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The Effects of Department Operating Budget Reductions on Systemwide Agribusiness Operations Ruby Ward, M. Edward Rister, Bruce A. McCarl, David J. Leatham,Dean McCorkle, and Charles R. Long Ward is assistant professor, Department of Agricultural and Resource Economics, North Carolina State University. Rister, McCarl, and Leatham are professors, and McCorkle is extension program specialist-risk management, all in the Department of Agricultural Economics, Texas A&M University. Long is professor of animal science and resident director, Agricultural Research and Extension Center at Overton, Texas. This research was funded by the Texas Agricultural Experiment Station, Project No. 3914, and the Texas Department of Criminal Justice, Contract No. IAC [96-97] 6000. The assistance of Jim Armstrong is gratefully acknowledged. Mathematical programming-based systems analysis is used to examine the consequences of alternative operating budget levels for a large, vertically integrated agribusiness operated by the Texas Department of Criminal Justice. Budget restrictions imposed on a single department level are demonstrated to have adverse effects across the total agribusiness-related operation. The capability and value of using a mathematical model to assimilate and account for interlinkages among departments is illustrated. Key words: integrated agribusiness, constrained operating budgets, mathematical programming, criminal justice. Article <top> Limited funding is a reality in today’s world. Managers must carefully consider and, in some cases, reduce departmental budgets. In a vertically integrated business, the decision to decrease funding for one department can have consequences for other departments with linked activities. This is particularly true in integrated agribusiness operations. For example, a decision to decrease field crop operation funding may decrease feed grains production, forcing the livestock operation to purchase more feed externally, or to decrease herd size. A related meat-processing operation would then receive third-order effects, e.g., finding more costly or less livestock available to process. Anticipating all of the effects of departmental funding decreases across an integrated firm is complex. A systematic method for examining the effects across the whole firm is required. In the past, studies concerned with constrained budgets and optimal funding levels have principally focused on the cost of funding, i.e., interest rate and decreased liquidity. Barry, Baker, and Sanint explored the cost of a liquidity reserve. Baker examined the optimal level of funds considering the costs of borrowing arising through interest payments and the cost of lost liquidity. Leatham and Baker investigated a firm’s optimal funding choice as influenced by the availability of adjustable and fixed rate loans. All of these studies considered only the funding decision for the firm as a whole. Many firms and agencies allocate departmental-level operating budgets. Our literature search has not uncovered studies of departmental budget allocation within integrated agribusinesses. This study examines the effects of limiting the operating budget for a single department within a vertically integrated agribusiness. The agriculturally related operations of the Texas Department of Criminal Justice (TDCJ) are used as an example of an agribusiness with related departments. The primary product-producing and -processing Agriculture Department (TDCJAG) budget will be reduced during the analyses reported in this article, as motivated by pressures from central TDCJ management and Texas State budget agencies. Implications for other related departments (i.e., Food Services, Industry, Transportation, and Facility) are identified. In an effort to improve management of its agricultural operations, TDCJAG funded development of a linear programming systems model1 of the total TDCJ agricultural and food/fiber provision system. This project, carried out cooperatively with the Texas Agricultural Experiment Station (TAES), resulted in the development of a long-term strategic decision-making model called PRISAG (Rister, McCarl, Conner, Knight, and Long; Ziari et al.; Ward). That model is used here for the analysis. In doing so, the challenges of using modeling to investigate financial and economic problems within large agribusinesses are illustrated. 1Due to project scope and funding, the model used herein depicts the whole TDCJ agricultural/diet provision food system. A more systemwide model could have been constructed encompassing nonagriculturally related operations. Scope of TDCJAG Operations <top> The TDCJ provides for the dietary and other requirements of over 127,000 inmates (Holcomb) located at 102 units dispersed across 67 Texas locations (Figure 1). Many of these needs are agriculturally related and are filled by TDCJAG in combination with other associated departments. TDCJAG manages 38,300 acres of vegetable and field crops along with 67,700 acres of pasture. It also has swine, egg, and beef operations. TDCJAG operates a number of processing facilities including two feed mills, an egg-processing facility, two meat-packing plants, two cotton gins, an alfalfa dehydrator, four grain elevators, and a vegetable cannery. Operations are spread across the state at many of the locations identified in Figure 1. A transportation network exists to facilitate movement of raw and processed products among multiple production, processing, and consumption sites. Figure 2 depicts the general structure of TDCJAG. Historically, TDCJ operated its agricultural enterprises with a self-sufficiency goal (Anderson). However, a rapid increase in inmate population (rising from 50,000 in the early 1980s to 127,000+ today) focused greater attention on economic efficiency. Today, TDCJAG’s goals are threefold: (a) to provide agricultural commodities and processed products for inmate consumption, thereby reducing the cost of buying outside products; (b) to provide employment "outside-the-cell" for the inmates; and (c) to efficiently manage TDCJAG resources, maximizing returns to state-owned capital investments (Rister et al.). TDCJAG does not incur a direct monetary cost for employing the inmates. The inmates must be guarded no matter where they are and, consequently, employing inmates in TDCJAG activities does not require TDCJ to incur any additional security costs. Alternatively, there are benefits associated with inmates working. Employment provides potential development of skills, improved work ethic, and lessened security tensions in the cell blocks (Rister and Long). Most operating decisions are made by TDCJAG, focusing on providing commodities for the inmates’ needs and using TDCJ resources efficiently (Armstrong). That is, TDCJ presupposes there is sufficient value associated with it being engaged in agricultural operations and with inmates being employed therein to justify the capital investments and fixed costs affiliated with such operations (McCray). Similarly, TDCJ assumes there are no interest costs associated with its use of operating funds (Armstrong)2. 2In the analyses discussed here, however, attention is directed toward recognizing the state’s cost of capital in the form of the interest rate attributable to short-term bonds—a rate of 4.6% (Merrill-Lynch). Figure 1. Texas Department of Criminal Justice Unit Locations, 1997
Source: Armstrong Figure 2. Scope of TDCJ Agricultural Operations, 1997
Source: Ziari et al. Principal Management Considerations and Constraints <top> TDCJAG has several operational constraints that add complexity to system-wide management. Land, machinery and equipment, and labor3 resources are limited in quantity and quality at the numerous TDCJAG production and processing locations. Geographic dispersion of production, processing, and consumption across the state introduces considerable transportation logistics. Commodities produced by the field and vegetable crop operations can be moved to: (a) free-world sale locations, (b) storage facilities, (c) kitchens for direct use in the diet, (d) a cannery for canning, (e) a feed mill to use in manufacturing feed, and (f) livestock operations for direct feeding. Canned goods are moved to warehouses and then on to kitchens. Feed produced by the feed mills is moved to livestock operations. Reared livestock are sold or moved to packing plants for slaughter. The possibility of using either TDCJAG-produced products or products purchased from the free world means management must weigh the opportunity cost of the resources used in production and the associated transportation costs against the free-world purchase price on a delivered basis. 3 Inmates are an integral part of the labor force and are used in many capacities on the farm level. Job duties range from clerks in the farm and shop offices, to tractor and heavy equipment operators, to line squad members who clean fence rows and drainage ditches and harvest crops. Jobs in various agriculture programs, such as the packing plant, canning plant, and feedmills, allow inmates to obtain skills and experience that eventually can be used in the outside world. Opportunities to work in other TDCJ departments’ activities, to pursue educational training, utilize the TDCJ legal library, and participate in recreational activities all contribute to inmate labor being a limited resource (Anderson). TDCJ has divided the responsibilities for the purchase of inmate needs across departments. TDCJAG bears the cost of producing all raw crop products. It also bears the cost of purchasing all beef and pork products required by the inmates’ dietary needs. The cost of purchasing any other meat products as well as any canned goods is charged against the Food Services Department budget. The Industry Department incurs the cost of buying lint and broomcorn requirements in excess of TDCJAG production. The Transportation Department incurs the cost of transporting goods around the state. The Facility Department manages the cost of commercial disposal of excess kitchen garbage4 and also pays all cold storage expenses. 4Hogs are used as much as possible within TDCJ to dispose of cooked kitchen garbage. Not unlike other agribusinesses, TDCJ is constrained by its budget. TDCJ is allocated annual operating funds as part of the overall Texas budget. This money is allocated, in turn, to the TDCJ departments. In an era of tightening budgets for state organizations and an expanding inmate population, TDCJAG has experienced real decreases in operating budgets. Such pressures are expected to continue in the future (Armstrong). Texas budgeting practices do not allow TDCJAG to gain flexibility through commodity sales. State legislation requires that revenue generated through commodity sales be deposited into the Texas General Revenue Fund rather than becoming available to TDCJAG (Armstrong). Budgeted operating funds must cover all costs of purchasing inputs, operations costs, and capital purchases. TDCJAG essentially is treated as a cost center, existing primarily to supply inputs to other departments rather than to generate outside sales5. In the absence of a market-based assessment of the value of production transferred to other departments, the TDCJAG cost center is evaluated on the basis of how it is using its operating budget rather than the net income it generates and how it is reinvesting profits. When confronted with budget reductions, TDCJAG managers interactively allocate the reductions across enterprises, focusing on maintaining a product mix which contributes the most to their internally computed total value of production (Armstrong). 5An exception is the beef cattle enterprise which TDCJAG uses as a revenue generator and as a way of utilizing buffer properties surrounding prison unit properties. Such an approach does not necessarily properly account for the value-added associated with products transferred to other TDCJ departments or the costs of providing lesser quantities of agricultural products to other departments. This may be particularly important because provision of, for example, less vegetables means that the Food Services Department must purchase additional vegetables in order to meet dietary needs. Similarly, provision of less cotton means that the Industry Department must increase its external purchases. Actions by the Agriculture Department can increase budget demands on the other departments. Expected Effects of TDCJAG Budget Reductions <top> Responding to budget reductions, the TDJCAG must alter product mix, focusing its production and processing efforts on those products with the greatest value-added return per dollar of budget expended. The products that would likely be reduced are those that: (a) are the most expensive to produce relative to external purchasing opportunities; (b) require the most cash operating expense relative to the value of production (e.g., vegetables being canned, pork trim being processed into pork products); and (c) are sold externally rather than used elsewhere by another TDCJ department (e.g., beef cattle)6. Simultaneously, one would expect to observe the Food Services and Industry Departments increasing their purchases of products now furnished by TDCJAG, while state collection of revenues from sales would decrease. 6It should be noted that if products were not marginally cheaper to produce than they are to purchase, they would not be produced under any of the scenarios considered here. Thus, the products operating budget scenario have a purchase price greater than the variable cost of producing them. Likewise, it also should be found that marginally profitable enterprises will be discontinued as the operating budget is restricted further. For example, as part of investigations of other TDCJAG scenarios, it was determined that the cattle enterprise is only marginally profitable (Ward). One unique characteristic of the cattle enterprise is that it does not produce any products that are used in the inmates’ diet. All TDCJAG cattle are sold live to external markets, while all beef consumed by inmates is purchased externally, either in final product form or as trim to be processed by the beef-packing plant. Consequently, it is hypothesized that the optimal production level of cattle will decrease as the operating budget is decreased. Associated commodities like feed and feed crop production should also lessen. Analytical Framework <top> The PRISAG model (Ward; Ziari et al.) is used to analyze the scenarios examined in this study. PRISAG maximizes returns above variable costs while providing for the agriculturally related dietary and other needs of the inmates. In doing this, PRISAG considers both (a) supplying the inmates’ needs via the best combination of internal production/processing coupled with external purchases, and (b) revenue-generating sales of TDCJAG production to outside the TDCJ system. This study examines how the TDCJ systemwide objective function value and the needs of the cash-operating budget change as the operating budget of TDCJAG is reduced. GAMS (Brooke, Kendrick, and Meeraus) was used to develop PRISAG. Table 1 illustrates its general structure. The size of the PRISAG LP model is substantial, totaling over 39,000 activities (columns) and over 17,000 constraints (rows), and including over 200,000 nonzero coefficients (Wilkins et al.). PRISAG is designed to identify optimal levels for TDCJAG and other departmental enterprises, maximizing the net returns accruing to agricultural production, processing, and transport less the costs for purchasing to fulfill inmate agriculturally related needs not supplied by TDCJAG. The enterprise levels chosen include: (a) acres of vegetable crops, field crops, and pasture alternatives; (b) size of the various livestock operations; (c) levels of processing undertaken; (d) internal commodity transportation; (e) diet composition; and (f) commodity purchases. The enterprise levels are chosen to maximize net returns subject to: (a) dietary requirements; (b) balance constraints on commodities, livestock, vegetables, canned goods, meat, etc. which force the use of an item to not exceed supply; (c) capacity constraints limiting the operation size; (d) inmate labor availability; and (e) land availability. A general description of the model and a discussion of the interaction of the activities are provided below. Producing crops and livestock, processing commodities, and producing meat and canned goods represent a use of cash in both the objective function and the cash flow constraints. Selling goods supplies revenue only in the objective function. Buying or shipping goods show up as a use of cash in both the objective function and the cash flow constraints. (For a more detailed explanation of PRISAG, refer to Ward; McCorkle, Armstrong, Wilkins, Rister, Ward, McCarl, Long, and Conner 1997a, b; and Wilkins et al.) The commodity balance constraints balance supplies of commodities arising from crop and livestock production, purchases, and processing against uses arising from feeding livestock, processing commodities, forming the diet, and selling to the free world. Also, most commodities can be shipped in from or out to other operations. Cotton lint can be ginned and then shipped to the Industry Department or purchased to satisfy the requirement of cotton lint for inmates. The Industry Department’s broomcorn requirement can be satisfied either through production of broomcorn in the field crop activity or by purchasing broomcorn and then shipping it to the Industry Department. The livestock balance constraint forces the use of any type of animal at a farm to be less than or equal to the supply. Producing livestock at an operation uses certain animals as intermediate products. For example, the cow-calf operation uses replacement heifers and bulls to supply weaned calves. Purchasing additional animals may increase the supply of most types of animals. Selling animals is a use and decreases the supply. The animals also can be shipped out to or in from other operations. The vegetable balance constraint requires the supply of vegetables produced to be sold or shipped. Shipped vegetables go to kitchens for fresh consumption, cold storage for subsequent use, or the cannery. The canned goods balance constraint requires the cans produced plus cans purchased to match canned goods requirements in the inmate diet. There is flexibility allowed in the vegetable item composition within the diet. The total amount of vegetable items within broad categories (i.e., protein, starch, and vegetable) is fixed, but the amount served of any individual vegetable item can fall anywhere between lower and upper bounds (Thomas). These bounds capture taste preferences, texture, needed variety, and other factors in diet formation. Table 1. General Agricultural Linear Programming Model, Texas Department of Criminal Justice, 1997 The meat balance constraint forces the meat produced, plus the meat purchased, to be greater than or equal to the dietary meat requirement. Possibilities exist within the model to substitute one meat product for another, e.g., substituting pork loins for ham. Capacity/resource constraints exist for most enterprises. Crop production is restrained by land, machinery, and inmate labor available. Facility capacity and pasture availability limit livestock production. Processing is limited by individual facility capacity including maximum throughput by the feed mills, alfalfa dehydrator, meat-packing plants, and cotton gins. Cannery production is limited by bi-weekly labor and machinery time constraints. There are also cash flow constraints. There are separate constraints for each of the TDCJ departments which participate in agriculturally related activities. An upper limit on the cash available may be imposed. Model Validation <top> An extensive validation process was applied to the data and model. Data were collected from TDCJAG and other TDCJ departments, as well as from several external sources. Commodity prices were developed from a combination of: (a) historical Texas regional price data assembled by the Texas Agricultural Extension Service (Waller), (b) Iowa State University/University of Missouri-Columbia’s Food and Agricultural Policy Research Institute (FAPRI) data, and (c) TDCJAG records. For example, prices for canned vegetables, fish, and chicken are based on a 199096 average of Food Services Department expenditures (Thomas). External meat purchase prices are subjective estimates provided by Griffin and by Heath. The PRISAG model was first run with activity levels fixed at the current production levels to confirm that it was possible for the model to replicate the current production environment. Those results and numerous others for several sensitivity scenarios were then verified with TDCJAG and Food Services managers during the seven years of model development to ensure that the results were possible from a practical standpoint. Experimentation and Results <top> A sequential process is used to examine the effects of alternative funding levels for TDCJAG7. First, the operating budget required to sustain current (1995)8 activities is determined by specifying (i.e., fixing) those enterprise levels and the fixed menu requirements in PRISAG (Table 2). While the total budget available to TDCJAG for 1995 was $32,837,000 (Armstrong), part of that budget was directed toward costs not considered in PRISAG, e.g., capital machinery replacement. The operating costs for current operations as defined in PRISAG are $22.3 million (Table 3), an amount verified by Armstrong as very close to TDCJAG’s budgeting of planned FY95 operating expenditures. 7Results are reported here for only the base set of prices, costs, yields, and constraining resources, with sensitivity analyses limited to focusing on the effects of alternative operating budget levels. Certainly the optimal levels of specific enterprises are conditional on such assumed factors; however, results for the numerous validation scenarios and several other investigations by Ward indicate a relative consistency in the type of results discussed here. 8 FY95 is the most recent year for which complete planning information is readily available to use in the model. Planned practices are used rather than actual levels of production to account for the model being a strategic-planning model; that is, tactical, within-year adjustments to sporadic, temporal, infrequent problems often preempt planned strategies. PRISAG was then solved again to determine the optimal operating plan assuming the TDCJAG operating budget was unconstrained, indicating a need for $26.8 million in operating funds at unconstrained, "optimal" levels of operations. Results of this solution also permitted comparison between "optimized" TDCJAG activities and current practices. In turn, PRISAG was re-solved with limited budgeted cash set at $1, $2, $5, and $10 million lower than the optimal $26.8 million just for TDCJAG. All other data were based upon a typical year with all other assumed constraints in effect (Ward). The related TDCJ departments were assumed to be able to increase their operating budgets as necessary (Armstrong)9. Current (1995) Practices versus Unconstrained Optimal PRISAG Results <top> Before beginning our analysis of budgetary constraints, it is first worthwhile to examine the returns to an "optimal" alternative to current TDCJ operating practices as well as the budgetary requirements under "optimal" management. In conducting this analysis, we run the model with and without constraints, imposing current solution practices for the diet, crop mix, and livestock numbers. The sensitivity of the objective function measure of net operating cost of all TDCJ agriculturally related operations is evidenced in Table 2. Most prominent is the $12,408,186 reduction in net operating cost that can be achieved by adjusting from the planned 1995 activities and menu to the enterprise levels under the "Unconstrained Optimal" scenario. Close scrutiny of results for these two scenarios indicates several opportunities for the revision of TDCJAG activities involved with crop mix, diet, and livestock numbers. Noticeable phenomena associated with these substantial differences are the $4.5+ million increase required in the TDCJAG operating budget (i.e., from the current $22.3 million to an optimal level of $26,831,550) accompanied by a substantially greater offset of nearly $8.8 million in reduced operating budget needs for the four related TDCJ departments (Table 2). The most notable budget savings occur in the Food Services Department (approaching $7.2 million) along with $1.2+ million in the Industry Department. The optimal menu and industrial activity reflects increased reliance on and coordination with TDCJAG as a source of commodities. Systemwide, cash operating requirements are reduced by $4,265,304 in association with the shift to the "Unconstrained Optimal" scenario’s activities. Other factors contributing to the $12+ million objective function savings are the increases in external sales, totaling over $8 million, largely involving swine, but with smaller increases in cattle, grain, and cotton sales (Table 2). Table 2 also shows measurable increases (i.e., > 10%) in crop land planted, pasture grazed, vegetable land planted, cow numbers, vegetable cannery processing, and beef/pork item purchases. Reductions appear in the number of hogs slaughtered, the amount of pork products processed, and the value of vegetables purchased for canning. Model experimentation indicates a delicate balance exists between hog market prices and the specific cuts of pork required in the Food Services menu; relaxation of the fixed menu requirements allows substitution away from more expensive cuts (e.g., loins and chops) resulting in opportunities to use purchased trim. Substitutions also occur for vegetable items in the diet, allowing TDCJAG production to provide a greater proportion of the cannery’s fresh vegetable needs. Table 3 represents a breakdown of TDCJAG’s operating budget among major categories. The axiom of "you have to spend money to make money" is reinforced by these results. Using again +/-10% as the criterion, measurable increases in expenditures are noted in the "Unconstrained Optimal" scenario for crop and vegetable production, cannery activity, miscellaneous resource supply, packing plant volume, cotton ginning, and feed mill operation. Increases in TDCJAG’s purchase of commodities to facilitate livestock ration formulation and supply meat, while allowing increased production of cotton and broomcorn to meet the Industry Department’s needs, are also evident. In contrast, measurable reductions in expenditures are realized with respect to vegetable purchases, storage expenses, and livestock variable expenses. The latter result is associated with a shift toward more TDCJ raising of heifer replacements. Table 2. Summary of TDCJ Activities for Alternative Levels of Operating Funds for TDCJAG, Texas Department of Criminal Justice PRISAG LP Model, 1997 Results for Reduced TDCJAG Operating Budgets <top> In Table 2, the "Unconstrained Optimal" column summarizes results for a TDCJAG operating budget of $26,831,550. There are over 38,000 acres of crops and over 6,000 acres of vegetables. The livestock operations include over 193,000 hens, 3,000 sows, and 12,000 cows. Processed pork products total almost 5 million pounds, although a majority of these products originate from the processing of pork trim rather than the slaughter of live animals. The beef plant capacity is designated to operate at its full annual capacity of 10 million pounds. As noted in the previous section, TDCJAG’s current operating budget is less than the calculated optimal amount, i.e., $22,310,708 as opposed to $26,831,550. Results for a series of PRISAG analyses for four alternative, less-than-optimal TDCJAG operating budgets are included in Tables 2 and 3. As one might expect, as the reductions in the operating budget become more constraining, the net state cost of TDCJ operations rises. The cost increases for $1 and $2 million decreases are relatively small; this result is not surprising since the budget level resulting from the supposed $2 million reduction is still greater than the operating budget under current practices of $22.3 million. A summary measure of the impact of reduced operating budgets is the "Ag Operating Funds Shadow Price" shown in row 3 of Table 2. These values represent the respective value of an additional dollar of operating funds at each of the reduced levels of funding, i.e., the marginal value product (MVP) of an additional dollar minus one10. When the optimal operating budget is decreased by $1 million, an additional operating dollar is only worth $0.02 above its costs, i.e., marginal value product (MVP) is $1.02 versus a marginal input cost (MIC) of $1. As the operating budget of the Agriculture Department is decreased further, however, the net marginal value of operating funds rises until it reaches $0.98 at the hypothetical $10 million reduction level. 10The $2.74 value for the "Unconstrained Optimal" budget (Table 2) is an average value product (AVP) estimate rather than an MVP. Because the enterprise activity levels all are constrained at 1995 planned levels within the PRISAG scenario, a useful shadow price value is not generated. To estimate the value of additional operating funding for TDCJAG beyond the current level, the difference in systemwide returns is divided by the difference in TDCJAG operating funds to arrive at the AVP value. Recall that TDCJ and TDCJAG management essentially ignore the opportunity cost of capital in their decision making (Armstrong; McCray). Assuming that an opportunity cost on the state’s use of money is the state’s bond rate of 4.6% (Merrill-Lynch) suggests that an operating budget for TDCJAG above the current level could be economically justified provided some of the optimized practices were followed. For example, at a $25,831,550 level of operating funds, the MVP of $0.02 is less than the MIC of $0.046. However, decreasing the operating budget from the PRISAG-defined "optimal level" by $2 million does not appear appropriate since the shadow price is $0.12 (Table 2). Thus, to summarize, in terms of overall TDCJ system impact, this study suggests there is a breakeven point of an acceptable budget somewhere between $1 and $2 million below the PRISAG-identified optimal budget of $26,831,550, but at a level above the current operating budget of $22,310,708. The PRISAG model predicts several management adjustments are necessary to accommodate the reduced budget levels (Table 2). The number of cows consistently decreases as the operating money is decreased, albeit only slightly at reductions of $12 million11. Associated feed and pasture demands also fall, thereby reducing operating expenditures. Note, however, that at the $1 and $2 million levels of decreases, feed mixing rises slightly—meeting demands for Security Department horses and dogs. The big decreases in feed mixing (reflecting the decrease in the demand for cattle feed) are seen in the $5 and $10 million budget reduction scenarios. Field crop production maintains a similar pattern due to the drop in feed ingredient demand. 11In a separate study, it was found that the cattle enterprise is only marginally profitable considering returns above specified variable costs, and is uneconomical when full accounting and economic costs are recognized (Ward). The egg enterprise operates at the same level for all budget alternatives (Table 3). The swine enterprise remains the same until operating funds are decreased by $10 million, at which point it drops off by about one-third (Table 2). Disposition of fed hogs, however, changes dramatically. Initially, under an unconstrained budget, most of the fed hogs are sold, with only 1,691 sent to the packing plant producing (with pork trim purchases) the pork products needed by the inmate diet. As the operating budget is decreased, more fed hogs are sent to the packing plant, reducing the need for operating funds to buy pork trim and finished pork products. That is, feeding and processing hogs uses less limited operating funds than producing hogs to sell and purchasing pork products. In Table 3, the cost of operating the packing plant includes both the variable costs and the cost of buying pork or beef trim. Although production increases at the packing plants as the operating budget is reduced, the packing plant costs decrease. This occurs due to the decrease in the need for pork trim and meat substitution in the diet. Initially, processing of beef products is at capacity and remains at capacity until the operating budget is decreased by $10 million. At that point, production decreases slightly. This is because some pork is substituted for beef. Such substitution reduces the need to use operating funds to buy beef trim. The cost of the beef products cannot be shifted to another department. Since processing the beef products is more economical than purchasing them, and processing requires a smaller outlay of cash, processing beef products is not very sensitive to constraints in the operating budget of TDCJAG. The remaining enterprises which reveal interesting adjustments are vegetable production and the cannery. They both produce goods that can be used in the diet to satisfy the vegetable requirements. When TDCJAG does not supply enough of these items, the Food Services Department is responsible for external purchases. There is one exception to this—Irish potatoes—which are purchased by TDJCAG. As the operating funds are reduced, vegetable production remains constant until the operating budget is reduced by $10 million. At that point, vegetable production drops considerably. In contrast, cannery production drops steadily as the operating budget is decreased. The purchase of vegetables for use at the cannery decreases consistent with the decrease in cannery production, as do the variable operating costs of the cannery (Table 3). Thus the first vegetable items shifted to the Food Services Department are those which require the largest outlay of cash by TDCJAG, i.e, those where fresh vegetables are purchased for use by the cannery. On the other hand, Irish potato production and canning increases, since they must be purchased from the TDCJAG budget if they are not produced. This is an example of how limiting the operating budget of one department will cause that department to shift costs to other departments. Summary and Concluding Comments <top> This study has investigated the effects of alternative levels of operating budget available to the TDCJAG. Through use of an integrated linear programming model encompassing the activities of the TDCJAG and related activities in several other TDCJ departments, it was found that the current TDCJAG budget is $4.3+ million less than is optimal, ignoring opportunity costs on capital. Recognition of capital opportunity costs suggests the operating budget could be reduced between $1 and $2 million from the unconstrained optimal level, but that reductions of $2 million or more are detrimental to the overall TDCJ system. As operating money available to the TDCJAG is increased from current levels, the results show that budgets fall by an even greater amount, economizing on systemwide performance as the level of commodity purchases in those departments is offset. Similarly, as the TDCJAG budget is decreased, the budgets in the other departments rise. TDCJAG also shifts production away from enterprises that provide external sales revenue to state coffers. Substantial reductions in the TDCJAG budgets may not be in the state’s best interests, since the effects on other departments’ budgets and the total system impact may more than offset the direct budget savings. More generally, this study makes it apparent that vertically integrated agribusinesses should be cautious when reducing budgets to highly integrated departments. Unilateral department decision making in response to budget reductions may dramatically affect other departments and overall agribusiness performance. This finding highlights the need to consider the effects of potential management decisions using a systems model like the one employed here. References <top>
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