c u l a t e d F s t a t i s t i c was 0.82. From the F t a b l e the 5 1 0 See Appendix A f o r c a l c u l a t i o n s 67 percent s i g n i f i c a n c e p o i n t was 2.00. Thus the c a l c u l a t e d value of F i s not s i g n i f i c a n t at the 5 percent l e v e l . T h erefore the n u l l h ypothesis that the r e l a t i o n s h i p i s s t a b l e can not be r e j e c t e d . 4.1.2 R e s u l t s of Revenue and P r o f i t Equations Since education, o p e r a t o r ' s labor and c a p i t a l v a r i a b l e s are common v a r i a b l e s i n both the revenue and v a r i a b l e p r o f i t models, t h e i r r e s u l t s are noted i n i t i a l l y . F i r s t , the r e g r e s s i o n c o e f f i c i e n t s 1 1 ( e l a s t i c i t i e s ) are d i s c u s s e d . Table 4.1 d e a l s with revenue equation and Table 4.2 with p r o f i t equation. Next, the estimated marginal value products are d i s c u s s e d . Table 4.3 d e a l s with the estimated marginal value products f o r the revenue equation and t a b l e 4.4 with those of the p r o f i t e q u ation. Since the data were pooled in order to o b t a i n more r e l i a b l e estimates the d i s c u s s i o n that f o l l o w s s t r e s s e s these r e s u l t s . R e s u l t s f o r education, operator's labor and the c a p i t a l v a r i a b l e s are c o n s i s t e n t with a p r i o r i e x p e c t a t i o n s . Education has a p o s i t i v e e f f e c t on both revenue and p r o f i t . In the revenue equation (Table 4.1) a 1% improvement in education r e s u l t s i n a 0.53% i n c r e a s e i n revenues. In the p r o f i t equation (Table 4.2) a 1% improvement in education r e s u l t s i n a 0.40% i n c r e a s e i n 1 1 The 1980 data were converted i n t o 1981 d o l l a r v a l u e s . See Appendix C f o r sample s t a t i s t i c s of some v a r i a b l e s . 68 p r o f i t . These r e s u l t s imply that the responsiveness of e i t h e r gross revenue or p r o f i t to improvement in education and t h e i r e l a s t i c i t i e s i s l e s s than o n e ( i n e l a s t i c ) . The s i g n i f i c a n c e of t h i s v a r i a b l e , although weak in both samples, tended to improve in the pooled sample. One p o s s i b l e e x p l a n a t i o n f o r the weak l e v e l of s i g n i f i c a n c e c o u l d be a m u l t i c o l l i n e a r i t y problem between education and other independent v a r i a b l e s i n the sample equations. Education a f f e c t s the amount of the operator's labor on the farm i n that the more educated may become i n v o l v e d in o f f -farm work or a c t i v i t i e s and i t c o u l d a l s o a f f e c t the s i z e of one's c a p i t a l stock. Operator's labor and c a p i t a l have strong and p o s i t i v e e f f e c t s on revenue and p r o f i t . T h e i r e f f e c t i s much stronger than that of e d u c a t i o n . In the case of operator's labor f o r the pooled sample a 1% i n c r e a s e i n the amount of labor used w i l l r e s u l t i n a 0.54% increase in gross s a l e s (Table 4.1) and a 0.77% i n c r e a s e in p r o f i t s (Table 4.2). C a p i t a l e x h i b i t s an extremely low e l a s t i c i t y ( 0 . 0 5 to 0.09). I t i s suspected that i n f o r m a t i o n about c a p i t a l stocks i s a d i f f i c u l t q u e s t i o n f o r farmers to answer and the aggregation procedure adopted f o r the c a p i t a l components may a l s o p a r t l y have a bearing on these r e s u l t s . Table 4.1 : Revenue Function to Measure the Marginal P r o d u c t i v i t y of Education ( t - s t a t i s t i c s i n parentheses) Independent Var i a b l e Unit of Measure 1 980 Data 1981 Data Pooled Data Operator's 1 . .23 0, .44 0, .53 Educat ion y r s (0. .94) (0. .96) ( 1 , .20) Operator's $/ 0, .42 0. .55 0, .54 Labor hour (1 . 49) (2. .83) (3, .57) Aggregate $/ 0. .03 0. .03 0, .05 C a p i t a l flow (0. .92) ( 1 . .54) (2, .74) H i r e d Labor 0. . 1 2 0, .08 0, .10 Expendi ture $ (2. .25) (2. .34) (3, .58) Non- Labor 0. . 1 4 0, .33 0, .23 Expenditure $ (0. .81 ) (4. .65) (4. .61 ) I n t e r c e p t -3. .31 -2. .85 -3. . 1 4 ( -0. .78) (-1 . ,85) (-2. .16) R 2 0. ,47 0. .81 0, .74 F 5. .51 40. ,0 41 . ,4 Number of Observat ions 26 47 73 70 Table 4.2 : V a r i a b l e P r o f i t F u nction to Measure the Marginal P r o d u c t i v i t y of Education ( t - s t a t i s t i c s in parentheses) Independent V a r i a b l e 1 980 Data 1 981 Data Pooled Data Operator's Educat i on 1 .79 (1.21) 0.04 (0.06) 0. 40 (0.67) Operator's Labor 0.59 (1 .87) 0.87 (3.24) 0.77 (4.03) Aggregate C a p i t a l 0.09 (2.31) 0.09 (3.30) 0.09 (4.72) H i r e d Labor Wage Rate 1.14 (0.83) 0.47 (0.52) 0.75 (1.05) I n t e r c e p t -5.87 (-0.78) -0.95 (-0.19) -2.35 (-0.59) R 2 0.25 0.59 0. 53 F 3.11 17.35 21.0 Number of Observat ions 26 47 73 In the revenue equation (Table 4.3) the marginal r e t u r n to a years s c h o o l i n g (education) f o r the pooled sample averages $4659. In the v a r i a b l e p r o f i t equation (Table 4.4) the r e t u r n to education f o r the pooled sample averages $2101. S e v e r a l p o i n t s may be noted about the estimated parameter f o r educ a t i o n . An important aspect of the s p e c i f i c a t i o n used , i n t h i s e x e r c i s e concerns the aggregation of c a p i t a l v a r i a b l e s . Although aggregation was necessary i n order to minimize the degree of m u l t i c o l l i n e a r i t y in the equation, t h i s aggregation of the c a p i t a l i n p uts c o u l d allow the s c h o o l i n g c o e f f i c i e n t to 71 i n c l u d e the e f f e c t of o p t i m i z i n g the l e v e l s of each component of c a p i t a l , given the t o t a l s e r v i c e f l o w . 1 2 Since most of the dynamics of t e c h n i c a l change are expected to be embodied in these c a p i t a l items, we would expect a c o n s i d e r a b l e increment in the marginal p r o d u c t i v i t y of s c h o o l i n g i f t h i s e f f e c t c o u l d be i s o l a t e d . A l s o , the p o s s i b i l i t y of b i a s i s not r u l e d out. The ommission of the a b i l i t y v a r i a b l e , a c c o r d i n g to G r i l i c h e s (1977), can introduce an upward b i a s i n t o the measured school parameter. In a d d i t i o n , s i n c e the r e t u r n s to school are measured in a c e t e r i s p a r ibus sense, any r e t u r n s to education from o p t i m i z i n g the l e v e l s of inputs such as t o t a l c a p i t a l and the input of f a m i l y labor are not captured. F i n a l l y , the problem of aggregation of r e c e i p t s i r r e s p e c t i v e of the commodity groups has a l r e a d y been d i s c u s s e d in the p r e v i o u s chapter. 1 2 See R i c h a r d R. B a r i c h e l l o , "The Schooling of Farm Youth in Canada," Ph.D. d i s s e r t a t i o n , U n i v e r s i t y of Chicago, 1979, p. 33. 72 Table 4.3 : Estimates of the Marginal Value Products for the T o t a l Revenue Model Independent Var i a b l e 1980 1981 Pooled Unit Data Data Data Operator's $/ Education y r . Operator's $/ Labor hr. Aggregate $ C a p i t a l flow H i r e d Labor Expenditure $ Non-Labor Expenditure $ 6735.00 4666.00 4659.00 16.00 39.00 31.00 0.07 0.11 0.14 2.26 1.13 1.49 0.61 0.86 0.66 Table 4.4: Estimates of the Marginal Value Products f o r the V a r i a b l e P r o f i t Model Independent V a r i a b l e Unit 1980 Data 1 981 Data Pooled Data Operator's Educat ion $/ y r . 7035. 00 231 . 00 2101.00 Operator's Labor $/ hr. 16. 00 34. 00 26.00 Aggregate Capi t a l $ flow 0. 1 3 0. 1 6 0.15 H i r e d Labor Wage Rate $ N. A.* N. A. N.A. * Not a p p l i c a b l e because of wrong si g n on parameter The r e t u r n to ope r a t o r ' s labor (revenue equation) i s $31 per hour f o r the pooled data. In terms of p r o f i t s , the r e t u r n to operator's labor i s $26 per hour f o r the pooled data. By way of comparison, r a t e s charged by 73 tradesmen and p r o f e s s i o n a l s may be used as a standard. These r e s u l t s c o n f i r m the hypothesis that the value of farm operator i n a management s i t u a t i o n i s reasonable. The r e t u r n s to c a p i t a l are low. In terms of revenue, c a p i t a l has a r e t u r n of 14 cents i n the pooled sample, 15 cents in the pooled sample in the p r o f i t equation. From a farm management p o i n t of view these r e s u l t s are d i s t u r b i n g . For every d o l l a r spent on c a p i t a l flows a farmer gets flow r e t u r n l e s s than a d o l l a r . Some p o s s i b l e causes of t h i s problem are noted. H i s t o r i c a l l y , 1 3 Canadian data seem to show an i n c r e a s e in p r o d u c t i v i t y to both labor and c a p i t a l because of improved technology and s k i l l . Because of a.slower r a t e of growth in hours worked, the amount of c a p i t a l has been growing at a f a s t e r r a t e than labor and hence each l a b o r e r has more c a p i t a l goods to work with. Thus, the r e t u r n per u n i t of c a p i t a l may be l e s s than c o s t s because each c a p i t a l u n i t has l e s s labor to complement i t . In a d d i t i o n , the p h y s i c a l c a p a c i t y of an operator l i m i t s the amount of work they can handle. Operators may over i n v e s t f o r t h i s reason. Another p o s s i b l e cause may be the reported d o l l a r value of c a p i t a l stock. Since farmers were asked to value t h e i r own c a p i t a l stocks they may tend to over value t h e i r a s s e t s . T h i s i n t r o d u c e s an " e r r o r - i n - v a r i a b l e s " measure and i n t r o d u c e s a b i a s i n the c a p i t a l parameter (Kmenta, 1971). 1 3 Paul A. Samuleson, and Anthony S c o t t , Economics (Mc G r a w h i l l Company of Canada, L i m i t e d , 1968), pp.647-72 74 H i r e d labor and non-labor expenditures show strong r e t u r n s i n p r o d u c t i o n . Returns to h i r e d labor are $1.49 per $1 p a i d i n wages in the pooled sample. Non-labor inputs have a r e t u r n of $0.66 per $1. The problem of low r e t u r n s to non-labor inputs c o u l d be one of overuse. Farmers c o u l d be overusing f e r t i l i z e r , animal feed and other inputs because of ever changing t e c h n o l o g i e s . On the other hand pr o d u c t i o n takes place i n an u n c e r t a i n environment and t h i s may i n f l u e n c e the outcome. The h i r e d labor wage rate v a r i a b l e i n the p r o f i t equation has the wrong s i g n . Being the only p r i c e a v a i l a b l e in the model the wrong sign to t h i s v a r i a b l e c o u l d probably be due to l e f t out v a r i a b l e s such as p r i c e s of other i n p u t s . Another source of the problem c o u l d be lack of enough v a r i a t i o n on the v a r i a b l e i t s e l f . Some of the data on t h i s wage rate had to be inputed by using a p r o v i n c i a l average wage r a t e . In summary, some marginal value products are not equal to resource p r i c e s although an e f f i c i e n t a l l o c a t i o n of resources i s assumed. From the standpoint of good farm management and economic p o l i c y more resources should be channeled in the d i r e c t i o n of f a m i l y labor and h i r e d labor and l e s s to c a p i t a l and non-labor i n p u t s . As regards education, t h i s study shows education to be p r o d u c t i v e input. 75 4.2 E s t i m a t i o n of Returns to F i n a n c i a l Management S k i l l s The aim of the present s e c t i o n i s to estimate the r e t u r n s to f i n a n c i a l management s k i l l s so as to allow for an ex-ante e v a l u a t i o n of the present extension program. The e m p i r i c a l model s p e c i f i e d i s more complete than that d i s c u s s e d i n the previous s e c t i o n . A human c a p i t a l v a r i a b l e , M, i s in c l u d e d in order to i n c o r p o r a t e the t e s t scores of f i n a n c i a l management a b i l i t i e s . An operator's f i n a n c i a l management a b i l i t i e s may be measured p r i o r to and a f t e r t h e i r p a r t i c i p a t i o n in the course. The measure p r i o r to t h e i r p a r t i c i p a t i o n i s intended to be a r e f e r e n c e score and through p a r t i c i p a t i o n in the course f i n a n c i a l management s k i l l s and t e s t scores are improved and t h i s w i l l a l s o r e s u l t in i n c r e a s e d s a l e s and p r o f i t s p r o v i d e d such t r a i n i n g i s b e n e f i c i a l . There i s , of course, a degree of complementarity between years of s c h o o l i n g and the s k i l l v a r i a b l e ( f i n a n c i a l management s k i l l s ) and so i t may be d i f f i c u l t to d i s t i n g u i s h between the b e n e f i t s from formal education and these s k i l l s . However, an improvement i n the f i n a n c i a l management t e s t score through p a r t i c i p a t i o n i n the course i s hypothesized to have an e f f e c t on the e f f i c i e n c y of the operator because these s k i l l s are a s s o c i a t e d with v a r i a b l e s that measure t h i s e f f i c i e n c y . Thus, the e s t i m a t i n g model becomes Inn- = InA + alnW •+ |31nK + 7lnL + 0lnS + 01nM + wlnMlnS + u 76 (4.5) where every other v a r i a b l e remains as d e f i n e d i n s e c t i o n 4.1. The M term stands f o r an index of f i n a n c i a l management s k i l l s . An i n t e r a c t i o n e f f e c t between education and f i n a n c i a l management s k i l l s i s a l s o allowed (M&S) f o r . The per u n i t e f f e c t of f i n a n c i a l management s k i l l s p r i o r to t r a i n i n g on pr o d u c t i o n i s obtained by d i f f e r e n t i a t i n g the l o g a r i t h m i c equation, h o l d i n g e v e r y t h i n g constant, as 3TT/9M = [ 6 + wins ].[ TT/M ] (4.6) and e v a l u a t e d at the geometric means of p r o f i t s and f i n a n c i a l management. 4.2.1 R e s u l t s of F i n a n c i a l Management The r e s u l t s of t h i s e s t i m a t i o n procedure which i n c l u d e s an aggregated f i n a n c i a l management t e s t score are reported i n Tables 4.5 and 4.6. Table 4.5 d e a l s with the r e g r e s s i o n equations and Table 4.6 with the estimated marginal value products. In the e a r l i e r stages of e s t i m a t i o n , i n d i v i d u a l t e s t answers to i n d i v i d u a l questions on f i n a n c i a l management were t r e a t e d as separate v a r i a b l e s and entered the p r o f i t f u n c t i o n as independent v a r i a b l e s . T h i s procedure posed two problems. Many q u e s t i o n s acquired unexpected s i g n s and other q u e s t i o n s r e s u l t e d i n a non-77 s i n g u l a r matrix. Another procedure followed was to evaluate the t o t a l score on cash flow s k i l l s and the t o t a l score from tax and e s t a t e p l a n n i n g s k i l l s as separate v a r i a b l e s in the equation. As noted e a r l i e r these two components comprise the s k i l l t e s t and the f i n a n c i a l management v a r i a b l e i s d e f i n e d as an aggregated sum of cash flow t e s t scores and tax plann i n g t e s t s c o r e s . An attempt to group data i n t o h o r t i c u l t u r e and l i v e s t o c k producers d i d not give s a t i s f a c t o r y r e s u l t s . The h o r t i c u l t u r e equation had the wrong sign to education and f i n a n c i a l management v a r i a b l e s , although not s i g n i f i c a n t . The l i v e s t o c k equation, on the other hand, had r i g h t signs fo r the above mentioned v a r i a b l e s , but the marginal value product of education was negative while the marginal value product of f i n a n c i a l management v a r i a b l e was extremely l a r g e . Another attempt was made to estimate the h o r t i c u l t u r e equation without the i n t e r a c t i o n term but these e f f o r t s d i d not improve the r e s u l t s . For l i v e s t o c k equation the f i n a n c i a l management parameter r e t a i n e d i t s s i z e and s i g n of 0.68 but the education parameter changed in s i z e and became i n s i g n i f i c a n t . Thus, as f o r e a r l i e r r e s u l t s , t h i s s e c t i o n r e l i e s on the r e s u l t s from the pooled sample. These are re p o r t e d i n Tables 4.5 and 4.6. R e s u l t s f o r education and labor v a r i a b l e s , and c a p i t a l have been d i s c u s s e d in the previous s e c t i o n s and, in g e n e r a l , c o n c l u s i o n s remain the same. Needless to say, the o p e r a t o r ' s labor and c a p i t a l v a r i a b l e c o n s i s t e n t l y show 78 strong e f f e c t s on p r o d u c t i o n and income. The i n t r o d u c t i o n of the f i n a n c i a l management v a r i a b l e does not a f f e c t the parameters of most of the v a r i a b l e s s i g n i f i c a n t l y except f o r the education v a r i a b l e . Without the f i n a n c i a l management v a r i a b l e , the e l a s t i c i t y of operator's labor was 0.77(Table 4.2) and the corresponding marginal value product was $26(Table 4.4). With the f i n a n c i a l management v a r i a b l e i n c l u d e d t h i s parameter and i t s estimated marginal product became 0.81(Table 4.5) and $27(Table 4.6) r e s p e c t i v e l y . Hence, we may conclude that a 1% percent i n c r e a s e in operator's labor (represented by hours) w i l l r e s u l t in v a r i a b l e p r o f i t being i n c r e a s e d from 0.77(Table 4.2) to 0.81 percent. As noted e a r l i e r the marginal value product of operator's labor of approximately $26 per hour represents an o p p o r t u n i t y cost that appears reasonable. The c a p i t a l parameter a l s o r e t a i n s i t s s i z e of 0.09. The e l a s t i c i t y of education estimated as (dn/dS) . ( S / T T ) = <j> + wlnM (4.7) at the geometric mean i s 0.32. T h i s r e s u l t i s d e r i v e d from Table 4.5 a f t e r a l l o w i n g f o r the i n t e r a c t i o n parameter shown as -1.95 f o r the pooled sample. T h i s r e s u l t i s s t i l l i n l i n e with the previous r e s u l t of 0.40(Table 4.2); that i s , the responsiveness of p r o f i t s to changes in education i s l e s s than one ( i n e l a s t i c ) . The value has decreased because of the i n t e r a c t i o n e f f e c t between education and 79 f i n a n c i a l management s k i l l s . Thus, a 1% improvement i n education may be viewed as approximately causing a change of 0.32 percent in the v a r i a b l e p r o f i t . The wage rate v a r i a b l e continues to have the wrong s i g n . Table 4.5: V a r i a b l e P r o f i t Function to Measure the Marginal P r o d u c t i v i t y of F i n a n c i a l Management ( t - s t a t i s t i c s in parentheses) Independent Var i a b l e Unit of Measure 1 980 Data 1981 Data Pooled Data Operator's Educat ion y r s . 7.54 (1.17) -5.62 (-0.85) 4.71 (1.20) Operator's Labor $/ hour 0.61 (2.03) 0.70 (2.34) 0.81 (4.15) Aggregate Capi t a l $ f low 0.09 (2.49) 0.10 (3.52) 0.09 (4.58) H i r e d Labor Wage Rate $/ day 0.89 (0.68). 0.50 (0.53) 0.56 (0.82) Financ i a l Management p o i n t s 7.39 (1.11) -7.11 (-0.96) 4.93 (1.21) Financ i a l Management and Educat i on -2.90 (-1.00) 2.57 (0.88) -1 .95 (-1.14) In t e r c e p t (-19.64) (-1.21) 15.51 (0.92) -12.75 (-1.36) R 2 0.33 0.58 0.53 F 3.09 1 1 .79 14.40 Number of Observat ions 26 47 73 F i n a n c i a l management s k i l l s show p o s i t i v e e f f e c t s on p r o f i t and i n t e r a c t with education as a s u b s t i t u t e i n the pooled sample. The e l a s t i c i t y of the f i n a n c i a l 80 management v a r i a b l e was estimated using r e l a t i o n (4.7) to be 0.16, which i s f a i r l y i n e l a s t i c . T h e o r e t i c a l l y and e m p i r i c a l l y , the r e s u l t s of r e g r e s s i o n equations with an i n t e r a c t i o n e f f e c t depend very much on the magnitude of the i n t e r a c t i o n e f f e c t . When a negative c r o s s e f f e c t outweighs the own-effect of a v a r i a b l e , the marginal value product of that v a r i a b l e becomes n e g a t i v e . S i m i l a r l y , when a negative own-effect outweighs the c r o s s e f f e c t , the marginal product of that v a r i a b l e becomes n e g a t i v e . The r e t u r n to a formal education or s c h o o l i n g averaged $1672 per year, that of f i n a n c i a l management s k i l l s to $968 per u n i t of s k i l l . The r e s u l t on education i s the r e t u r n to a year of s c h o o l i n g on p r o f i t . T h i s estimate does not appear to be too out of l i n e with r e t u r n s measured in other s t u d i e s . Fane(l972) r e p o r t e d a marginal value product of $321 per year from 1964 county data f o r four U.S. Corn B e l t S t a t e s . B a r i c h e l l o ( 1 9 7 7 ) using the 1971 census data f o r Canada estimated an annual marginal product of s c h o o l i n g of $286 per year f o r a l l Canada. A f t e r a l l o w i n g f o r adjustments i n the ra t e s of i n f l a t i o n over the years, the r e t u r n to education of $1672 i n 1981 d o l l a r s i s somewhat h i g h e r . 81 Table 4.6: Estimates of the Marginal Returns - P r o f i t Equation with F i n a n c i a l Management V a r i a b l e Independent 1980 1981 Pooled V a r i a b l e Unit Data Data Data Operator's $/ Education y r . 4426.00 1785.00 1672.00 Operator's $/ Labor hr. 17.00 27.00 27.00 Aggregate $ C a p i t a l flow 0.13 0.19 0.15 Hi r e d Labor $/ Wage Rate day N.A. N.A. N.A. F i n a n c i a l $/ Management point 1339.00 -5815.00 968.00 As f o r f i n a n c i a l management, the nature of the questions on cash flow and tax plan n i n g have been d i s c u s s e d in Chapter 3. Questions on cash flow centered around debt s e r v i c i n g , c o s t s i n c u r r e d through investment i n machinery, budgeting techniques, f i n a n c i a l statements, types of income and expense statements. On the other hand, q u e s t i o n s on tax planning r e v o l v e around problems of marginal tax r a t e s , taxable c a p i t a l gains, v a l i d i t y of a w i l l , r ecaptured c a p i t a l cost allowance, a s s e t s that can be r o l l e d to a child., d i f f e r e n c e s between d e p r e c i a t i o n and c a p i t a l g a i n s . In i n t e r p r e t i n g the r e s u l t s on f i n a n c i a l management i t i s assumed that most of these t e s t s adequately represent important aspects of f i n a n c i a l management(Aiken ,1971). The $968 i s then the r e t u r n , on average, to a one u n i t i n c r e a s e in the s k i l l l e v e l of f i n a n a c i a l management a b i l i t i e s . I t 82 i s the r e t u r n to a farmer f o r every r i g h t d e c i s i o n they make in handling cash flow problems and s t r a t e g i e s f o r minimizing tax i n c i d e n c e on taxable income. One may expect r e t u r n s to c o r r e c t d e c i s i o n s of t h i s nature to be high. In terms of cost of the course and r e t u r n s , farmers who attended the course p a i d $13 d o l l a r s . T h i s fee i s , of course, a s u b s i d i z e d fee f o r i t does not include the expenses i n c u r r e d by the M i n i s t r y i n o f f e r i n g the course. A cost estimate per farmer may be provided by examining the a l l o c a t e d budget fo r t h i s p r o j e c t . By comparison with other s t u d i e s on r e t u r n s to extension, Huffman(1974, 1976, 1977) has p u b l i s h e d s e v e r a l estimates of marginal value p r o d u c t s ( T a b l e 4.7) to e x t e n s i o n s . He estimated a marginal r e t u r n of $4.48 per hour of extension time a l l o c a t e d to crops f o r the 1954-64 Corn B e l t data i n the U. S. A. and a r e t u r n of $600 per day of extension time a l l o c a t e d to crops(1959-64 Corn B e l t d a t a ) . Using 1964 data f o r Iowa, North C a r o l i n a and Oklahoma, Huffman estimated a marginal value product of $1000~$3000 per day of extension time a l l o c a t e d to crops and l i v e s t o c k a c t i v i t i e s . 83 Table 4 . 7 : Huffman's Estimates of Returns to Extension in the U.S.A Study Data Set Marginal Value Product of Extension ($) 1 974 Corn B e l t 1954 - 64 $4.48 per hour of extension time a l l o c a t e d to crops 1976 Iowa, N. C a r o l i n a , Oklahoma, 1964 $ l000 -$3000 per day of extension time a l l o c a t e d to crops and l i v e s t o c k a c t i v i t i e s 1 977 Corn B e l t 1959 - 64 $600 per day of ex t e n s i o n time a l l o c a t e d to crops Very r e c e n t l y Huffman(1980) has attempted to reestimate the marginal r e t u r n to extension f o r Iowa, North C a r o l i n a and Oklahoma(Table 4 . 8 ) . His estimates l i e between $564 and $8000 per day of extension a c t i v i t i e s . An important aspect of Huffman's r e s u l t s i s the s e n s i t i v i t y of h i s r e s u l t s to output mix. On the other hand, Sim and Gardner(1980 ) report a summary of four s t u d i e s ( b y G r i l i c h e s , Duncan, Peterson and F i t z h a r r i s and Lu and C l i n e ) that generate a combined i n t e r n a l r a t e of r e t u r n to research and ext e n s i o n . These are reported below. 84 Table 4.8: Huffman's New Estimates of Returns to Extension i n the U. S. A. -1964 Data Set Data Set Marginal Value Product of Extension ($) I owa North C a r o l i n a $2357 per day of extension a l l o c a t e d to crops, l i v e s t o c k . Negat ive Oklahoma $564 per day of extension a l l o c a t e d to crops, l i v e s t o c k . I owa $8000 per day of extension a l l o c a t e d to crops North C. Negat ive Oklahoma $2058 per day of extension a l l o c a t e d to crops Gri1iches(1958) estimated an annual i n t e r n a l r a t e of r e t u r n between 20 to 40 per cent f o r h y b r i d corn and h y b r i d sorghum. Peterson and F i t z h a r r i s ( 1 9 7 5 ) using four data s e t s ( 1937-42; 1947-52; 1957-62; and 1967-72) d e r i v e d an annual i n t e r n a l rate of r e t u r n of 0.34 and 0.51 percent. Lu and C l i n e ( l 9 7 6 ) f o r the U. S. A. (1938-48; 1949-59; 1959-69 and 1969-79) estimated an annual i n t e r n a l r a t e of return between 23.5 and 30.5 percent. Duncan(l972) d e r i v e d an annual i n t e r n a l rate of r e t u r n in pasture improvement i n A u s t r a l i a ranging between 58.0 and 60.0 per c e n t . Our estimate of $968 marginal r e t u r n per u n i t of s k i l l in f i n a n c i a l management does seem to f a l l w i t h i n the bounds of most of these s t u d i e s . P o l i c y i m p l i c a t i o n s that may be drawn f o r these 85 f i n a n c i a l management t r a i n i n g workshops may be summarized as: F i r s t l y , s k i l l s in f i n a n c i a l management are an important input in p r o d u c t i o n . Secondly, on b a s i s of these r e s u l t s , i t should be expected that an extension program that improves these s k i l l s w i l l a l s o increase the p r o f i t a b i l i t y of the farms. T h i r d l y , the estimated marginal r e t u r n of $968 per u n i t change i n s k i l l s i s f a r grea t e r than the c o s t of t h i s course($13) to the farmer and given the l a r g e number of p a r t i c i p a n t s i t i s a l s o probably higher than the c o s t to the funding agency. From a s o c i a l p o i n t of view, the $968 r e t u r n per u n i t of score seem to j u s t i f y the expenses i n c u r r e d by the M i n i s t r y i n o f f e r i n g the course per farm. F o u r t h l y , the r e t u r n to f i n a n c i a l management s k i l l i s second only to education i n i t s e f f e c t i n the e s t i m a t i n g equation. It i s of course r e a l i z e d that the u n i t of inputs are d i f f e r e n t . Thus, given these advantages, more farmers should become aware of the gains that can be made from improving t h e i r f i n a n c i a l management s k i l l s . Another aspect of t h i s r e s u l t concerns the r e l a t i o n s h i p between education and f i n a n c i a l management. Th i s study seems to suggest that these v a r i a b l e s i n t e r a c t as s u b s t i t u t e s f o r each other. The p o l i c y i m p l i c a t i o n of t h i s r e s u l t i s that an ext e n s i o n program of t h i s nature c o u l d be b e n e f i c i a l as an a l t e r n a t i v e form of education. For example, a c o n c e n t r a t i o n of extension e f f o r t s on l e s s educated farmers c o u l d probably help even out the unequal d i s t r i b u t i o n of r e t u r n s among farmers. 86 These r e s u l t s do not d e t a i l the e f f e c t of course p a r t i c i p a t i o n for i n d i v i d u a l producers. Our sample s t a t i s t i c s and parameters are those for the mean of the pooled sample. In the f i n a l a n a l y s i s these r e s u l t s as they a f f e c t d i f f e r e n t groups of farmers are examined. 4.2.2 The Marginal Value Product Per Farm The marginal value product of the f i n a n c i a l management input and other v a r i a b l e s has been computed at the sample means for p r o f i t and f i n a n c i a l management t e s t s k i l l s (Table 4.6). H e r e a f t e r , these r e s u l t s are r e f e r r e d to as at the "sample means". E s t i m a t i o n of the marginal value product at these p o i n t s does not allow one to examine the e f f e c t s of f i n a n c i a l management s k i l l s f o r each i n d i v i d u a l farmer i n the sample. In the remaining part of t h i s s e c t i o n the marginal value products f o r a grouping of farmers i n t o v a r i o u s s i z e s i s r e p o r t e d . These r e s u l t s were obtained by e v a l u a t i n g e x p r e s s i o n (4.6) at every data p o i n t . In other words, e x p r e s s i o n dir/dM = [ 6 + wlnS ].[ TT/M ] (4.6.1) was e v a l u a t e d f o r each farmer's p r o f i t and f i n a n c i a l management s k i l l l e v e l . These r e s u l t s are r e f e r r e d to as "farm l e v e l " s i t u a t i o n . In order to make the p r e s e n t a t i o n of these r e s u l t s p o s s i b l e farmers were grouped by s i z e of 87 t h e i r prof i t s ( i n d e p e n d e n t v a r i a b l e ) . These sample s t a t i s t i c s are presented i n Table 4.9. Information on i n d i v i d u a l farmers with negative (or p o s i t i v e ) marginal value products may be obtained from Appendix C. At the farm l e v e l the range of the marginal value products f o r each income group ranges from negative to p o s i t i v e . The maximum re t u r n s observed i n any one income group l i e s between $1416 and $43832 per farm, and the minimum values l i e between -$14037 and -$159. The mean performance of each group i s p o s i t i v e and there i s a c o n s i d e r a b l e degree of d i s p e r s i o n around the group means as i n d i c a t e d by t h e i r standard d e v i a t i o n s . Farmers f a l l i n g i n t o the lowest v a r i a b l e p r o f i t group ($300-$9000) are expected to b e n e f i t by $147 through an improvement in t h e i r s k i l l s , those i n the highest group ($100000 to $400000) by $4551. F i f t y s i x farmers out of a p o p u l a t i o n of 73 have a p o s i t i v e marginal value product f o r t h i s v a r i a b l e and 17 have a negative marginal value product. 88 Table 4.9: Summary S t a t i s t i c s on marginal Return per Farm by V a r i a b l e P r o f i t Group Var i a b l e P r o f i t Number of ($) Farmers Mean S.D. Min imum Max imum 300-9000 1 7 1 47 370 -1 59 1416 1 0000-20000 1 4 422 1 1 54 -21 92 2490 30000-40000 1 4 •254 804 -969 1 633 50000-90000 1 3 1831 3875 -4223 7735 1 00000-400000 1 5 4551 14614 -14037 43832 Average f o r the Sample 73 1 425 6880 -1 4037 43832 A c o n c l u s i o n that emerges from t h i s a n a l y s i s i s tha t , on average, and even without p a r t i c i p a t i o n i n the course, f i n a n c i a l management s k i l l s have an e f f e c t on pr o d u c t i o n and p r o f i t . One may a l s o conclude that i f these s k i l l s are improved then an improvement i n the o p e r a t i n g e f f i c i e n c y of farmers i s a l s o p o s s i b l e . 4.2.3 P r e d i c t i n g Expected Changes in P r o f i t s We have, so f a r , attempted to show the e f f e c t of the f i n a n c i a l management input on p r o d u c t i o n . T h i s was done at the sample means of the v a r i a b l e s ( p r o f i t and f i n a n c i a l management s k i l l s , s e c t i o n 4.2.1) and at the farm l e v e l ( s e c t i o n 4.2.2). On the b a s i s of the marginal value product obtained at the sample means, an attempt i s made to p r e d i c t the e f f e c t of the B r i t i s h Columbia f i n a n c i a l 89 management p r o j e c t on p r o f i t s of the farmers who have taken the t r a i n i n g i n f i n a n c i a l management. In other words, r e l a t ion becomes our po i n t of departure. Suppose that in p e r i o d t the e f f e c t of f i n a n c i a l management s k i l l s on p r o f i t i s represented by the f o l l o w i n g equation : where A i s a constant and 6 i s the marginal e f f e c t of a un i t change in f i n a n c i a l management on p r o f i t without the course i n p e r i o d t . Suppose i n p e r i o d t+, the same c o n d i t i o n s as p e r i o d t p r e v a i l with the only exception that f i n a n c i a l management s k i l l s ( M ) are expected to assume a new l e v e l due to the course taken d u r i n g that p e r i o d . In other words, the slope (not n e c e s s a r i l y the i n t e r c e p t ) remains unchanged. The problem at hand i s to p r e d i c t the e f f e c t on p r o f i t of the new l e v e l of f i n a n c i a l management s k i l l s in p e r i o d t+,. Mathematically t h i s i s e q u i v a l e n t to f i n d i n g the expected value of r e l a t i o n (4.8) i n p e r i o d t+, given as: 3TT/3M = [ 9 + colnS ] . [ TT/M ] (4.6.2) V  A + mt + ^ (4.8) E [ ] = E [ A + flM^ + ]'. (4.9) 90 Hence, we wish to estimate the e f f e c t of a change i n f i n a n c i a l management s k i l l s due to the course on p r o f i t s . S u b t r a c t i n g equation (4.8) from (4.9) the change i n p r o f i t due to a change in f i n a n c i a l management i s given as: V 1 " f t B e [ % 1 - M t ] or Aw = 0 AM (4.10) where Air i s the change in p r o f i t , 8 i n t h i s case i s the marginal value product of f i n a n c i a l management s k i l l s ( $ 9 6 8 ) p r i o r to the course and AM i s the change in f i n a n c i a l management s k i l l due to the course. R e l a t i o n (4.10) t h e r e f o r e becomes our p r e d i c t i o n equation. In the previous s e c t i o n an argument was made about the performance of an i n d i v i d u a l farm. In t h i s s e c t i o n , too, i t i s recognized that not a l l . farmers who attended f i n a n c i a l management workshops expect p o s i t i v e b e n e f i t s . Some farmers too show negative changes between t e s t scores p r i o r to and a f t e r t r a i n i n g . I t may be argued that given the element of chance i n every t e s t score, a decrease i n t e s t scores may not n e c e s s a r i l y mean d i s l e a r n i n g because of random e r r o r s . T h i s study however assumes that t e s t scores r e f l e c t t r ue knowledge and changes in t e s t scores r e f l e c t a change in f i n a n c i a l management s k i l l s . In order to present these r e s u l t s on the expected b e n e f i t s from the program, farmers were grouped by s i z e of 91 t h e i r p r o f i t s . I n T a b l e 4 . 1 0 t h e a v e r a g e t e s t s c o r e s b e f o r e t h e c o u r s e , t h e a v e r a g e c h a n g e i n t e s t s c o r e s b e c a u s e o f t h e c o u r s e , t h e a v e r a g e p r o f i t l e v e l b e f o r e t h e c o u r s e a n d t h e a v e r a g e e x p e c t e d c h a n g e i n p r o f i t d u e t o t h e c o u r s e f o r s p e c i f i c i n c o m e g r o u p s a n d f o r t h e e n t i r e s a m p l e a r e p r e s e n t e d . B e f o r e t h e t r a i n i n g s e s s i o n s t h e a v e r a g e t e s t s c o r e o b t a i n e d w a s 1 0 . 0 . A f t e r t h e c o u r s e t h i s s c o r e w a s i m p r o v e d t o 1 2 . 2 , a c h a n g e o f 2 . 2 p o i n t s . T h e a v e r a g e c h a n g e i n t e s t s c o r e s f o r i n d i v i d u a l g r o u p s l i e s b e t w e e n 1 . 7 a n d 2 p o i n t s c o r e s e x c e p t f o r o n e g r o u p w i t h a n a v e r a g e c h a n g e o f 3 p o i n t s . T h e p e r c e n t i m p r o v e m e n t i n p r o f i t d e f i n e d a s t h e r a t i o o f t h e a v e r a g e e x p e c t e d c h a n g e i n p r o f i t d u e t o t h e c o u r s e t o t h e a v e r a g e p r o f i t . b e f o r e t h e c o u r s e , f o r d i f f e r e n t i n c o m e g r o u p s , . i n d i c a t e s t h a t t h e s m a l l f a r m e r s ( l 7 f a r m e r s w i t h i n c o m e b e t w e e n $ 3 0 0 a n d $ 9 0 0 0 ) e x p e c t a 5 4 % p e r c e n t i m p r o v e m e n t i n t h e i r p r o f i t s . T h i s r e s u l t d e c r e a s e s a s t h e i n c o m e b a s e i n c r e a s e s . F o r e x a m p l e , f o r t h e l a r g e s t g r o u p t h i s c h a n g e i n p r o f i t s i s o n l y 1 % . H o w e v e r , e v e n f o r t h i s g r o u p t h e r e i s a n e t i n c r e a s e i n p r o f i t s o f $ 1 9 6 8 . F o r t h e e n t i r e s a m p l e , t h e e x p e c t e d a v e r a g e c h a n g e i n p r o f i t s i s $ 2 0 8 9 . T h i s i s e q u i v a l e n t t o a 3 % p e r c e n t i m p r o v e m e n t . 92 Table 4.10: Summary S t a t i s t i c s on Test Scores and V a r i a b l e P r o f i t Groups Improve Number of Farmer Test Before Scores Change Average Before P r o f i t Change ment % 1 7 10.2 1 .7 3083 1 680 54 1 4 10.5 3.0 1 9650 2939 1 5 1 4 9.7 2.4 38882 231 6 6 1 3 10.5 1 .7 71 632 1 601 2 1 5 9.3 2.0 173010 1968 1 Average f o r the Sample 10.0 2.2 60250 2089 3 Tables 4.10, 4.11 and Appendix D may be combined. In Table 4.11 the mean change in p r o f i t due to the course, standard d e v i a t i o n s , and maximum and minimum values f o r s p e c i f i c income groups are presented. Appendix D may be used to d e t a i l the number of farmers who expect negative (or p o s i t i v e ) . changes in p r o f i t . The maximum, expected change in p r o f i t due to t r a i n i n g by income groups ranges between $7744 and $10648, the minimum change l i e s between -$11132 and -$1936. There i s a high degree of v a r i a b i l i t y around these group means with the exception of the $10000 and $20000 income group. T h i s group has a mean of $2939 and a standard d e v i a t i o n of $2913. T h i s income group has only one case of where expected change in p r o f i t i s n e g a t i v e . 93 Table 4.11: Summary S t a t i s t i c s on Expected P r o f i t due to the Program Var i a b l e P r o f i t Number of ($) Farmers Mean S.D. Mi n imum Max imum 300-9000 1 7 1 680 3545 -3388 1 0648 10000-20000 1 4 2939 291 3 -1936 8228 30000-40000 1 4 231 6 4754 -91 96 91 96 50000-90000 1 3 1 601 4825 - 11132 7260 1 00000-400000 1 5 1 968 4931 -9680 7744 Average f o r the Sample 73 2089 41 53 -11132 1 0648 In Appendix C i t i s . shown that at l e a s t 51 (almost 2/3) out of a p o p u l a t i o n of 73 farmers are expected to have p o s i t i v e changes i n t h e i r p r o f i t s due to t r a i n i n g . In c o n c l u s i o n , r e s u l t s i n d i c a t e that the m a j o r i t y of farmers expect p o s i t i v e changes i n p r o f i t s . The number of farmers exp e c t i n g negative changes due to poor performance i n the t e s t a f t e r the t r a i n i n g i s r e l a t i v e l y small i n r e l a t i o n to those expecting otherwise. I t i s recognized that expected negative changes c o u l d be the r e s u l t of random e r r o r s i n the t e s t s c o r e s . At the farm l e v e l s i t u a t i o n , most farmers have a p o s i t i v e marginal r e t u r n to f i n a n c i a l management d e c i s i o n s . A l s o f i n a n c i a l management s k i l l s a ct as a s u b s t i t u t e f o r education and v i c e - v e r s a . 94 CHAPTER V SUMMARY, CONCLUSIONS AND IMPLICATIONS FOR FUTURE RESEARCH Th i s chapter c o n s i s t s of a b r i e f summary on the content of the resea r c h undertaken i n t h i s t h e s i s and o u t l i n e s some of the c o n c l u s i o n s d e r i v e d from the e m p i r i c a l r e s u l t s . I m p l i c a t i o n s f o r f u t u r e r e s e a r c h are d i s c u s s e d based on some of the problems encountered i n work. 5.1 Summary In the i n t r o d u c t o r y chapter of t h i s t h e s i s an attempt was made to r a t i o n a l i z e the r o l e of education i n p r o d u c t i o n . I t i s recognized that q u a l i t i e s of p h y s i c a l inputs are in themselves important inputs i n p r o d u c t i o n . I t was argued that i f education improves the q u a l i t y of the labor f o r c e , then there are expected b e n e f i t s from the present extension program i n f i n a n c i a l management i n B r i t i s h Columbia. But, because extension a c t i v i t i e s use scarce budget resources, there i s a need to develop an a p p r o p r i a t e methodology f o r e v a l u a t i n g the b e n e f i t s of the f i n a n c i a l management program. Since the u l t i m a t e goal of an a g r i c u l t u r a l e x tension program i s to improve farmers' income, the primary o b j e c t i v e of t h i s t h e s i s was to t r y to r e l a t e extension to t h i s income. In order to do t h i s the f i r s t step of t h i s t h e s i s , was (1) to review the l i t e r a t u r e on extension e v a l u a t i o n (2) and to review the theory of pr o d u c t i o n and c o s t s i n order to a r r i v e at a conceptual 95 model that would best s u i t the purpose of t h i s e v a l u a t i o n e x e r c i s e . In t h i s process, a p r o f i t f u n c t i o n was chosen f o r i t s a b i l i t y to capture the t o t a l e f f e c t of p h y s i c a l inputs and t h e i r q u a l i t i e s on p r o d u c t i o n and income. The data needs, co n c e p t u a l and measured v a r i a b l e s and t h e i r i m p l i c a t i o n s on e s t i m a t i o n were d i s c u s s e d . I t was noted that some b i a s may be expected i n the r e s u l t s due to problems encountered i n attempting to measure v a r i a b l e s c o r r e c t l y and due to lack of p r i c e data on inputs and outputs. Another p o t e n t i a l source of b i a s c o n s i d e r e d i s a p o s s i b l e l a c k of v a r i a t i o n in some input l e v e l s . The next step was to review f u n c t i o n a l forms in order to choose the most v i a b l e one f o r t h i s study. The Cobb-Douglas seemed to respond f a i r l y w e l l to the data and other needs and was t h e r e f o r e chosen. E m p i r i c a l l y , the f i r s t step was to show the e f f e c t of formal education on p r o d u c t i o n and p r o f i t without c o n s i d e r i n g the e f f e c t of f i n a n c i a l management a p t i t u d e . T h i s was set as a prelude to show the t e c h n i c a l , a l l o c a t i v e and dynamic e f f e c t s of e d u c a t i o n . The estimated parameters are a l l l e s s than one, implying an i n e l a s t i c response of gross s a l e s and p r o f i t to changes in the independent v a r i a b l e s . The e l a s t i c i t i e s of gross s a l e s and p r o f i t with respect to education l i e between 0.40 and 0.53 percent; those with respect to o p e r a t o r ' s labor between 0.54 and 0.77 percent and with respect to c a p i t a l 0.05 percent for both s p e c i f i c a t i o n s . 96 The estimated r e t u r n s to a year of s c h o o l i n g ( e d u c a t i o n ) on gross s a l e s and p r o f i t are $4659 and $2101, r e s p e c t i v e l y . The r e t u r n s to ope r a t o r ' s labor on gross s a l e s and p r o f i t s are $31 and $26 per hour, r e s p e c t i v e l y . These r e s u l t s are comparable with the rate charged by tradesmen and some p r o f e s s i o n a l s . The r e t u r n to c a p i t a l , which i s low, i s 14 cents on gross s a l e s and 15 cents on p r o f i t s . The estimated r e t u r n to h i r e d l abor i s $1.49 and to non-labor inputs $0.66 c e n t s . In the p r o f i t equation the wage rate has the wrong s i g n . On the assumption that education and f i n a n c i a l management t r a i n i n g are s u b s t i t u t e s the next step i n v o l v e d i n c l u d i n g a f i n a n c i a l management v a r i a b l e i n the estimated r e l a t i o n s h i p in order to assess the e f f e c t s of the extension or economic performance. The f i n a n c i a l management v a r i a b l e and tax management scores were aggregated in order to minimize m u l t i c o l l i n e a r i t y problems. By r e l a t i n g the f i n a n c i a l management s k i l l s to past p r o f i t s , t h i s study attempts , i n an ex-ante sense, to p r e d i c t the expected e f f e c t of the present extension on f u t u r e p r o f i t s . Most parameters are robust with the i n t r o d u c t i o n of the f i n a n c i a l management v a r i a b l e . The operator's labor parameter changes s l i g h t l y from 0.77 to 0.81 and the marginal r e t u r n on p r o f i t changes from $26 to $27. The c a p i t a l parameter r e t a i n s i t s previous s i z e of 0.09. The education parameter changed from 0.40 to 0.32 but a decrease i n t h i s parameter r e f l e c t s the 97 i n t e r a c t i o n e f f e c t between education and f i n a n c i a l management s k i l l s . The wage v a r i a b l e continues to show i t s wrong s i g n . The estimated e l a s t i c i t y parameter of the f i n a n c i a l management input i s 0.16, q u i t e i n e l a s t i c . The estimated r e t u r n to a year of s c h o o l i n g ( e d u c a t i o n ) averages $1672 and that of f i n a n c i a l management s k i l l s amounts to $968 per u n i t score. These r e s u l t s compare reasonably w e l l with most s t u d i e s on education and extension in Canada and elsewhere. P o l i c y i m p l i c a t i o n s to be drawn i n c l u d e : (1) the importance of the f i n a n c i a l management input in p r o d u c t i o n i s recognized, (2) given the f i n d i n g s of t h i s study, s i m i l a r workshops c o u l d enhance the p r o f i t a b i l i t y of most farms, (3) the estimated marginal r e t u r n of $968 to f i n a n c i a l management j u s t i f i e s the expense i n c u r r e d by the m i n i s t r y i n d e l i v e r i n g the course per farm. Given the cost of the course($13 to an i n d i v i d u a l farmer) more farmers should be acquainted with the b e n e f i t s forthcoming from an improvement in f i n a n c i a l management s k i l l s . R e s u l t s show that not a l l farmers have a p o s i t i v e marginal value product to f i n a n c i a l management s k i l l s . The estimated marginal value products l i e between -$14037 and $43832. Larger farms have l a r g e r marginal value products than small farmers. The average marginal value product for farmers f a l l i n g in the lowest v a r i a b l e p r o f i t group($300-$9000) i s $147, that of the highest group($ 100000 to $400000) i s $4551. F i f t y s i x farmers out of a p o p u l a t i o n of 98 73 have p o s i t i v e marginal value products to f i n a n c i a l management s k i l l s . The next e x e r c i s e was to p r e d i c t ex-ante the e f f e c t of the course on p r o f i t s . Not a l l farmers are expected to gain from the course since some farmers have negative changes in t h e i r t e s t s c o r e s . The average change in t e s t score f o r the whole sample was 2.2 p o i n t s . The range of t h i s expected change i n p r o f i t per farm l i e s between -$11132 and $10648. The expected, average change in p r o f i t s , f o r the e n t i r e sample, i s $2089, which i s e q u i v a l e n t to a 3 percent improvement. 5.2 C o n c l u s i o n s The c o n c l u s i o n s that f o l l o w from t h i s study are (1) the marginal value product of f i n a n c i a l management s k i l l s are p o s i t i v e and s i g n i f i c a n t i n i n c r e a s i n g p r o duction and incomes of the farmers in B r i t i s h Columbia, (2) education and f i n a n c i a l management s k i l l s are found to be s u b s t i t u t e s to each other i n i n f l u e n c i n g p r o d u c t i o n and incomes of the farmers. The s u b s t i t u t i o n e f f e c t i s estimated by d i f f e r e n t i a t i n g equation (4.5) twice: f i r s t , with respect to f i n a n c i a l management and then with respect to education as 3 2TT/3M3S = [-1 .95] . [ 1 /MS] (5.1) and e v a l u a t e d at the sample means of f i n a n c i a l management(M) and s c h o o l i n g ( S ) . 99 Since f i n a n c i a l management s k i l l s c o u l d s u b s t i t u t e f o r the e f f e c t of s c h o o l i n g , t h i s leaves one with the q u e s t i o n as to what group of farmers extension e f f o r t s should concentrate on. According to Roger's (1962) d i f f u s i o n of in n o v a t i o n theory, under non-peasant farming s i t u a t i o n s , extension e f f o r t s should be d i r e c t e d to the more p r o g r e s s i v e farmers, on the assumption that the adoption of i n n o v a t i o n would " t r i c k l e " down to the m a j o r i t y of farmers; that i s , the l e s s p r o g r e s s i v e ones. In our case, there i s evidence on the s u b s t i t u t i o n e f f e c t between education and f i n a n c i a l management s k i l l s . 5.3 I m p l i c a t i o n s for Future Research T h i s study l i k e many other s t u d i e s has i t s shortcomings. The shortcomings encountered are i n the area of the q u e s t i o n n a i r e design, the s k i l l t e s t i t s e l f , the c o l l e c t e d data and to a c e r t a i n extent the methodology. In t h i s s e c t i o n some of the problems are d i s c u s s e d and suggestions are made f o r f u t u r e r e s e a r c h . It i s suggested that the q u e s t i o n s on the f i n a n c i a l management s k i l l s be r e v i s e d not only by f i n a n c i a l management experts but a l s o by experts i n e d u c a t i o n a l t e s t i n g . T h i s study recognizes that s k i l l t e s t s used should s a t i s f y two b a s i c psychometric p r o p e r t i e s , that of r e l i a b i l i t y and v a l i d i t y (Walter e t . a l . , 1971). In other words, f o r r e l i a b i l i t y a t e s t needs to be 100 a d m i n i s t e r e d twice to see whether the obtained score i s a s t a b l e i n d i c a t i o n of the p a r t i c i p a n t s performance and an accurate i n d i c a t i o n of t h e i r " r e a l a b i l i t y " . In t h i s study, the s k i l l s t e s t was a d m i n i s t e r e d only once. For v a l i d i t y , a t e s t should measure r e a l knowledge(American P s y c h o l o g i c a l A s s o c i a t i o n , Standards f o r E d u c a t i o n a l and P s y c h o l o g i c a l Test and Mannuals, 1966). In t h i s study, the v a l i d i t y of the t e s t i s a l s o q u e s t i o n a b l e . Most questions seem to deal with simple r e c a l l knowledge, which can measure a low l e v e l of l e a r n i n g . Few q u e s t i o n s allow the p a r t i c i p a n t s to reason in order to show s k i l l s necessary to handle f i n a n c i a l management. These c o n s i d e r a t i o n s w i l l ensure that f u t u r e t e s t s be r e l i a b l e and r e f l e c t a c t u a l knowledge and have proper weights assigned to d i f f e r e n t aspects of a t e s t . In a d d i t i o n , there should be r e s t r i c t i o n s on those responding such that only farm operators or managers or the a c t u a l farm operator be i n c l u d e d . T h i s w i l l e l i m i n a t e s i t u a t i o n s where non-farm operators or d e c i s i o n makers att e n d workshops and take t e s t s or where at home others may f i l l in the q u e s t i o n n a i r e . Instead of a "take-home" type, farmers should be interviewed by the researcher and records of a l l r e c e i p t s and expenses used. Of course, t h i s r e q u i r e s time but there are p a y - o f f s a s s o c i a t e d with t h i s approach i f r e l i a b l e estimates are obtained. There i s a need f o r b e t t e r i n f o r m a t i o n on output and v a r i a b l e input p r i c e s . For f e r t i l i z e r , chemicals and feed, f o r example, the p r i c e per pound would s u f f i c e . If 101 t h i s i s not p o s s i b l e , q u e s t i o n s on the q u a n t i t y of these items bought and the expenditure on them are needed. T h i s would allow r e s e a r c h e r s to compute p r i c e s and aggregate as r e q u i r e d . C a p i t a l stock estimates are always d i f f i c u l t to d e r i v e . I t i s r a t i o n a l to expect farmers to value t h e i r a s s e t s h i g h l y but an assessment by an independent a u t h o r i t y with a knowledge of land and other asset markets may be more d e s i r a b l e . Some of the items on the q u e s t i o n n a i r e need to be r e v i s e d , f o r example, the expenditure items. If a method of o b t a i n i n g expenditure i n f o r m a t i o n on an e n t e r p r i s e b a s i s i s d e r i v e d the a n a l y s i s c o u l d be c a r r i e d out i n terms of homogeneous commodity groups. Estimated marginal products for d i f f e r e n t output mixes may be examined. The q u e s t i o n on h i r e d a g r i c u l t u r a l labor should probably i n c l u d e the amount of h i red . s k i l i e d and u n s k i l l e d labor so that when an wage r a t e i s not reported, the wage rate c o u l d be c a l c u l a t e d . Under f a m i l y l a b o r , i n order to get the operator's l a b o r , probably a quest i o n on o f f - f a r m employment measured i n number of days would s u f f i c e . The q u e s t i o n on years of s c h o o l i n g should be rephrased to read : (1) " The highest grade achieved at elementary or secondary s c h o o l " and (2) "Years of u n i v e r s i t y , c o l l e g e or i n s t i t u t e of technology attended". In t h i s i n s t a n c e i t may a l s o be f e a s i b l e to co n s i d e r an aggregation procedure that w i l l a t t a c h d i f f e r e n t weights to 1 02 secondary school education versus u n i v e r s i t y , c o l l e g e or i n s t i t u t e t r a i n i n g . As regards methodology, three q u a n t i t a t i v e models are suggested for c o n s i d e r a t i o n and these are d i s c u s s e d below. Share equations, f o r example, provide more infor m a t i o n than the p r o f i t f u n c t i o n when estimated d i r e c t l y . The approach allows f o r more s t r u c t u r a l r e s t r i c t i o n s and g i v e s more in f o r m a t i o n on input and output responses. The conceptual model used i n t h i s study may a l s o be c o n s i d e r e d w i t h i n a b e n e f i t cost framework. T h i s study has attempted to f i n d the expected impact of the t r a i n i n g course on p r o d u c t i o n and income. The r e s u l t s however do not examine whether farmers who attended the course w i l l apply what they l e a r n e d . In a d d i t i o n , there i s evidence to show that extension knowledge tends to become obs o l e t e with time (Sim e t . a l . , 1980). Thus, the expected i n p a c t of the course may be d i s c o u n t e d over a c e r t a i n p e r i o d of time with the p r o b a b i l i t y of adoption of what i s l e a r n e d from the course taken i n t o account. Two measures of b e n e f i t can be obtained with t h i s procedure. One i s the b e n e f i t - c o s t r a t i o . Another measure i s the i n t e r n a l rate of r e t u r n . The d i s t r i b u t i o n a l e f f e c t of the course may a l s o perhaps be e v a l u a t e d through a s s e s s i n g producer and consumer b e n e f i t s and c o s t s . The b e n e f i t s of any a g r i c u l t u r a l e xtension u l t i m a t e l y a f f e c t consumer and producer through implementation of what i s l e a r n t from the 103 extension. Improvements in the f i n a n c i a l management s k i l l s may reduce marginal c o s t s of pr o d u c t i o n and, at the i n d u s t r y l e v e l under p e r f e c t c o m p e t i t i o n , i n c r e a s e the q u a n t i t y of a good produced and reduce the market p r i c e . There i s a s h i f t in the supply curve. In an ex-post sense, i t i s p o s s i b l e to estimate consumers' and producers' s u r p l u s e s f o l l o w i n g Akino and Hayami's (1975) approach. Another c o n s i d e r a t i o n i n v o l v e s examining the demand for t h i s course. F o l l o w i n g Duncan's(1972) e v a l u a t i o n of r e t u r n to r e s e a r c h in pasture improvement, i f improvements i n f i n a n c i a l management are expected to inc r e a s e p r o d u c t i v i t y , then there w i l l be a demand f u n c t i o n f o r the course. The estimated b e n e f i t s may be compared with the c o s t s of the course by means of the i n t e r n a l r a t e of r e t u r n , necessary to generate a r e t u r n to the course expendi t u r e s . Another shortcoming of t h i s study i s the ex-ante approach i t followed, when there i s the l i k e l i h o o d of changes i n the c o n d i t i o n s upon which the f u t u r e i s p r e d i c t e d . T h i s study has no way of t e l l i n g which farmers are l i k e l y to adopt that which they have l e a r n e d . T h i s study hopes, however, that f u t u r e r e s e a r c h e r s would be able to conduct an ex-post e v a l u a t i o n of t h i s p r o j e c t by d i s t i n g u i s h i n g between performance of those who attended the c u r r e n t t r a i n i n g i n f i n a n c i a l management versus those who d i d not. In a d d i t i o n , the r e s u l t s obtained from t h i s study are evaluated from a p r i v a t e p o i n t of view, and yet 1 04 the funds to suppport these extension a c t i v i t i e s are p u b l i c . A more complete framework, perhaps, should c o n s i d e r the p r o j e c t ' s s o c i a l c ost and s o c i a l b e n e f i t s . F i n a l l y , t h i s study has probably e s t a b l i s h e d a new approach in attempting to assess extension programs. A t e s t score i s used. The r e s u l t s obtained seem to be in l i n e with other s t u d i e s . 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Cumingham."Extension Output Measures as I d e n t i f i e d by Extension C l i e n t e l e , " Cooperative Extension S e r v i c e , (1977), 19-20. APPENDIX A C a l c u l a t i o n of the F - s t a t i s t i c s for the Chow Test 1 1 2 C a l c u l a t ions The standard e r r o r of estimate for 1980 and 1981 samples are 0.94932 and 0.80430 r e s p e c t i v e l y . 1 4 The u n r e s t r i c t e d r e s i d u a l sum of squares for 1980 data equals (0.94934)(0.94934)20 = 18.09 Th i s has 20 degrees of freedom. For 1981 sample the u n r e s t r i c t e d r e s i d u a l sum of squares equals (0.80430)(0.80430)41 = 26.52 Th i s has 41 degrees of freedom. The sum of the u n r e s t r i c t e d r e s i d u a l sum of squares of both years adds to 44.61. The standard e r r o r of estimate of the pooled sample equals (0.85502)(0.85502)67 = 48.98. This has 67 degrees of freedom. The sum of the u n r e s t r i c t e d r e s i d u a l summ of squares of both years has degrees of fredom equal to (n, - k - 1) + ( n 2 - k -1) There are. k + 1 l i n e a r r e s t r i c t i o n s . Hence, F = [(48.98-44.61)/7] / [44.61/59] = 0.82 ' The 1980 and 1981 samples have 26 and 47 o b s e r v a t i o n s respect i v e l y . 1 1 3 APPENDIX B 1980 Data Sample S t a t i s t i c s in 1981 D o l l a r Value Table B.1: Prof i t , C a p i t a l Flows and Wage Rate- 1980 Data i n 1981 D o l l a r Value V a r i a b l e Mean Sales 63914. 0 P r o f i t 45878. 0 C a p i t a l Flow 31019. 0 Hi r e d Labor Wage Rate 40. 5 H i r e d Labor Expendi ture 3390. 0 Non-Labor Expendi ture 1 4647. 0 APPENDIX C Marginal Return per Farm 1 16 Within the $300-$9000 income group s i x farms have negative marginal value products. Eleven have p o s i t i v e marginal value products (Table C.1). Being a small income group, t h e i r i n d i v i d u a l marginal value products are r e l a t i v e l y s m a l l . The range of p o s i t i v e values i s $3 and $1416. Most of these have marginal value products of s i z e $100, $200 and $400. Negative values f a l l w i t h i n -$6 and -$1 59. Table C.1: Return per $300-$9000 Marginal Farm Group -75 76 1416 68 421 3 3 38 212 -6 1 23 405 -17 -158 1 1 5 -1 59 278 In the $ 10000-$20000 income group there are two cases i n the negative range (-$659 and $2192). Twelve are in the p o s i t i v e range (Table C.2). Out of these twelve three farmers have marginal value products as high as $1040, $1630 and $2490. Except for one case with a marginal value product worth $698, the remaning have marginal value products of about $71 and $83, $102 and $157. 1 1 7 Table C.2: Marginal Return per Farm $1 0000-$20000 Group 689 205 1 630 -21 92 1040 1 38 147 2490 1 02 83 2005 1 57 -659 71 In the $30000-$40000 income group, f i v e farmers out of fourteen have negative marginal value produts ranging from -$969 to -$254. The r e s t of the group has marginal value products as low as $279 and as high as $1633 (Table C.3). Table C.3: Marginal Return per Farm $30000-$40000 Group -254 1 592 31 1 -604 -969 362 483 258 279 1 633 739 -852 -295 878 The $50000-$90000 income group has nine cases out of t h i r t e e n with p o s i t i v e marginal value products (Table C.4) The lowest of these values i s $367 and the highest $6494. Three cases average to about $6000. Two cases show $3890 and $4223 each. Four have values between $367 and $480. The r e s t of t h i s group has negative marginal value products : -$4223, -$359, -$3403 and -$37. Table C .4: M a r g i n a l Return per Farm $50000- $90000 Group 480 3890 4223 6494 -4223 7735 -359 7640 -3403 399 -37 608 367 The $ 100000-$400000 income group, being a group of l a r g e incomes, has the l a r g e s t i n d i v i d u a l marginal value products (Table C.5). P o s i t i v e cases range between $553 and $43832. Negative cases are: -$14037, -$6485 and -$6622. Table C.5: Ma r g i n a l Return per Farm $100000-$400000 Group -9562 1411 43832 879 4687 1 2849 -14037 5636 -6485 700 571 2 5636 -6622 700 1 358 27352 533 APPENDIX D Expected Change in P r o f i t due to T r a i n i n g 1 20 In the $300-$9000 income group s i x farmers expect negative changes i n p r o f i t (Table D.1). These negative changes vary between $484 and $3000. On the other end of the s c a l e , ten farmers expect p o s i t i v e p r o f i t s . The h i g h e s t p r o f i t in t h i s group of ten i s $10648 fo l l o w e d by $6776. The remaining of cases expect p r o f i t s between $484 and $3872. Table D.1: Expected Change i n P r o f i t Due to T r a i n i n g Program $300-$9000 Group 484 1 936 6676 -1 936 0 2420 2904 -3388 1 0648 -1 452 -1 936 -484 3872 4356 .3872 -484 968 The $ 10000-$20000 income group only has one case of expected, negative p r o f i t ( - $ 1 9 3 6 ) (Table D.2). The highest expected changes are $7744 and $8228. The lowest are between $968 and $1936. In between extremes the range of these changes i s $2904 and $4840. 121 Table D.2: Expected Change in P r o f i t due to T r a i n i n g Program $l0000-$20000 Group 1 936 0 8228 968 4840 7744 2904 4356 -1936 968 0 4840 2904 3388 In terms of group averages the $ 10000-$20000 income group compares very w e l l with the $30000-$40000 income group (Table D.3). The l a t t e r has s i x cases out of twelve whose expected changes i n p r o f i t s vary between $1452 and $4356. The other s i x expect p r o f i t s between $5808 and $9196. Table D.3: Expected Change in P r o f i t due to T r a i n i n g Program $30000-$40000 Group -3872 1 452 -91 96 91 96 -1452 6776 3872 0 4356 4656 2420 5808 2904 5808 The $50000-$90000 income group, which i s comparable only with the $300-$9000 group i n terms of group averages, has four cases with expected negative p r o f i t s (Table D.4). The remaining , with the exception of two 1 22 cases with $968 and $484, expect p r o f i t s between $2904 and $7260. Table D.4: Expected Change in P r o f i t due to T r a i n i n g Program $50000-$90000 Group - 11132 3388 7260 5808 484 5324 -968 4356 -968 968 5324 -1 936 2904 F i n a l l y , the hi g h e s t income group of $100000-$400000 has three cases of expected negative changes (Table D.5). These range between -$9680 and -$484. The expected, p o s i t i v e changes, on the other hand, range between $968 and $1936; $3872 and $4840; $5808 and $7740. Table D.5: Expected Change in P r o f i t due to T r a i n i n g Program $100000-$400000 Group 4840 5808 -484 -7260 3872 5080 1 936 7740 1 936 2420 -9680 0 7260 4356 APPENDIX E F i n a n c i a l Management T r a i n i n g Q u e s t i o n n a i r e 124 FINANCIAL MANAGEMENT TRAINING QUESTIONNAIRE Note that these questionnaires are completely c o n f i d e n t i a l . No names or addresses are required and your response w i l l be anonymous. To preserve t h i s anonymity the evaluation i s being done by a t h i r d party. i ! | I 19S2-33 Course Year 125 Object ive This questionnaire i s being used to c o l l e c t information from a l l p a r t i c i p a n t s so that the f i n a n c i a l management training project can be evaluated. There are two aspects to the evaluation. F i r s t , we wish to obtain test scores and your assessment of the course to permit continued improvement and r e v i s i o n of the course format, material, and presentation. Secondly, i f the project is to be continued, there must be evidence that i t i s having a p o s i t i v e e f f e c t on farm production and incomes and i s reaching a wide array of producers. To meet t h i s second end we need some d e t a i l e d information about your farm operation, such as gross r e c e i p t s , asset l e v e l s , time a l l o c a t i o n and expenditures. Thank you in advance for completing the questionnaires. Just as the cooperation of the l a s t year's p a r t i c i p a n t s has improved the courses for your b e n e f i t , your cooperation w i l l help future p a r t i c i p a n t s . As well, your response w i l l help provide the basis for c o n t i n u i t y of the p r o j e c t . Note: If you wish to take t h i s questionnaire home to f i l l i t in f e e l free to do so. Please bring i t back with you tomorrow. 126 Course Location. Farm Tyoe Date LAND T o t a l A c r e s A c r e s C u l t i v a t e d C u r r e n t Value. Deeded Land $/Acre Rented Land R e n t a l P r i c e $/Acre Leased Grazed Land a.u.m's C u r r e n t V a l u e $ BUILDINGS Market V a l u e Of A l l Farm B u i l d i n g s ( e x c l u d i n g v a l u e of farm house) 127 LIVESTOCK Number C u r r e n t Value Females i n the bree d i n g herd (e.g. sows, d a i r y cows, beef cows, y e a r l i n g s i f backgrounding) $ 3ee H i v e s $ O t h e r s $ TOTAL VALUE OF ALL LIVESTOCK ? MARKETING QUOTA Eaqs Cases 3 r o i l e r s Pounds M a r k e t i n g S h a r i n g D a i l y c L i t e r s Annual Kg. Of B u t t e r f a t 128 MACHINERY AND EQUIPMENT Current Value M o t o r i z e d Machinery $ T i l l a g e And Seeding Machinery $ H a r v e s t i n g Machinery $ S p r a y i n g Equipment $ F e r t i l i z i n g Equipment 5 I r r i g a t i o n Equipment $ Other S p e c i a l i z e d Equipment ( e . g . m i l k i n g equipment, honey e x t r a c t i n g equipment,etc.; p l e a s e s p e c i f y ) $ Shop T o o l s $ TOTAL VALUE OF ALL FARM MACHINERY AND EQUIPMENT $ 129 EXPENDITURES FOR 193 1 Cash Wages P a i d To H i r e d A g r i g u l t u r a l l a b o r Taxes L e v i e d On Your A g r i c u l t u r a l P r c o e r t v Feed Purchases (Hay, G r a i n , Mixed Feeds, C o n c e n t r a t e s , Supplements C a i f Feed, e t c . ) Br e e d i n g Fees V e t e r i n a r y And M e d i c i n e Bedding Replacement Animals F u e l And O i l Used For Farm Purposes ( T r a c t o r s , T r u c k s , Combines, e t c . ) Machine R e n t a l Custom Or C o n t r a c t Work Repair' And Maintenance For Machinery, B u i l d i n g s , D r a i n a g e And F e n c i n g Commercial F e r t i l i z e r And A g r i c u l t u r a l C h e m i c als( I n s e c t i c i d e s , H e r b i c i d e s , F u n g i c i d e s , D i s i n f e c t a n t s P e s t i c i d e s ) Crop Expenses (Seed, B a l e r , Twine, e t c . ) ' I n t e r e s t On O p e r a t i n g C a p i t a l G e n e r a l S u p p l i e s And Overhead Other Expenses (e.g. Beekeeping Expenses ) 130 HIRED AGRICULTURAL LABOR Time Worked Hrs/Wk Wks/Yr Wage Rate ( I n c l u d e A l l B e n e f i t s ) S k i l l e d Farm Labor $/Day $/Month C a s u a l Farm Labor $/Day $/Month FAMILY LABOR Ope r a t o r Spouse C h i l d r e n 15 y r s + Under 15 Sex Age Years Of S c h o o l i n g Years Of E x p e r i e n c e Managing A Farm 131 FAMILY LABOR ( c o n t i n u e d ! O p e r a t o r Spouse C h i l d r e n 15 yrs+ Under 15 Re g u l a r s c h e d u l e i n 193! hrs/wk wks/yr Summer Schedule i n 1981 hrs/wk wks/yr O f f - F a r m Employ-ment i f A p p l i c -c a b l e Number Of Days I Wage Rate ....$/hr . . . . 5/aio ....$/hr . . ..$/mo A g r i c u l t u r a l F i n a n c i a l E x t e n s i o n Courses A t t e n d e d In The Pas t Three Years yes yes - — y e s yes no no no no Other C o u r s e s yes yes — y e s yes - : — n o no no no 132 - 1 3 0 •a cn C n 3 •a <: •Jt -3 a x "! O n .—, 3 CT Ti n 3 3 Cfl 3 0 3 T T z 3 0 0 3 3 0 3 — 3 -. C f) < < < 1 a 3 3 a c 3 3* -< n 3 3 ci 0 G 0 3 O 3 a .11 3 eg a. 3 3 3 -1 3 —• — "S3 3 •» T a T 3 3 < — — - a —• 3 3 01 eg 3 0 3 3 ca — c •n •3 3 0 < — c < •a 3 a iG <J T 3 3 "3 a • 0 in 3 > a cfl * Cfl O — 0 ca 0 a 3 3 a i 0 m si • i — • eg — (3 T3 a ~ < 0 0 1-OJ 3 CB "j ro 3 ca a 3 % 3 a c ."n C Cl ca ca CT a 10 1 3 C 0 o • • 3 .3 ca •3 a -i 1 1 CO O • -4 3 3 o> 0 eg 0 1 Ul f l CO n eg •Q n ca » CO a d ca 0 CO 3 3 eg ca ro •* 3 n a CO -w G R O S S R E C E I P T S ( c o n t I n u e d ) 1 9 7 9 Q u a n t i t y R e c e i p t s % f 1 0 ( 1 0 Q u a n t i t y R e c e i p t s t Q u a n t 1 t y mo t R e c a I p t s L I V E S T O C K A N O P O U L T R Y P R O D U C T S S O L O : C a t t l o ( I n c l u d i n g (In 1 r y ) H o g s S h e e p a n d L a m b s ( I n c l u d i n g w o o l ) B r o i l e r s o r a l O t h e r P o u l t r y E g g s M i l k A n d C r e a m O t h e r A g r i c u l t u r a l P r o d u c t s ( H o n e y , e t c . ) G o v ' t . L i v e s t o c k P a y m e n t s ( s u c h a s F a r m I N c o m e A s s u r a n c e , o t c . ) T O T A L V A L U E O F A G R I C U L T U R A L P R O D U C T S S O L D -APPENDIX F i l l Questions 135 SKILL QUESTIONS Course: Location: 1. For your kind of farm business ( ) which d o l l a r f i g u r e represents the debt per unit cl o s e s t to that which your business could handle: a) at 12% in t e r e s t ? Please indicate your answer with a check mark. $400 $500 $600 $700 $1,000 $1,500 $2,000 $3,000 $5,000 $7,000 ; b) at 22% i n t e r e s t ? Give your answer i n approximate d o l l a r s . $ 2. A larger-than-necessary investment i n machinery and f a c i l i t i e s r a i s e s costs because: Please indicate with a check mark which statement(s) apply. a) maintenance costs are lower b) i n t e r e s t costs w i l l be higher c) depreciation allowances w i l l be higher 3. Which of the following budget(s) are normally used to determine the break-even cost per un i t of saleable product? Please i n d i c a t e your answer(s) with a check mark. a) net worth b) cost of production c) cash flow d) p a r t i a l budget e) income and expense 4. Which of the following f i n a n c i a l statements reveal the true p r o f i t or loss from the farm operation? Please i n d i c a t e your answer with a check mark. a) Cash flow . b) Tax statement of cash income and expense c) Accrual type income and expense statement " ______ 5. For tax purposes, which type of income and expense statement do you f e e l would be most advantageous f o r you to complete? Please i n d i c a t e your answer with a check mark. a) Accrual type b) Cash type 136 6. Which of the following budgets would you use to determine your needs for an operating loan? Please indicate: your answer with a check mark. a) P a r t i a l budget b) Loan worksheet c) Income and expanse budget d) Cash flow budget TAX PLANNING QUIZ In the highest tax bracket, the percentage marginal tax rate f o r an i n d i v i d u a l i s over 50%. True False Undecided A fanner bought land for $100,000 i n 1973 and sold i t i n 1980 f o r $200,000 with a c a p i t a l gain of $100,000. Is the taxable c a p i t a l gain: ( c i r c l e one answer) (a) $100,000 (b) $50,000 (c) $0 (d) $200,000 (e) Don't Know Is a w i l l which i s not properly witnessed v a l i d i n B r i t i s h Columbia? Yes No Undecided Recaptured c a p i t a l cost allowance i s : f u l l y taxable h a l f taxable ' not taxable 5. Which of the following types of assets can be r o l l e d over to a c h i l d from a farmer who i s a c t i v e l y engaged i n far_dng? Farm land Yes No " Farm machinery Yes No Shares i n a farm corporation Yes No Are depreciation and c a p i t a l cost allovance the sane thing? Yes No Uncertain 7. Do you have to take the f u l l amount of c a p i t a l cost allowance allowed each year? Yes No Don't Know 

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