Farm management

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On a recent visit to Bredasdorp, it was clear the local co-op didn’t have enough silo space for the grain harvested. A farmer told me that after last year’s huge wheat crop they didn’t think it was possible to get another big crop. By the end of January, meanwhile, the wool price was already 32% up on the first sale of the season and more than 90% up on the end of the 2009/2010 season.

Clearly wool and wheat farmers are enjoying good times. In general, farmers are better off now than a year ago. Gross farm income for the year to December 2012 is 13,9% higher than during the previous year. Income from all sectors of agriculture increased in 2012. Expenditure on production inputs also increased, but at a lower rate of 13,2%. This resulted in an increase in farm profit of 20%.

In spite of this, farm debt increased by 11,9%. Thus, even in more favourable production conditions, farmers in general did not manage to lower their total debt. Instead, they used their higher income to increase the value of their assets and so also increased their total debt.

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Good debt
There is such a thing as ‘good debt’. Money borrowed to buy capital equipment or inputs that result in higher production and higher profits can be regarded as good debt, while money borrowed to pay for private capital equipment that doesn’t provide higher production or income or result in significant cost savings, is bad debt. Unfortunately, it’s easier to borrow money to buy a new SUV than to buy 50 cows. I fail to understand why SA banks believe livestock to be a high risk investment, especially if the lender is a well-established farmer.

Wrong advice

Farmers are frequently told they should use the income from good years to repay debt. While this is true in many cases, it’s the wrong advice for highly efficient farmers who earn higher returns in their farming operations than the interest charged by the banks. The principle of negative and positive leverage was discussed in a previous column.  

As long as farmers are able to service their debt, they’ll build wealth by borrowing money and investing it in their farming operations, provided the investment contributes to profitability. The surplus cash flow generated in good years provides the opportunity for farmers to buy fertiliser and other inputs at good prices.

Safety factor

Since we live in uncertain times, strategic plans should also include measures to prevent permanent damage if conditions and prices don’t perform as expected. Some years ago, the Overberg area was in dire straits after two failed harvests. Farmers who combined livestock and crop production managed to survive this, while those who only produced grain were in trouble. Unfortunately, the current good crops in this area are again resulting in less livestock being kept.

A Bredasdorp farmer told me that “nothing beats wheat at 5t/ha”. That may be, but livestock can provide emergency financing if needed. Also, in many cases, grain production costs exceed the value of the farm land. This means farmers who use production credit to finance their plantings gamble the value of their farm every year. Not surprisingly, in a country with very variable weather and where the size of the wheat crop is highly dependent on the correct spring rain, people in the Overberg say the judge sits in September.

Farmers who manage to fund their crop production either fully or partially out of their own pockets have a much better chance of surviving a bad year. Cash surpluses, or even available credit not used, can help a lot to survive a bad year. In long-term planning it’s necessary to build in a safety factor as yields, prices and interest rates are all volatile and difficult to predict.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and don’t reflect MPO policy. Contact Dr Coetzee at [email protected] with ‘Global farming’ in the subject line.