|Better Farming Series 26 - The Modern Farm Business (FAO - INADES, 1977, 55 p.)|
|Part 4 - The farmer's expenses|
So far, we have seen how the farmer can earn more money.
A farmer tries to earn more money in order to have more money to spend, and in this way to meet his needs. Now we shall see how the farmer can use the money he has earned. We are going to study the farmer's expenses.
A farmer has various kinds of expenses.
Expenses for the family
A farmer may buy clothes for his wife, his children, himself: shorts, dresses, shirts, trousers, shoes. He may buy food: salt, sugar, fish, meat, beer, wine. He may buy furniture for his house: a table, chairs, beds. He may buy things for the kitchen: jars, cooking pots. He may buy articles of everyday use such as soap, paraffin, matches. All these expenses are to satisfy the family's needs; they are called consumption expenses (or family expenses). These expenses make up the family budget. They are not expenses for the farm business.
In studying a farmer's expenses, we must keep apart expenses for the family and expenses for the farm business.
Expenses for the farm business
Expenses for the farm business make up the farm budget
There are two chief kinds of expense for the farm business.
· First, there are expenses that come every year.
These are called yearly production costs. They are expenses that have to be met every year, so that the farm can go on working and earn more money.
Examples of yearly production costs:
· Buying selected varieties of seed
To get bigger harvests, the farmer must buy each year selected varieties of cotton, or groundnuts, or rice. This expense has to be met each year.
· Buying pesticides
To prevent his plants from becoming diseased, the farmer has to buy pesticides every year to protect cotton or groundnuts, to protect cocoa trees or coffee trees.
· Buying fertilizers
To increase the yield of his crops, the farmer has to buy chemical fertilizers every year to apply to the crops that earn money. The farmer must think carefully before deciding to apply fertilizers. He must be sure that all the other farming jobs have been well done,. for example, that sowing was done at the right time, that weeding has been done often enough, that pesticides have been used. Otherwise, it is useless to spend money on fertilizers.
· Expenses of paying labour
· There are also expenses that do not come- every year.
These expenses have to be met only from time to time. They are expenses for improving the farm business. These expenses increase the farm's productive capacity. Spending money to increase productive capacity is making an investment.
To make an investment means spending money to increase the farm's productive capacity.
Examples of investment:
· Buying new tools
A farmer buys a plough or a seed drill that is drawn by animals. With this plough or seed drill, the farmer works better and quicker. By this means he can increase the area farmed. He will have increased his productive capacity by buying a plough or a seed drill. He has made an investment.
· Land improvement
The farmer clears some land and grubs up all the trees. He digs irrigation and drainage ditches to make an irrigated rice field. He makes barrier strips and terraces to protect the soil from erosion. All these undertakings are investment because they increase productive capacity.
· Establishment of new plantations
The planter who makes new plantations of coffee trees or mango trees also makes an investment.
Investment expenses are often very large.
· Some farmers have enough money at hand to pay the full cost of an investment.
Example: Issa is a good farmer, he has had good harvests for several years; he has not spent any money on useless things. Issa has more than 40 000 francs in reserve. Issa wants to get on. He wants to buy a plough and a pair of oxen. The plough costs 8 000 francs and the oxen 20 000 francs. Issa pays cash for the plough and the oxen. Issa can pay for his investment right away because he has money in reserve; he has made savings.
· But many farmers are not like Issa, they have not got enough money to make an investment. They have to ask for money from banks or credit institutes; they have to borrow money (see Part 4: How a farmer can find the money).
Marcel wants to get on; he wants to buy a plough and a pair of oxen. The plough costs 8 000 francs, the oxen 20 000 francs. But Marcel has no money. He borrows 28 000 francs from the agricultural credit institute.
The institute lends him the money for five years Each year Marcel is to give back 28 000/5 francs = 5 600 francs to repay his loan.
In addition, he has to pay the agricultural credit institute interest of 5% a year, that is: 28 000 francs x 5/100 = 1 400 francs
So each year Marcel has to pay the institute 5 600 plus 1 400 francs = 7 000 francs. At the end of five years, he will have paid 7 000 francs x 5 = 35 000 francs
The next paragraph's are difficult. If you do not understand, you are not obliged to read them, you can go straight on to "Part 4: How a farmer can find the money".
A farmer who wants to get on has to spend money for his farm He has to buy selected varieties of seed, pesticides, fertilizers; he has to invest by buying new tools, improving his land, making new plantations.
But a farmer has to be very careful when he spends money; he must not spend on just anything for the farm.
He must spend only on what will earn money later. When an expense earns a lot of money, we say that it pays, that it is profitable.
What makes an expanse profitable? Three conditions are necessary to make an expense profitable:
(1) The increase in output must repay the money spent.
(2) The increase in output must pay the interest (here reckoned at 5%).
(3) In addition, the increase in output must leave a profit,
The following two examples show how to reckon the returns on an expense.
In the first example, we show the returns on an expense for one year (the expense has to be repeated every year).
In the second example, we show the returns on an expense that is required once in several years (it is not repeated in following years).
In the first case:
If the expense is yearly, it will be profitable if:
(1) the increase in output repays the money spent;
(2) the increase in output also repays the interest on the money spent;
(3) in addition, the increase in output leaves a profit.
In 1970 John sowed 1 hectare of cotton, he did his work well, and he used pesticides, but did not apply any fertilizer. He harvested 720 kg of cotton, which sold at 30 francs per kilo. He earned: 720 x 30 francs = 21 600 francs.
In 1971 John again sowed 1 hectare of cotton, he did his work well, he used pesticides, and applied 100 kg of ammonium sulphate; on this he spent 2500 francs. He harvested 960 kg of cotton, which ho sold at 30 francs per kilo. He earned: 960 x 30 francs = 28 800 francs.
Thanks to the fertilizer, ho increased his earnings by 28 800 francs loss 21 600 francs = 7 200 francs. But he has to repay the cost of the fertilizer: 2 500 francs. Ho also has to pay the interest on the cost of the fertilizer (interest at 5%):
2 500 x 5/100 = 125 francs
This makes a total of: 2 500 francs plus 125 =2625. So his increased earnings are really: 7200 francs less 2 625 francs = 4 575 francs.
Therefore, the use of fertilizer is profitable because the farmer earns an additional 4 575 franca
In the second case:
If the expense happens once in several years, it will be profitable if:
(1) the increase in output in all these years repays the money spent.
(2) if the increase in output in all these years repays the interest on the money spent.
(3) if the increase in output in all these years leaves a profit.
In 1968 Karamoko bought a pair of oxen end a plough. I le paid 25 000 francs for the oxen and 10 000 francs for the plough.
He spent a total of 35 000 francs. With the two oxen and the plough Karamoko can increase the area cultivated; he will grow crops on another hectare and thus will get a bigger harvest. He will be able to do his work quicker and better, and thus will increase the yield.
The plough and the oxen will last him for 5 years. The yearly cost of the plough and oxen will be:
35 000/5 years francs = 7 000 francs a year.
The yearly interest on the sum spent must also be included (taking the interest at 5%):
35 000 x 5 / 100 = 1 750 francs
Each year the increase in output obtained with the plough and oxen should be more than:
7 000 francs plus 1 750 francs = 8 750 francs.
In 1969 Karamoko earned 13 650 francs more.
In 1970 Karamoko earned 18 220 francs more.
In 1971 Karamoko earned 26 400 francs more.
Karamoko has not yet worn out his plough and oxen, but with the money already earned in 3 years he can cover much more than the cost of what he bought. His investment is profitable.
How a farmer can find the money
To get on, a farmer must invest; so he must spend money. But often farmers have no money in reserve. They are obliged to look for the money elsewhere.
Where can a farmer find the money?
To find the money, the farmer has to ask for money. He has to borrow.
To borrow = To ask someone for money. This money has to be
returned after a certain time.
To lend = To give money to someone who will return it after a certain time.
The farmer can borrow money from a relative or a friend. But often relatives and friends have no money to lend.
The farmer can borrow money from dealers. But often dealers demand a very high rate of interest. Farmers should not borrow from dealers because they will often be robbed.
The farmer can borrow from a commercial bank. But commercial banks do not readily make loans to individual farmers, and moreover they ask a high rate of interest.
To get money, farmers should apply to an agricultural credit institute.
In most African countries there are credit institutes that lend money to farmers. These institutes may have different names: they may be called National Agricultural Credit Fund, or else National Agricultural Development Bank. In other countries there are development corporations which lend money to farmers.
These credit institutes make loans at a fairly low rate of interest.
They can make short- term loans, that is, loans for yearly expenses such as buying fertilizers and pesticides. The farmer has to repay the money after the harvest.
They can also make medium- term and long- term loans for investment expenses such as buying tools, improving a plantation. The farmer has to repay the money over a period of 4 or 5 years, or of 10 years.
The agricultural credit institutes do not readily lend money to individual farmers, because sometimes individual farmers do not repay the money. The credit institutes often prefer to lend money to farmers who belong to a cooperative group.
Because if a farmer cannot repay the money he has borrowed, then the other farmers in the group will repay the money in his place. This is what is called mutual liability. All the farmers in the group undertake to help the one who is in difficulty.
Farmers in a cooperative group get a loan more easily.