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This appendix gives the authors' perspective on farm management in the context of management per se and of farm systems. It outlines, first, the concept of management; second, the distinctive features of agriculture that make farm management different from management in other fields, particularly industrial management; third and fourth, the major characteristics of farm management theory and of its practice; and, fifth, how government may help to make the management of small resource-poor farms more effective. The presentation is conceptual rather than empirical and its orientation is to small farms that are inevitably becoming less subsistence and more commercially oriented as development occurs.


1.1 History of Management Thought
1.2 Definition of Management
1.3 Major Features of Management
1.4 Definition of Farm Management

Management is nothing new. It is something we do every time we choose between alternatives as we attempt to make the most of our lives. Women and men have been necessarily acting as managers ever since the origin of Homo sapiens.

1.1 History of Management Thought

It is not surprising, given the necessity for food, to find many references to farm management in the writings that have survived from ancient times. Best known in this regard are the Roman treatises De Re Rustica of Cato (234 to 149 B.C.) and Rerum Rusticam Libritres of Varro (116 to 28 B.C.) (Anon. 1913; Bradley 1725). Our favourite, however, is the Greek Hesiod who lived in the ninth century B.C. In his Works and Days (Evelyn-White 1914) he gives us what to our knowledge are the first recorded principles of farm management. Few would dispute the good sense of much maxims as "Do not put your work off till tomorrow and the day after, for a sluggish worker does not fill his barn, nor one who puts off his work" or "Avoid shady seats and sleeping until dawn in the harvest season ... Be busy then, and bring home your fruits, getting up early to make your livelihood sure" or "Propitiate [the gods] with libations ... so you may buy another's holding and not another yours." Some, however, might query Hesiod's advice to "Do not let a flaunting woman coax and cozen and deceive you; she is after your barn. The man who trusts womankind trusts deceivers."

As well exposited by George (1968), since the time of the ancients there has been a continuing stream of writings on management in the context of, in particular, trade, business, warfare, politics and statesmanship. Perhaps best known from the medieval period are two books oriented to management in civil society and politics: Thomas More's (1478 to 1535) Utopia and Machiavelli's (1469 to 1527) The Prince. Through the eighteenth and nineteenth centuries, much of the work of the classical economists such as Adam Smith, James Mill, John Stuart Mill and William Jevons is sprinkled with considerations of the role, function and importance of management. Other notable contributors in this period were Carl von Clausewitz, a Prussian general who wrote on military management; Charles Dupin, a French engineer who emphasized worker welfare and the need for integrity and accountability in management; and Charles Babbage, an Englishman and pioneer of computing, whose work was seminal to the development of the scientific approach to the study of management.

Spurred on by the industrial revolution and the emergence of large-scale organizations (such as railways and multi-branch banks), what is now known as the scientific management movement began in about 1870. Many were involved but, today, Frederick W. Taylor - a U.S. engineer - is credited as being the founder and driving force. His interest was in management in an industrial context, where, in order to maximize output with a given level of effort, he argued that the scientific method had to be applied to job determination, worker selection, creation of a good work environment and specification of output standards so as to determine properly the task for each worker (Taylor 1911). If the worker then achieved excellence in output, he or she was to be rewarded. If standard output was not achieved, the worker was to be penalized.

Relative to the management of small farms, two points must be made about Taylor's contribution. First, it provided the impetus not only for changes in the practice of industrial management but also, since early in the twentieth century and particularly since World War II, for the scientific study of management. This area of study has burgeoned in recent decades, particularly in industry but also in the field of farm management. A vast literature and a myriad of texts have been generated, particularly in industrial management. University programs in management and business administration are now commonplace and most agricultural faculties, as well as specialist colleges, offer units in farm management. Second, Taylor's contribution was in the context of industrial production with its associated large number of employees whose impact on organizational performance was crucial. The same is true of most of the industrial studies of management made since Taylor's initial promulgation of scientific management. For this reason, much of the modem conceptualization of management with its emphasis on the industrial context and a large workforce does not fit well within the context of agricultural production. This is particularly so for small-farm systems using only family labour. Nonetheless, despite the above strictures, there is much in the modem conceptualization of management that is pertinent in a generic sense to farm management.

1.2 Definition of Management

To elaborate the general conceptualization of management, consider the following representative sampling of definitions:

"[Management aims to] accomplish group purposes with the least expenditure of material or human resources" (Koontz 1969, p.415).

"[Management aims to ensure] that the organization serves its mission in an effective way, and also that it serve the needs of those who control or otherwise have power over the organization (such as its owners, government agencies, unions, pressure groups)" (Mintzberg 1983, p.13).

"Management is the art of getting things done through other people" (Hellriegel and Slocum 1986, p.8).

"Management is the effective and efficient integration and coordination of resources to achieve desired objectives" (Hitt, Middlemist and Mathis 1989, p. 13).

"Management is the process of working with and through others to achieve organizational objectives in a changing environment. Central to this process is the effective and efficient use of limited resources" (Kreitner 1989, p.9).

1.3 Major Features of Management

While not irrelevant to farm management, definitions such as the above clearly do not specifically fit farming situations. However, before presenting a definition that does fit farming, major facets of the modem concept of management (as presented by authors such as those of the definitions cited above) should be noted.

First, successful management is seen as entailing both efficiency in resource use and effectiveness in the achievement of goals.

Second, management is seen as a universal process involving a set of management functions. These functions are variously elaborated either simply as planning, organizing and controlling or in more detail as, e.g., planning, decision making, organizing, staffing, communicating, motivating, leading, monitoring and controlling.

Third, management is seen as involving a number of roles. These are of three types: interpersonal roles as figurehead, leader and liaison link; informational roles as monitor, disseminator and spokesperson; and decisional roles as entrepreneur, disturbance handler, resource allocator and negotiator.

Fourth, relative to its stakeholders, the management of an organization is seen as having three sets of duties (Mintzberg 1983, p. 13). First of these is direct supervision and running of the organization. Second is the management of the organization's boundary conditions - its relations with the various environments surrounding it. The third set of duties relates to the development of the organization's strategy which may be viewed as a mediating force between the organization and its environment. As Mintzberg (1983, p.14) puts it: "In managing the boundary conditions of the organization, managers develop an understanding of its environment; and in carrying out the duties of direct supervision, they seek to tailor strategy to its strengths and to its needs, trying to maintain a pace of change that is responsive to the environment without being disruptive to the organization." Toffler (1980, pp. 235-8) has argued that the major changing environments to which today's management must adapt are the physical environment in relation to resource depletion and pollution; the social environment in relation to socially oriented special-interest groups; the information and communication environment with its exponential growth in technology, coverage and accessibility; the political environment with its increasingly better-informed constituency demanding transparency and accountability; and the moral environment with increasing public concern for high ethical standards in management.

Fifth, good management is seen as dependent on the manager possessing technical, interpersonal, conceptual and diagnostic skills (Hellriegel and Slocum 1986, pp. 22-5). Technical skills are those that a manager needs to perform specialized tasks within the organization. Interpersonal skills are those needed to communicate and work well with other people. Conceptual skills relate to a manager's ability to think in the abstract, to see relationships and opportunities, to plan, and to take a global perspective of the organization and its environment. Diagnostic skills are those used to define and understand situations, to recognize problems and see avenues to their solution.

Sixth, successful management is seen as the product of three essential elements, viz., ability, motivation to manage and opportunity (Kreitner 1989, p.22). Since each of these elements is essential, the relationship between them must be multiplicative.

Seventh, four major approaches to management have been delineated (Hellriegel and Slocum 1986, pp. 25-9; Kast and Rosenzweig 1974; Koontz 1976). The traditional approach emphasizes order, stability and routine procedures for carrying out the planning, organizing, leading and control functions. This approach perhaps corresponds best to the traditional approach to farm management. The behavioural approach emphasizes knowledge about how people behave and why they act as they do. It assumes numerous employees and groups, and is thus less relevant to the management of small farms. The systems approach recognizes interrelatedness within the organization and views it as a purposeful (rather than purely mechanistic) system that needs to be considered in a holistic rather than reductionist way. Such an approach is clearly relevant to farm management as has been recognized in recent decades with the development of farm-systems theory and analysis. Lastly, the contingency approach recognizes that there is no best way of managing for all situations. Different situations are seen as requiring different management approaches - sometimes traditional, sometimes behavioural and sometimes system-oriented. Such an approach clearly has merit in farm management.

Eighth, management is seen as probably being best described as a mixture of science, practice and art. Successful management, as measured by efficient goal achievement, can not be guaranteed by the scientific principles of management that are currently available. Insofar as much of management is routine, it is a practice. Not least, successful management is often the outcome of good luck in combination with the artistry of a creative use of knowledge, opportunity and intuition.

Ninth, quantitative methods of analysis can often be highly relevant to some management functions. This is particularly so for planning resource allocation and decision making. However, whether or not quantitative analysis is cost effective will generally depend upon the data required, the complexity of the analysis, the size of the organization or scale of the enterprise and the degree to which its performance is under the manager's control. Simple budgeting may thus be the only cost-effective approach for small enterprises (including small farms) while large enterprises may make full use of all the latest quantitative aids to decision making.

Tenth and finally in this overview of the concept of management, the following question must be asked. Is managerial ability innate and thus dependent on genetics or is it something that can be developed through education and training? Though the relevant genes have not yet been located, there seems to be no doubt that people do differ in their innate managerial ability. At the same time, the plethora of management education programs available today attest to the view that management ability can be learnt.

1.4 Definition of Farm Management

Against the above general management background, we can now consider management in the specific context of agricultural production. To begin, consider the following representative sampling of twentieth-century definitions of farm management as proposed in relation to commercial family farms.

"[Farm management is concerned with] how can the individual farmer so organise the factors of production - land, labour and capital - on his farm, so adapt practice to his particular environment, and so dispose of his product, as to yield him the largest net return, while still maintaining the integrity of his land and equipment" (Butterfield 1910, p.3).

"Farm management, as the subdivision of economics which considers the allocation of limited resources within the individual farm, is a science of choice and decision making" (Heady and Jensen 1954, p.6).

"Farm management is concerned with the organisation and deployment of the resources put into a farm business - the land, the capital, the labour and that item of over-riding importance, the ability and skills of the individual farmer" (Dexter and Barber 1960, p.13).

"[Farm management] is concerned with the organization of resources, with planning their use, both within and between enterprises, and with the control of plans both during their implementation and afterwards" (Barnard and Nix 1973, p.18).

"Farm management is concerned with the decisions which affect the profitability of the farm business" (Castle, Becker and Nelson 1987, p.3).

"Farm management can be thought of as being a decision-making process. It is a continual process ... The decisions are concerned with allocating the limited resources of land, labor, and capital among alternative and competing uses. This allocation process forces the manager to identify goals to guide and direct the decision making" (Kay and Edwards 1994, p.9).

There are clearly both similarities and marginal differences among these definitions. It is interesting that the earliest definition from 1910 is little different from the most recent of 1994. The common thread through most of them is decision making about the allocation of resources. Though all the definitions are by respected authorities, we find them inadequate. To our mind, none of them captures all the essential elements of farm management. It is also notable that, reflecting their family-farm orientation, they do not emphasize labour or people any more than other resources. This is in contrast to the general management definitions cited earlier.

Our preference, if we want to go beyond saying "farm management is what farmers do", is for what - compared with the above definitions - is a more succinct but far more comprehensive definition. This is of farm management as the process by which resources and situations are manipulated over time by the manager of the farm system in trying, with less than full information, to achieve his or her goals (Dillon 1980). In contrast to the cited definitions, this statement either recognizes or better emphasizes: first, that farm management is not farm management research, teaching or consulting; second, the dynamic nature of the farm system and its environment; third, the fact that the farm manager deals not just with resources but also faces the challenge of situations to be met and opportunities to be seized; fourth, the active role of manipulation as distinct from the more passive role of merely organizing and controlling; fifth, the uncertainty and consequent risk present in the farm manager's decisions, thereby implying attempted (rather than sure) achievement of objectives based on personal preference and subjective judgement; sixth, by referring to goals rather than profit, the reality of non-profit goals is recognized; further, in the family-farm context, the nonsense of endeavouring to differentiate between the farm as a business and as an economic entity is done away with - the latter subsumes the former and, in our judgement, must be the context in which farm management operates. Too, not only does this definition better capture the challenge and excitement of farm management but, with the deletion of the word 'farm', it serves as an excellent definition of management in general.


2.1 Biological Effects
2.2 Time Effects
2.3 Resource-portfolio Effects
2.4 Small-farm Effects

From a management perspective, agriculture is quite distinctive. This distinctiveness primarily relates to the time-dependent biological nature of agricultural production and to the risks this necessarily entails. As well, there are other differences related to cost structure and, in the context of small farms, to the markets faced, their lack of political influence, and the virtually inseparable relationship between the farm system and the farm household.

2.1 Biological Effects

Industrial production, being independent of the natural environment, is mechanical. In contrast, the biological nature of agricultural production causes it to be strongly influenced by the natural environment. In consequence, agriculture has its own innate rhythms and significant elements of agricultural production are not under the farmer's control. Species suitability and growth potential, climate, disease and pest occurrence, yield, livestock freewill and gestation period are a few examples. Over time, repetition of the same production process carried out in the same fashion on the same land can give dramatically different results. Nor can production be easily speeded up (or slowed down) in response to favorable (or unfavorable) prices. Indeed, because plant and animal biology are not thoroughly understood, they are still the subject of much research. This can benefit farmers but adds to the burden of the farm manager's role if he or she is to keep abreast of relevant research results.

2.2 Time Effects

Unlike most other production enterprises, because of its biological nature, agriculture is inextricably time dependent (Dillon and Anderson 1990, Ch. 6). Compared with industrial production, agricultural production both takes more time and is generally time-related in terms of the seasons. As well, the form of agricultural production, i.e., the species to be grown, is generally dictated by climatic conditions in terms of precipitation, solar radiation etc. Thus, e.g., while grain production requires some three to six months of time and the correct climate and seasons, factory production of a car requires less than a day and is independent of such seasonal elements as rainfall, temperature, day length etc.

From a management perspective, there are four influences of time on agricultural production that make it distinctive. First, there is what can be called the flexibility effect. By its nature, time gives the farm manager flexibility in the form of options that would not be available if production were instantaneous. Time gives the farmer the opportunity to sequence input injections and/or output harvests in varying ways. Thus the farmer has to decide not only the amount of fertilizer, irrigation water, livestock feed etc. to be used, but also the pattern of its use over the production period. Too, within the timespan of any particular activity, decisions about its operation (including marketing of the product, if relevant) can be revised on a sequential contingency basis relative to market or climatic conditions. Obviously, such time-induced flexibility has both advantages and disadvantages for the farm manager. On the one hand it provides the opportunity to correct or improve decisions over time but, on the other hand, it greatly increases the possible volume and complexity of decisions.

Second, in contrast to industrial production, in many agricultural production activities, time may be a variable input under the manager's control, i.e., a decision variable to be manipulated by the farmer on the basis of its opportunity cost. This is particularly the case for livestock-fattening and aquaculture activities, as well as for some annual crops, and also relative to the replacement decision for perennial crops and woodlots. Such time dependence of output, of course, always exists in agriculture. Often, however, as for most grain crops, it can be ignored because the input of time required, once a particular cultivar has been chosen, is fixed and/or not under the farmer's control.

Third, and again in contrast to industry, time may have an indirect effect on agricultural production through the influence of carryover effects. These may be positive as, e.g., when there is a carryover of nutrients from fertilizer application or green manure crops in prior periods. Conversely, they may be negative as in the case of carryover of the eggs of pests or the spores of disease. The extent of such carryover is a function of the time elapsed (e.g., a year or two for green manure but up to 30 years in the case of anthrax spores) and may influence the farmer's current decisions on product choice and input use.

Fourth, time - in conjunction with the biological nature and climatic dependence of agricultural production - makes farm management a far more risky endeavour than industrial management. In the case of small farms, this is compounded both by the close association between the farm and the household and, if they are market oriented, by their situation as price-takers in both input and output markets. By its nature, time introduces uncertainty into farmers' decision making. Because of the complex processes of change, evolution and growth that accompany the flux of time in agriculture and its market and other environments, farmers cannot be sure of the future either in terms of (i) the outcomes of today's decisions or (ii) the opportunities (including new products and technologies) that may become available or (iii) the developments that may occur in their personal, family, social, political, legal, natural or economic environments. Given the information available to the farm manager, the best he or she can do is to make those decisions which are expected to best achieve the desired goals. There can be no guarantee that these risky decisions will, with hindsight, turn out to have been the best that could have been made. Only perfect foresight can guarantee no ex post regrets about what might have been.

2.3 Resource-portfolio Effects

There are four resource-portfolio effects that distinguish farm from industrial management. First, fixed costs in farming are often proportionately higher than in industry. This is due to the importance of land in agricultural production and, on family farms, to the fixed cost of family labour. Because of the more risky nature of agriculture, it is generally more difficult to cover the fixed costs of production in farming than in industry. In consequence, more than industry, agriculture exhibits boom or bust characteristics.

Second, relatively higher investment in fixed resources such as land and improvements also causes greater asset-fixity effects in agriculture. This fixed investment reduces the opportunity for farm managers, as entrepreneurs, to move into or out of or within agriculture - as may also be the case for small farmers in situations where tenure is on some traditional basis and there is no land market.

Third, far more than in industry, farm management has a custodial or guardianship responsibility for the natural resources under its control. This is particularly so for land and water which play a more dominant role in agricultural production than in industrial production. Increasingly, for the benefit of present and future generations, society is demanding that farmers manage their land and water resources so as to enhance or at least sustain their quality rather than to deplete or pollute them.

Fourth, because of the importance of land as a fixed input in agricultural production, the farm manager, more so than his or her counterpart in industry, confronts the law of diminishing returns. In consequence, as product and input prices change (as they do more so in agriculture than in industry), the farm manager has an increased volume of decisions to make about how much of each variable input to use and the consequent expected level of output. Concomitantly, the fixity of the land resource and its high contribution to farm costs undoubtedly make it more difficult for management to achieve economies of scale in agriculture than in industry.

2.4 Small-farm Effects

Management differences between agriculture and industry are exacerbated in the case of small commercial family farms. First, the managers of small farms suffer from a lack of market power. They are generally price-takers in both their input and output markets. Often in their input markets they face administered prices. In output markets they generally face few buyers and have to bear the burden of product perishability and the tyranny of distance from the market.

Second, the close relationship between the farm system and the family on most small commercial farms implies that the farm is not purely a business. The farm and its household constitute an economic entity whose goals are inevitably going to place a heavy emphasis on profit and long-term commercial viability but will also involve non-profit elements. Some degree of conflict between farm and family goals is inevitable. The special difficulties for management of working with family members in a business cannot be overstated.

Third, compared with industry, the factors of production on small family farms are often not separately supplied: the manager will generally also be a worker, the farm's transport will also be the family transport, and the family home will be the manager's office. This can lead to difficulties in allocation - e.g., to what extent should the farmer spend his or her time as manager or as labourer? Too, on family farms, labour is much less specialized than in industry. The farm operator has to be able to do everything from managing the farm to repairing its infrastructure, keeping its books and ploughing the fields.

Fourth, it is a fact of life that the managers of most small businesses, not just farms, have not had the opportunity of formal education and training to develop their managerial skills and capability. Nor, unlike managers in large-scale industry, have they been purposefully selected on the basis of their managerial ability. It is therefore to be expected that the general level of management in small agricultural enterprises will not be as good as that in larger industrial enterprises. Unless government ensures otherwise, this problem may be compounded by the fact that small farmers are generally disadvantaged in terms of access to information and credit. They also usually lack influence in the setting of agricultural policies and research agendas.


3.1 Farm-system Theory
3.2 Theory of Management by Objectives

In the context of small farms, the current theory of farm management is best expressed as the integrated consideration of two complementary theoretical frameworks derived from modem management theory (Kast and Rosenzweig 1974). The first of these frameworks is farm-system theory with its conceptualization of the farm as a purposeful system. This theory constitutes a way of looking at the farm; it provides a checklist of aspects of the farm that should be the concern of management. The second theoretical framework is the overlay of farm system theory by what might be generally called the theory of management by objectives. This involves the managerial functions of planning, organizing and controlling the operation of the farm system over time through the use of economic and other principles and administrative procedures. Management by objectives corresponds to the analytical and decision-making activities necessarily undertaken by the farmer in his or her role as manager.

Management by objectives with the aim of maximizing financial profit subject to relevant constraints has been the traditional theoretical approach to commercial farm management (Case and Williams 1957; Jensen 1977; Nix 1979). In contrast, farm-system theory has come to formal prominence only over recent decades. However, the theory of farm management by objectives has always to some degree had implicit within it the recognition of the farm as a purposeful system.

Both theories could be used as frameworks for the descriptive or positive analysis of a farm's management and performance. Generally, however, they are couched and used as normative theories, i.e., with the aim of providing guidance as to what the farm manager should do if system goals are to be achieved as well as possible. Discussion here is from such a normative perspective.

3.1 Farm-system Theory

A system is an organized unitary whole consisting of a set of interrelated elements, components or subsystems, each of which is related directly or indirectly to every other element, component or subsystem in the system. The basis of systems theory is that, by their nature, systems can only be properly considered qua systems.

With the advent of systems thinking in the 1950s, the traditional approaches to understanding phenomena of 'reductionism' (i.e., reducing phenomena to their basic parts and studying these parts in isolation) and 'mechanism' (i.e., that phenomena can be fully explained by mechanical cause-effect relations) have been seen as inadequate for understanding and manipulating systems (Ackoff, 1973). Rather, the systems approach is based on 'expansionism' or the view that a system is more than the mere sum of its parts. That is, the system's behaviour is not fully deducible from the behaviour of its parts considered in isolation. The systems approach also recognizes that, as well as mechanistic effects, the operation of purposeful systems with their goal-setting and goal-seeking behaviour will be influenced by teleological (i.e. purpose-driven) effects arising from choice and free-will. System performance must therefore be judged not simply in terms of how each part works separately, but also in terms of how the parts fit together and relate to each other, and in terms of how the system relates to its environment and to other systems in that environment.

Applied to purposive man-made systems such as farms, the systems approach highlights two features - subjectivity and purpose - that are eschewed by traditional science in its quest for understanding. First, a farm system involves not merely the interactions of physical forces but also free-will choices under uncertainty and contests of will arising from the purposiveness of behaviour of animate elements (i.e., people and livestock) in the system. Farm systems thus exhibit non-determinism and capriciousness of behaviour that, before the event, can be captured only by subjective judgement and not by objective fact. Second, the understanding (and management) of a purposive system such as a farm necessitates a teleological or means-end approach of (i) recognizing the system's goals and (ii) assessing alternative strategies as to how those goals might best be achieved given whatever may be the initial state of the system and its constraining conditions. Use of the systems approach to understand and better manage purposeful systems such as farms, however, is no easy task (Dillon, 1992). Difficulties lie in (a) the free-will and non-deterministic attributes of the farm system; (b) the complexity of purpose and operation that the farm system may possess; and (c) the uncertain dynamic character of the farm system and its environment.

The Farm System

Farm-system theory views a farm as a unique goal-setting (i.e., purposeful) open stochastic dynamic artificial (i.e., man-made) system having a major aim of generating income (in cash or kind) for its stakeholders through agricultural production (Dillon 1992). Generally, a farm system is complex rather than simple. Its purposefulness is ensured by its human and social involvement which enables the system to vary its goals under a given environment. The uniqueness of any particular farm system is guaranteed by its location, history, resources and human elements. In consequence, while the general principles of farm-system management are appropriate for any particular farm, their application must generally lead to different decisions on each particular farm. The openness of the farm system is obvious from its interaction with its environment. The stochastic nature of the farm system is guaranteed both by the free-choice capacity of its human (and, if present, animal) elements and by the stochastic nature of the environment with which it interacts. Necessarily, a farm system is also dynamic by virtue of its purposefulness, openness and stochasticity which ensure that the system changes over time. Too, any farm system is a mixture of abstract and concrete elements or subsystems. The concrete elements are associated with the physical activities and processes that occur on the farm. The abstract elements relate to the managerial and social aspects of the farm.

Farm-system theory sees the farm as having a variety of boundaries or interfaces, i.e., contact points with other systems or environments. Clearly, the physical farm boundary is relevant to the system's land management and is easily specified. Other relevant boundaries will be specified by farm-system interfaces with input suppliers, credit agencies, the local community, government agencies etc.

Intra-system resources available to the farm system may be categorized as either physical or non-physical. By their nature, physical resources (such as land, water, buildings, machinery, recreation facilities etc.) are easily specified. Non-physical resources are more difficult to list. They include the knowledge and skills possessed by management, labour and the farm system's social organization. As well, the set of social relationships and the formal and informal organizational structures in which these exist constitute a non-physical resource, as do such attributes as the farm's equity ratio, credit worthiness and the like.

Subsystems of the Farm System

From the perspective of farm-system theory, any farm system - being a purposeful man-made organization - is seen as involving five major subsystems (Dillon 1992; Kast and Rosenzweig 1974, pp. 111-3). These are:

(1) The technical subsystem whereby resources, technology, knowledge and opportunity are used to produce agricultural products. The technical subsystem will itself involve a number of production subsystems such as, e.g., the cropping system or the wheat system or the irrigation system. The precise nature of these subsystems on any particular farm will be determined by geographic, social, economic and technical constraints. Their nature constitutes the subject matter of most farm management handbooks and manuals. Historically, their interrelationships as subsystems of the farm system have not been adequately recognized. This led to the Post World War II call for farm management analysis to be on a 'whole-farm basis' which, though an improvement, is usually still inadequate in failing to appreciate sufficiently the farm's non-technical subsystems.

(2) The organizational structural subsystem which corresponds to the formal structure of authority, communication, job descriptions, responsibilities and task allocation within the farm system. On small farms this structural subsystem will not be elaborate.

(3) The informal structural subsystem which exists in any farm system involving two or more persons. The greater the number of persons involved in the farm's social organization (the farm family, workers and their families, neighbours, school teachers etc.), the more complex the informal structural subsystem will be. It is abstract and consists of individuals' motivations and behaviour, informal relationships, feelings of status, power and influence. It also reflects the mixture and interaction of personalities, attitudes, expectations and aspirations of people in the farm system. Regardless of how the formal organizational structure is defined, psychological and social interaction between individuals and groups in the farm system will occur outside the formal structure. Even on small family farms, the 'grape vine' is pervasive - though less so than in large farm systems.

(4) The goals and values subsystem which relates to those goals and values held by the farm system as a purposeful organization. In general, the goals and values subsystem will not correspond exactly to the overall set of (often conflicting) personal goals and values held by individuals in the farm system. The farm's goals and values subsystem will, however, be influenced by the goals and values of individual members since significant disharmony would be destructive to the farm system. The goals and values subsystem will also be influenced by the general sociocultural and political environment which determines the role individual farm systems are expected to play in society and the requirements they must meet in order to be allowed to function.

(5) The managerial subsystem which relates to the entire farm system through the farm manager's activity of setting goals, developing long- and short-term plans, specifying organizational structure, deciding on enterprises, choosing technology, allocating resources, seizing opportunities, establishing control processes, harmonizing relations between all the subsystems and with the various environmental suprasystems relevant to the farm etc. - in short, managing the farm system as a purposeful entity. Like the informal structural subsystem and the goals and values subsystem, the managerial subsystem is abstract. It is not concrete in the same way that we can specify the formal organizational structure and write job specifications, or write a manual of technology and a calendar of operations corresponding to the technical subsystem. Components of the managerial subsystem will generally be the persons involved in management (perhaps only one for a small farm system), their knowledge, experience, judgements and preferences, and the information systems used in exercising management.

A generalized schematic representation of the farm system in terms of the above five subsystems is shown in Figure A.1. The central role of management is clearly emphasized. On large farms all five subsystems would be significant. On small farms involving few people, the organizational structure and informal social subsystems are unlikely to be very important. Nonetheless, all five subsystems are relevant regardless of farm size; any appraisal of a farm system by its manager or by outsiders should pay due regard to these five subsystems.

Integrating Processes

The five subsystems - technical, structural, informal, goals and values, and managerial - making up the farm system may be viewed as constituting a differentiation of the overall system. They are the building blocks. The cement which binds these subsystems together or facilitates their interaction and interdependence to form a purposeful whole is a set of integrating variables or processes. These are the role process, leadership, decision making, information flow and control mechanisms.

FIGURE A.1 - Generalized Schematic Representation of the Farm System

For the farm system to function effectively, its management must pay close attention to these integrating processes. It must provide leadership, carry out effective decision making, ensure that there is a flow of requisite information both for management purposes and to keep others informed, and implement control mechanisms to guide and direct performance. Management must also generally ensure an intra-system environment such that the role performance (i.e., expected behaviour) of persons in the farm system assists rather than hinders system performance.

The Farm's Environmental Suprasystem

The environmental suprasystem is everything external to the individual farm system. The influence of the suprasystem environment on the farm system is much greater than vice versa. One more or less farm system would make virtually no difference to the environment - but it could be profoundly important to those involved with the particular farm system.

The farm system's environmental suprasystem involves a number of significant suprasystems of a general nature (Dillon 1992). These are the cultural, technological, educational, political, legal, demographic, sociological, climatic and economic suprasystems. The state, dynamics, direction of change and interrelations of these environmental subsystems are significant for the individual farm system as a general influence of varying import over time.

The historical background, ideologies, values and norms of the enveloping society constitute the cultural suprasystem. This influences views on leadership patterns, authority, rationalism and interpersonal relations within the farm system.

The technological suprasystem sets the level of scientific and technological development potentially available to the farm system. Closely related and complementary is the educational suprasystem which determines the general level of literacy and numeracy in the environment, and the availability of specialized services and skills.

The general political climate and organization of the enveloping society in terms of political parties, concentration of power and system of government reflects the political suprasystem. Over time, the individual farm system needs to stay in harmony with the political system.

The legal suprasystem is specified by constitutional considerations, the nature of the legal system, the jurisdiction of government units and specific laws relating to commercial organization, land use, technology, taxation, labour, health, natural resources, pollution etc. Such laws and regulations, as well as more diffuse legal influences, constrain the operation of every farm system.

The demographic suprasystem determines the flow of human resources available to the society in terms of number, regional distribution, age and sex. It also influences the pattern of market demand.

The class structure, social mobility, definition of social roles and mores, and nature of social organization specify the sociological suprasystem. These sociological influences from the environment will broadly influence farm system goals and organization, and will determine the social setting within which the farm system operates.

For nearly all farm systems, the climatic suprasystem is very important through its close physical interaction with the farm's technical system. At the macro level, global climatic effects can also be significant through their effect on markets and world trade. Significant uncertainty exists about the occurrence, magnitude and impact of global climate change.

Lastly and often most important as a general influence, the economic suprasystem sets the economic framework both macro (capitalist or socialist, open or regulated etc.) and micro (taxation, commodity policies etc.) enveloping the farm system.

As well as the above general environmental influences, any particular farm system may face other significant environmental influences that are specific to it and must be allowed for by management.

Farm-system Goals

Goals of the farm system can be seen as arising from three sources. These are: (i) goals of the farm system itself as a purposive entity (e.g., family sustenance or profit maximization); (ii) social goals (such as resource conservation) imposed or wished on the farm system by the society in which it functions; and (iii) personal goals (such as an outdoor life) held by participants in the farm system. A major task of the farm's management is to harmonize these different goals so as to best achieve farm-system goals. Theoretically, the goals chosen are seen as reflecting need or aspiration circumscribed by values or normative views of what is good or desirable. These values will be a composite of those held by farm-system participants and by the members of its enveloping society (Dillon 1992; Kast and Rosenzweig 1974, pp. 155-6).

As a practical matter, it is reasonable to hypothesize or assume that small commercial farms have a number of major or strategic goals. These are likely to include survival, being as profitable as possible, growth of the farm business and conservation of the farm's natural resource base. Obviously, such overarching goals are interdependent. They overlap to some degree and have tradeoff possibilities. Survival, profit and growth are interlinked, with the generation of sufficient profit being a necessary requirement for survival and growth. Conservation of the natural resource base, like the need to meet health, labour, safety and other relevant legal (and sociocultural) requirements and norms, is best viewed as a constraint. Hence there is logic in the traditional orientation of farm management theory to profit maximization under relevant resource and other constraints. Such an approach also has the advantage of indicating, in terms of forgone profit, the opportunity cost of pursuing non-profit goals. It has the disadvantage, however, of not allowing for the risk inherent in the stochastic nature of the farm system.

To allow for risk considerations, probably the best approach is to view the farm manager as possessing a multiattribute expected utility function specified in terms of the selected strategic goals, i.e., a function specifying the amount of satisfaction obtainable from the farm system through any combination of goal achievements. Being rational, the manager is assumed to attempt to maximize this utility function, subject to the constraints faced, on the basis of his or her personal judgements and preferences about the risks being faced (Anderson, Dillon and Hardaker 1977). This is probably the best technical description of what farm managers actually attempt to do - not in a formal quantitative way but introspectively by means of inductive reasoning from past experience and intuition on the basis of whatever information is available to them. We see this as occurring in much the same way that a football player, without any knowledge of physics or differential equations, knows intuitively how to play the ball. Of course, to the extent that small commercial farms are also family farms, such judgements are further complicated by family goals and interactions between the farm and its household.

3.2 Theory of Management by Objectives

Both in theory and in practice the nitty-gritty of management of the farm system is provided through management by objectives. This is done via the application of the sequential management functions of (as most simply categorized) planning, organizing and controlling (Barnard and Nix 1973) across the management fields of production, marketing, finance and workforce. Being aimed at the optimal achievement of farm-system goals, the functions of planning, organizing and controlling have a normative orientation. Farm-system goals will be set by the owner(s) or stakeholder(s) of the system. For small farms this will be the farm family or its head, who will often be the farm manager. The actual strategic goals likely to be chosen - survival, profit, growth and resource conservation - have been discussed above. Such strategic goals lie at the top of a means-end schema in which the achievement of lower-level objectives or sub-goals is an end serving as a means to the attainment of higher-level objectives. Hence, management by objectives relates not just to final objectives or strategic goals but to the whole means-end hierarchy of objectives or goals. Necessarily, therefore, the never-ending cyclical sequential process of planning, organizing and controlling is, in theory, applicable to all levels of the hierarchy of objectives. However, the extent to which this should be so is a decision depending on its benefit-cost ratio at each level. Logic implies that the more important (or the higher) the objective, the more attention management should pay to its planning, organization and control.

The applicability of management by objectives to various levels of the farm system's goal hierarchy necessarily implies its applicability across different time spans, e.g., to short-, medium- and long-term objectives. The longer the term, however, the greater the uncertainty, the greater the need for management by objectives and the more difficult its successful application.


Over time, but conveniently year by year, the farm system manager has to decide on his or her answers to three basic questions: (1) What to produce? (2) How to produce? (3) How much to produce? The answers to these questions constitute the farm's annual production plan. This will generally be complemented by other plans, relating, e.g., to farm or personal development. Ideally, the current annual production plan should constitute the first year of a rolling or annually revised multi-year farm plan extending into the future to the point where the net gain from further planning is zero.

Planning decisions about what, how and how much to produce, just like any other non-lumpy decisions, should be based on what we call the basic rule of production economics. This is that any activity should be undertaken up to and no further than the point where the marginal benefit (i.e., the benefit from undertaking one more unit) of the activity is just balanced by its marginal opportunity cost. In theory, in a world with no uncertainty and with full information about all relevant production relationships, prices and discount rates, optimal annual farm plans could be easily developed (given adequate computer capacity) using the principles of production economics in a multi-year mathematical programming framework specified to accommodate the farm's relevant goals and constraints (Rae 1994). These constraints, theoretically, could include not only resource constraints but also technical constraints to ensure that the farm plan meets, if the manager wishes, such criteria as income stability over time, diversity in production, flexibility in product disposal, intra-year dispersion of income, resource sustainability and environmental compatibility.

When uncertainty is present, as is always the case for real-world farm planning, the situation becomes exponentially more complex. Nonetheless, in theory, analytical planning is still feasible so long as information is available about the farm manager's (i) utility function and thus his or her risk preferences, (ii) subjective judgements about the probability distributions of the relevant uncertain outcomes and (iii) time-preference discount rate. With uncertainty present, choice of plan is a matter of subjective judgement. Rather than choice between a variety of options with sure outcomes, the farm manager faces a set of probability distributions for outcomes corresponding one-to-one to the available set of alternative plans. These probability distributions are specified subjectively by the farm manager, i.e., they express his or her personal degree of belief in the chance of various outcomes occurring. Choice should then be made, we believe, on the basis of what is known as subjective expected utility theory (Hardaker, Huirne and Anderson 1977).

The presence of time and its corollary, uncertainty, also adds another dimension to farm planning. This is that annual plans may also be revised within years. As well, a contingency approach to planning is possible. This implies that not just one but a number of plans may be specified encompassing what is to be done if various contingencies (such as drought) occur during the planning period.

In theory, data used in planning should relate to the period for which plans are being made. Since this is in the future, such data is generally uncertain or taken as unknown. Instead, data from the past, e.g., from farm records of the recent past, are often used. This is seen as providing a link between past control (i.e., monitoring and recording) and future planning. However, naive use of such past data implies the unlikely assumption that the future will be like the past.

To sum up, at both the level of the farm system and of its technical subsystems, planning and decision making for modern commercial farms have been the subject of much theoretical analysis in recent decades. Stimulated by developments in management science, operations research and computer technology, an array of mathematical programming, simulation and decision theoretic approaches have been proposed and investigated. Their real-world value is discussed in Section 4 below.


Compared with planning, organizing is an administrative rather than an analytical or decision-making process. The aim of organizing is to ensure that the farm system's plan is implemented. The plan specifies what, how and how much is expected to be produced. Ensuring that this is carried out requires that necessary tasks are assigned and coordinated, that necessary inputs and arrangements are organized on time, and that appropriate authority is delegated. Two comments can be made about organizing in the context of small commercial farm systems. First, the managers of such systems vary greatly in their ability to organize. Second, the capacity to organize is enhanced by having a written farm plan complemented by a technical manual covering the calendar of operations for the products to be produced.


In the theory of management by objectives, control is seen as a process of monitoring plan implementation and, as necessary, making adjustments to the plan or its implementation. The information, both experience and data, gathered through control in prior production cycles is seen as contributing to planning for future cycles.

Control may be exercised in more or less elaborate ways. It entails the collection of relevant feedback information, the analysis of such data and, as need be, the taking of corrective action (Barnard and Nix 1973). The collection of control data, i.e., the keeping of farm records, has long been advocated by farm management experts and advisers. Many farm recording systems have been promulgated and, these days, software systems are available. These may be more or less detailed but, at minimum, should include major physical and financial information. Analysis of such data is based on its concordance with or deviation from previous performance, expected performance or proposed standard performance. In the 1950s and 1960s, but much less so today, comparative analysis of farm records across groups of similar farms was popular as a guide to management. While helpful to the diagnosis of problems, it is now generally recognized that comparative analysis should be used with caution. Sometimes, deficiencies in plan implementation can be corrected as they are detected. More often, given the farm system's time-dependent nature, adjustments will need to be made to the plan and such corrective action incorporated in future plans.


4.1 Farm-system Approach
4.2 Management by Objectives

The use made either directly or indirectly by small farmers of farm management theory is an empirical question whose answer is sure to change somewhat over time. The question is also likely to be complicated by the fact that small-farm systems differ greatly between countries in their historical backgrounds, constraints and environmental suprasystems, and that farm managers differ in their education and training.

4.1 Farm-system Approach

The view of the farm as a purposeful open stochastic dynamic system with its various subsystems and suprasystems is a conceptual device. Beyond emphasizing that the farm system should be recognized, understood and managed as a purpose-driven system rather than as just a set of disjointed parts, the systems approach in itself provides no analytical tools aimed at assisting farm management. These come from the application of management by objectives to achieve system goals. Recognizing this, we believe there is no significant gap between farm-system theory and its practice by farmers. In our judgement, farmers generally have a very keen awareness of their farm as an open stochastic purposeful dynamic system, of its various subsystems and of its environmental suprasystems. Farmers may not have the jargon of systems theory but they do have its insights - and had them long before farm-system theorists.

4.2 Management by Objectives

Ever since the advent of scientific concern for farm management early in this century, there has been a large gap between the theory of farm management in terms of management by objectives as espoused by 'experts' (i.e., academics, government agents and other advisory professionals) and its practice by farmers. Today, probably only on a minority of large corporate farms in developed countries is anything approaching full use being made of the array of analytical (including simulation) procedures developed by farm management theorists. Across the spectrum of small farms, the use of even simple analytical farm management techniques is minimal. Despite the long, sustained and widespread advocacy of farm record systems by experts in many countries, few small farmers have used them in a thoroughgoing way for purposes of planning and control. This is not to say that small farmers do not carry out planning and control. Rather, they exercise these functions in informal rather than formal ways. Likewise, so far as we are aware, none of the commercial attempts that have been made to provide small farmers with whole-farm planning services based on mathematical (usually linear) programming have been successful - all have eventually had to close down for want of demand. Nor have attempts to persuade farmers to use even the simplest of formal procedures (such as decision trees and certainty equivalents) to handle risky decisions been successful. However, some simple concepts from farm management theory have proved popular with a number of small commercial farmers. The most important examples are gross margins budgeting and sensitivity analysis for planning. In part, this acceptance has probably been the result of banks and other formal sources of credit requiring budgeted plans to justify the granting of loans.

The dichotomy between theory and practice is apparent in farm management texts. Those aimed at an academic audience, e.g., Rae (1994), are heavily analytical and full of economic theory. Those aimed at a farmer audience, e.g., Giles and Stansfield (1995), are far more practical and eschew any formal presentation of economic theory. Texts such as Makeham and Malcolm (1993) and Barnard and Nix (1973) which provide a reasonable bridge between farm management theory (especially production economics) and practice are rare.

Why is there such a large gap between farm management theory and practice? The temptation for theorists is to say farmers are ignorant and irrational. This temptation must be rejected. We know of no evidence to suggest that, within their frame of reference, farmers are irrational. Nor that they are so ignorant as to reject gainful opportunities. A more substantive explanation of the gap is possibly that the suggested techniques of planning and decision making are too difficult and costly for farmers to apply. Too much data is needed and the data is too difficult and time-consuming to collect so that the costs of analysis exceed the benefits.

Another possibility is that the analytical products of farm management theory have not been promoted sufficiently well. Given the efforts of government agencies around the world, this appears to be most unlikely. There is also another possibility. This is that the majority of small commercial farmers may judge there to be so much uncertainty in their environment that they cannot exercise sufficient control to warrant the application of sophisticated analytical aids.

Of course, not all small farmers have rejected proposed aids to their managerial decision making. Indeed, with modernization, pressures are such as to enhance the adoption of such aids. Worldwide, the business of farming is coming under pressure from the influence of deregulation, open markets and globalization combined with secular decline in agriculture's terms of trade. Significant changes affecting the agricultural system have occurred in most countries in recent years. These changes include: a paradigm shift from production-driven to market-driven agriculture; less government interference; diminishing international trade barriers and increasing international competition combined with rapid transmission of world market volatility; increasing concentration of food processing among transnational and multinational companies requiring consistent quality product; shorter market chains and increased vertical integration; consumer demand for a wide product choice with year-round availability, consistency, convenience and safety; rapid changes in technology, particularly in plant and animal genetics, precision farming, communication and information management; greater integration of chemical, seed and machinery suppliers, and greater emphasis on patents and property rights; increased concern for biodiversity, the environment and personal health; ongoing reduction in the number of farms and a steady increase in farm size; a greater involvement of wives in family farming; and a decline in the 'image' of agriculture.

These changes, we believe, will increase the pressure on small farmers to seek greater efficiencies and be more competitive, as will external pressure from their credit sources. In seeking greater efficiency, we do not expect small-farm managers to adopt sophisticated aids. Rather, we would see them as: (1) becoming knowledgeable about their enterprise gross margins; (2) making greater use of data and information from off-farm sources; and (3) keeping minimal farm records (or having access to minimal standard data) sufficient to develop a basic annual farm plan using gross margins. We also see this broader adoption of the use of gross margins and simple farm planning as being catalysed over time by the use of personal computers and spreadsheet analysis together with the greater involvement of wives in the office of the family farm. Only now is it being recognized that farm women constitute a significant potential source of human capital in agricultural development.

These days, personal computers are readily available. Many farm management theorists seem to be mesmerized by their possible potential and to see them as a catalytic vehicle for the adoption by small farmers of sophisticated aids to management. Much specialist software has already been developed in more developed countries for particular purposes such as least-cost feed mixing, pest management, irrigation scheduling, livestock genetic evaluation, satellite-guided robot ploughing etc. Such software is available for use on-farm or through specialist service agencies. In addition, a great array of more general software is available commercially for on-farm financial recording and analysis and also for risk analysis. This is a good thing. However, for the reasons already given, it cannot be expected that the computer revolution will lead to rapid general adoption by small farmers of management aids beyond budgeting and planning based on spreadsheet analysis using gross margins and sensitivity analysis.


There is no magic wand that can be waved to make the general level of management on small farms more effective overnight. Such improvement should be realistically viewed as an ongoing long-term task involving incremental gains over time. These gains will accrue as the constraints on managerial performance are lessened. Nor in an unregulated open economic system should it be expected that small farms can escape the pressures of volatility in international commodity markets, ups and downs in income, secular decline in agriculture's terms of trade, and the need to be internationally competitive through ongoing technological improvement and the capturing of size economies. Today, there is much more to the small commercial farm than the nineteenth century description - given by S.C. Warren in his discussion of a paper by Schultz (1939) - as:

'A little land well tilled,
a little barn well filled
and a little wife well willed.'

Solution of the problem of small farm viability lies mainly in small farmers' hands. Those who do not take the right steps to remain competitive, or who suffer bad luck, can expect to lose out under a process of Darwinian selection. Government, however, through its influence on the environment of small-farm systems, can have a significant indirect role in assisting small farmers to be effective and successful managers. This indirect role is over and above any safety-net role that government may play through social welfare policies aimed at assisting non-viable small farmers to leave agriculture.

Beyond ensuring that policies do not reflect urban bias, there are four broad opportunities open to government to help enhance the quality of small-farm management. First, small-farm managers can be helped by the provision of adequate public infrastructure of both a physical and institutional nature. Public roads and other facilities such as ports which facilitate market access are probably the most important physical infrastructure. Institutionally, the need is for government to ensure a framework of arrangements that is not detrimental to the provision of communication, credit, electricity, transport, storage, market, research and other services to meet the needs of small-farm systems. These service activities may involve a mix of private and public sponsorship with the latter based, as need be, on the user-pays principle. Research, e.g., might be conducted by both public and private agencies with public-sector research funded in part by output-based levies on producers. The government should also ensure that, except to meet desired social and other objectives, institutional arrangements are not such as to hinder operation of the land market.

Second, government needs to ensure that it has liaison linkages, preferably of a formal nature, with small farmers through their organizations. Without such liaison linkages, small farmers will continue to be unheard or ignored because of their lack of influence relative to large producers and other sectors of the economy. This is particularly important in the area of publicly funded research. Historically, the evidence is that unless affirmative action is taken to seek out and accommodate the research needs of small farmers, agricultural research agendas are mainly set with an orientation to the wishes of large farmers. This applies just as much to economic and marketing research as to physical crop and livestock research.

Third, government should ensure the provision of appropriate and adequate educational opportunities and facilities to meet the requirements of small-farm systems. This need for human resource development has a number of dimensions, all of which are of a long-term rather than short-term nature. A primary need is for basic literacy and numeracy in the farm-system community. Managers, workers and others associated with small farms in this modem age need to be literate and numerate if they are to make use of modern technology, interpret market signals and remain competitive. Vocational training opportunities for existing and potential managers of small-farm systems are also very important. These opportunities may take a variety of forms from short-course arrangements of a few weeks to live-in college programs offering one-, two- or three-year courses. Alternatively, they may involve correspondence programs extending over two or three years with occasional one- or two-week residential schools. These courses could be based on application of the management functions of planning, organizing and controlling across the fields of production, marketing, finance and workforce with emphasis on gross margins, budgeting and sensitivity analysis as tools of production planning. Whatever their particular form, such farm management-oriented programs might be offered by tertiary institutions as an adjunct to their degree programs or through the Ministry of Agriculture (perhaps as part of extension activities). Lastly in the educational arena, the government needs to ensure that there is a sufficient output of agricultural graduates to service the demands of small-farm agriculture for management information and professional advice whether through research, extension, private consulting or other activities such as policy advice to government.

Fourth, the general area of information is one in which government can do much to assist the managers of small farms. Traditionally, significant information transfer in agriculture has occurred in many countries through government-sponsored extension services linked to public research agencies. Increasingly, such extension services have moved towards including a management as well as a technical focus. There has also been a realization that relevant and timely information has increasing value as the business of agriculture becomes more complex and volatile. The more situation-specific and time-specific the information, the greater its competitive value. Conversely, generalized public information is of decreasing value. Nonetheless, just as can be argued for agricultural research, a case may be argued that a government extension service to small farmers is in the national interest. Such extension should not ignore management information. It could usefully include annual tabulations of enterprise gross-margin budgets on a regional basis, information on expected market needs and outlook on a commodity basis, information on risk-spreading and risk-transfer strategies for handling price risk, meteorological (including probability and forecast) information on rainfall and frost occurrence, and both technical and economic (including risk) information on new technologies and products.


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