Farm income increased substantially from 2005/06 to 2006/07, but farmers still earn a much lower profit than the processing and retail sectors. Farmer-controlled businesses offers a solution.
According to the Department of Agriculture, 2006/07 was a better year for farmers than the previous one. Gross income for the 12 months to June 2007 increased 24,9% to R89 billion. This was caused by a 21,8% increase in product prices. Input prices moderated from the previous year and only increased 6,5%. Net farming income thus increased for the first time in three years and actually doubled to R26,4 billion.
In spite of the good results, farmers still feel they don’t get a fair share of the consumer’s rand. Farmers’ share of the consumer rand decreases constantly. Retail prices increase when producer prices do, and then tend to remain high when producer prices decrease again. In time farmers’ income shrinks while off-farm income grows. There are many reasons for farmers’ low share in the consumer rand.
The modern consumer does not buy basic foodstuffs any more, but buys sophisticated and expensively packaged goods. The farmer’s share in the price of a bag of potatoes is higher than his share in the price of a packet of potato chips. Milk producers get a higher share of the consumer rand spent on fresh milk than they get out of money spent on yoghurt. The consumer prefers attractive packaging, which adds to product cost and retail prices.
Processors and retailers use all this to explain their larger share of the consumer rand. When confronted about high retail prices, retailers and processors are quick to put the blame on external factors such as the oil price, price of packaging, logistics and other factors. However, the suspicion remains that the downstream industries make much larger profits from farm products than the farmers do. Objective information against which to evaluate this claim is scarce. Public companies generally don’t lie to their shareholders. This is especially true for companies listed on the Johannesburg Securities Exchange (JSE) with its very strict reporting rules.
Annually the economists at ABSA compile a report on the financial ratios in the different sectors of the JSE. This gives a clear average picture of the profitability and capital position of the different sectors. The National Department of Agriculture reports on the average profitability of farmers in its periodic economic reports.
Table 1 compares the profitability of primary agriculture with the beverage, food and general retail sectors on the JSE. The operating profit margin (gross profit as percentage of cost price) is very high in the beverage sector, slightly lower in the food sector and a reasonable 11% for the general retail sector. Their net profit margin (net profit as percentage of cost) varies from 10,25% to 6,93%. Operating profit margin and net profit margin is difficult to calculate for primary agriculture. Farmers are more interested in their return on assets (ROA) or net farm income per R100 capital. In spite of the 100% increase in income from the previous year, farmers’ 16,14% ROA compares unfavourably with industry’s 25% to 30%. Farmers earned a positive 21% on their equity (own capital), slightly better than the beverage sector, but lower than the food and retail sectors.
Farmers generally have a much lower debt-to-asset ratio than the other sectors. The debt level a company can carry is determined by its net profitability and fixed expenses. For a farmer it also depends on private expenditure, debt repayment and capital expenditure. A 23% debt at current interest rates is low compared to a 16% ROA. But if farm profitability decreases in 2008, due to higher input prices and a slow-down in product prices, 23% may become a heavy debt burden. Farmers are learning that being efficient producers isn’t enough. Individuals and groups of farmers have developed farmer-controlled businesses to add value to their products. many cases they took over the role previously played by the cooperatives. This trend will gain momentum in coming years. Farmer-controlled businesses are the only way in which farmers can get and keep a fair share of the consumer rand.
Dr Koos Coetzee is an agricultural economist at the Milk Producers’ Organisation. All opinions expressed are his own, and do not reflect MPO policy.
