SMALL FARMER CENTRE

 Economies of scale

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 What is new?

    Economies of scale have always existed in agriculture.

Farming on a larger scale has been more efficient than farming on a small scale.

The cost per unit has been lower on large farms.

These economies were however strictly limited before the era of mechanisation.

Large teams of workers were often difficult to manage.

The time taken to travel to distant fields was unproductive and paid workers were less motivated than a farm family working for themselves.

Small farmers could compete because the quality of their work was better. They could recycle manure from their animals onto fields of cereals and carry out other detailed management that was often neglected on large farms.

The large scale farming schemes in the former Soviet Union and in China show that the management of very large units is extremely difficult and often less successful that small family units.

With the introduction of modern farming technology the economies of scale have grown considerably.

Mechanisation requires larger areas to work on than the average small farm.

Large machines are generally more productive per unit of cost than small ones.

Chemical fertilisers have largely replaced animal manure. The use of chemicals and constant changes in technology require a greater knowledge base.

Almost every aspect of modern agriculture favours the large scale over the small.

    There are strategies to reduce the disadvantages suffered by small farmers. Some are outlined below for mechanisation.
 

Mechanisation.

    There are two different problems of scale for small farmers in the WANA region.

   Tillage and sowing.

    Tillage and sowing are carried out using implements attached to a tractor.

There are many sizes of tractors and many types of soil so it is not possible to determine precisely the area of land that is optimal for a tractor.

Having said that one needs to make some estimates.

For a medium size tractor of about 50 HP using shallow cultivation with a scarifier and a combine seeder it should be possible to sow 50 ha easily within the limited optimum time available in autumn.

For a large farmer with large fields of 20 ha or more for each field the area would be more than 50 ha but for a number small farmers there is a considerable amount of wasted time as the tractor moves from one farm and one small field to another.

Seed and fertiliser may have to be changed. More time is also wasted in turning in small fields.
 
 

    If we translate this 50 ha. of cultivated and sown land carried out by one tractor into farm sizes it would mean:-  
 

Rotation used on farm

 Total area of arable land on a farm where 50 ha cultivated and sown to cereals or other crops or forage.

Cereal - grain legume rotation

50 ha. That is all the arable land is cultivated every years.

Cereal - vetch rotation

50 ha. Perhaps a little more as vetch land not cultivated to such a high standard but the difference is not great.

Cereal - fallow rotation

100 ha. The cultivation work is split between spring and autumn. 50 ha are in fallow and 50 in crop. It may be possible to have more than 100 ha

Cereal - medic rotation 

100 ha. 50 ha are in cereals. 50 ha of medic does not require any cultivation once it has been established.

Zaghouan 4 rotation

200 ha. 100 ha are in pasture. 50 in fallow and 50 ha in crop. 

    All these areas are considerably more than the area of an average small farm.

    If the small farmer purchases a tractor and implements (even if they are second hand) and uses them for only 5 ha. he will pay a heavy price in the form of interest and depreciation on the machinery.
 

    Ownership and use comparisons.

Farmer is a member of a small machinery cooperative

Farmer purchases tractor and implements alone

Farmer uses contractor or share farmer

Uses family labour. Not purchasing labour with machinery from contractor.

Uses family labour. Not purchasing labour with machinery from contractor.

For small farmer with a surplus of family labour it is costly to purchase more labour with the contractor or share farmer.

Cost of tractor and machinery low because of economies of scale.  Fixed costs are spread over a greater area.

Costs are high for small farmers even if second hand machinery is purchase. Only justified if he can find work as a contractor or share farmer. 

Machinery costs are low because fixed costs are spread over a large area but for the small farmer purchasing the contract service they are high because of the labour.

Cannot be used at exactly the time needed. However farmers are on a list and will receive equal treatment. 
Hidden costs of delayed seeding.

Can be used at right time.
Yields should be higher due to optimum sowing time. Second hand equipment may have a hidden cost associated with more breakdowns and delayed seeding.

Contractor will give priority to his own land and then larger clients. Small farmers will always be on the end of the list.
Hidden cost of delayed seeding.

New machines. Less breakdown. More drivers and more area can cause more breakdowns.

Second hand machinery. More breakdowns.

Varies greatly.

New machine can be more efficient. For example fertiliser and seed placement. 

Second hand machines lack recent innovations. 

Farmer totally in hands of contractor or share farmer. Cannot carry out shallow cultivation unless contractor has equipment.

Security in case of sickness or injury if also part of a work sharing group.

No security.

Total security as farm labour not used. 

Requires little access to capital or credit worth.

Requires considerable capital or credit.

Requires no access to capital for machinery but more working capital needed for payment of contractors fees in cash. Share farming no capital needed except for seed and fertiliser. 

Share farming

    This has been discussed in the chapter on risk reduction. See Small farmer risk  and Small farmer mechanisation and Share farming agreements
 

Machinery cooperatives or groups.

   What are they?

    Machinery cooperatives have also been discussed in other parts of this site.

See Small farmer mechanisation  in particular.

They are formed by small groups of farmers who come together to purchase a machine or group of machines.

Many governments in the WANA region have had their fingers burnt in supplying machinery to small farmers.

These small cooperatives or machinery groups are completely different from the government supplied service.

The government machinery services were large contractors that supplied machines and labour.

They were too centralised and too expensive. They had to be subsidised to make them affordable to small farmers and suffered from all the problems of contractors with the additional ones of extra administrative costs.

Group ownership or use of machinery is common among family groups.

The cooperative is only an extension of the concept to a wider group of farmers who may not be related. It does require trust as each farmer drives the tractor and implements. For this reason the groups should be small.

Usually three to ten farmers but they can be larger up to a maximum of about twenty.

After about ten the cost and complications of communication can outweigh any advantages of increased scale.

    Source of funds

The cooperative will buy the machinery with a loan.

Farmers are reluctant to contribute their own funds to such a group.

They may be prepared to do so with family members but not with a larger group.

As well as their unwillingness to contribute funds the cooperative is in fact easier to manage if it is based on a loan.

Payment to the cooperative is based on usage.

Use of the machine is not related to land area and cannot be anticipated.

The smallest farmer in the group may decide on an intensive rotation of cereals and grain legumes and use the machines more than another larger farmer who uses a Zaghouan 4 rotation (See table above of rotations and cultivated area). 

If the farmers made capital contributions based on their individual farm areas there could be ill-will and possibly disputes.

If all the funds come from loans and payments are made by farmers according to their use it does not matter who has a large farm or who has a small one.

The other advantage of a bank loan is that the machinery can be replaced frequently.

A good cooperative will try and use the machines to the maximum and to achieve high levels of use they must be reliable.

If the machines are purchased through a loan the decision can be made to replace them without concern for the current capital position of the members (for example a drought).

   Bank loans

    A bank loan to purchase the machinery is a good source of capital.

The advantages can be considerable for both the members of the group and the bank.

The loans are usually arranged on the basis of individual personal guarantees without mortgages or other fixed security.

This means that the the loan is guaranteed by each member for the full amount.

Obviously in the case of a default the bank would attempt to obtain repayment from the group as a whole but if that failed they could seek the funds from the individuals up to the total amount outstanding from any one. This provides a good level of security to the bank.

For the members of the group it requires trust in the other members that they will pay their share if the cooperative defaults.

It also means that their own credit is not affected.

There is no mortgage over their land or other formal security taken so they are still free to borrow from the bank for other purposes.

Loan guarantees

    Banks are however conservative and may not understand this different credit concept.

Instead of a single high level of security as provided by a mortgage over land or housing they have many lower levels of security provide by the personal guarantees of all the members.

That is one first ranking security against five or more lower level securities.

They may also object to lending to members who are clients of other banks.

Against this more progressive banks may see the loan as a means of acquiring more clients.

Some countries have a system of cooperative loan guarantees for machinery purchase.

They are often organised through a farmers' association or other cooperative group.

The loan guarantee is provided to the bank and the organisation charges a small addition fees to provide this form of insurance.

The organisation providing the loan guarantees can operate on a not-for-profit and not-a-subsidy basis.

That is it provides an insurance cover to its member at cost.
 

    Machinery finance.

    Another source of funds is machinery finance.

This is usually more expensive than a bank loan but the cost depends on the size of the loan.

Most bank loans have fixed establishment fees and can be expensive for small amounts.

Machinery finance is usually arranged by the seller of the tractor and implements. The security is the machinery itself.

    Credit Unions.

    In theory they should be an excellent source of funds for small machinery cooperatives as they are based on the concept of individual credit worth rather than mortgages based on assets.

The loan provided to the machinery group is secured on the personal guarantee of each member.

The members of the group may not all be members of the same credit union. 

Another problem is that there is not a wide spread system of credit unions in the WANA region.

    Hire companies or cooperatives.

    The concept of machinery or vehicle hire is very common.

Cars are hired to travellers for short periods.

Many building contractors hire machinery and vehicles for the length of a building contract.

It provides considerable flexibility.

For farmers the concept is a little different as short term hire for most machinery would be impossible.

Most machinery has a specific seasonal use.

If it is hired for two months in autumn that is in fact the total use for the year.

A notable exception is the ICARDA medic pod harvester which has a long period of potential use over the summer and a short period of need by individual farmers.

Hiring the harvester on a daily basis would make excellent sense. 

Hire contracts for farm machinery would normally need to be made on an annual basis.

In the long term there is little advantage in a hire arrangement compared to a loan but in the short term it is an excellent means of introducing innovation to small farmers.

For example implements for shallow cultivation or the stripper harvester could be hired to a group of farmers thinking about establishing a machinery cooperative.

The farmers would not be committed beyond the first year.

The machines could be returned to the hire company or cooperative at the end of the year.

In fact the hire arrangement could be limited to a few years after which the group would be forced to move to a loan arrangement for their own machinery.

Hire arrangement also provide a mechanism for targeted and limited support to small farmers.

For example innovations such as the ICARDA pod harvester could be hired at a reduced fee for a couple of years to encourage use.

In Australia tree planting machinery is hired to farmers in some areas at a zero fee to encourage them to establish more forests on their land.
 

    How do they work? 

    The machinery group is formed at a meeting of farmers. 

The first stage is to elect a provisional committee to investigate the feasibility of the machinery group and report back to the full meeting.

The committee will need to investigate the feasibility of purchasing the machinery suggested at the full meeting.

They will find out the cost and other relevant information.

They will need to approach a bank or other lending organisation to provide an estimated cost.

 If the report is accepted by the next full meeting the group is formed.

A president and manager must be elected and an agreement drawn up (see below).

 The loan is arrange.

The budget is approved by the group as the basis of fees.

The machinery is purchased and used by the members.

The farmer members make payments to the group account.

At the end of the loan or earlier if agreed the machinery is sold and a new set purchased.
 

    The manager

    The machinery group needs to elect a manager to supervise the machinery, collect the charges and keep the accounts.

The manager plays an important role in the success of the group.

The manager can be a member of the group who carries out the task unpaid (except for expenses).

This is appropriate for a small group or with simple machines such as a medic pod harvester or seed cleaner.

For tractors, tillage and seeding a good manager is essential to ensure the equipment is ready to use at all times.

He should be paid.

He does not necessarily have to be a member of the group.

For example a small farmer with particular skills in repair work could be manager to many groups.

While the payment of a fee to the manager is an additional cost to the small farmer it is still a better option than using a contractor.

The contractor provides the management service but also the labour for operating.

The other great advantage of having a paid manager is that it provides an incentive for energetic farmers to become managers and establish a number of machinery groups.

I was the prime mover in all the groups I was involved in and found that many farmers were prepared to join but few were prepared to organise groups. I was not paid but I can see that payment would provide an incentive to organise and expand groups.
 

    Size of machinery 

    This is a question of balance.

Larger machinery achieves greater economies of scale.

That means the extra cost for larger machines is usually less than their extra potential capacity.

The cost per hectare of land worked is therefore less.

Against this cost advantage for large machines is the disadvantage of working large machines in small fields.

To justify large machines will require a large number of small farmers to join the group.

This is often impractical and becomes difficult to manage.

The machinery may need to be transported some distance to different farms.

Travel time is wasted time and will reduce any cost advantages from the large size of the equipment.

In fact most machinery groups for small farmers will purchase small to medium sized equipment.

The concept of a machinery group does apply more widely than small farmers.

I know of a very successful group formed by three medium sized farmers.

They each had a tractor of 50 HP but decided to purchase jointly through a group a single tractor of 150 HP and the associated large scale implements.

They then establish a work exchange that allowed the new tractor to be worked 24 hours a day on a three shift basis during the critical months of cultivation and seeding.

The new arrangement increased the capacity of the three farmers to cultivate and sow their land by a factor of two or three times.

Crops were sown at the optimum time.

Yields increased.

Costs were reduced as the cost of maintaining a single tractor was considerably less than three tractors of a smaller size.

    Extra capacity.

    It is most important to have some extra capacity to avoid delays.

The strongest criticism of machinery groups is that the machines are not available at the optimum time.

As I have point out they are not available with contractors either.

If some extra capacity is built into the plan the pressure on optimum time will be less.

The easiest means of achieving extra capacity is through some form of work exchange.

This does not need to be a formal part of the machinery group.

Members can make their own arrangement with other members informally.

The work exchange produces greater capacity from the machinery.

It works like this.

Two or three farmers agree to work together on each others' land.

The tractor is worked for longer hours each day.

The seed and fertiliser is loaded faster and there is no delay while the farmer returns to the house for more fuel, seed and fertiliser.

The farmer does not pay any extra as the work is exchanged. One farmer receives help from the others and then provides help to them in turn.

 Rosters

     It is important to establish a roster system for the machinery cooperative.

Hopefully the members will develop a pattern of use that is mutually convenient but there must be a system or set of rules to avoid dispute if agreement fails.

I was a member of a number of machinery groups and they all had rosters but they were never used as the rotation of the machinery was always arranged by mutual agreement.

The fact that there was a roster that gave members rights to the machines was an important part of the arrangement.
 

    Example 1.

    For machinery that has little seasonal pressure the roster can be a simple list of member.

They can use the machine until they have finished the task.

It is then passed on to the next member.

This is ideal for a medic pod harvester or a cereal seed cleaner.

They can be used over a long period during the summer.

There is plenty of capacity and complex rosters are not required.

    Example 2

    Let us say that a group consists of 10 members and they purchase a tractor and combine seeder between them.

Each member has 5 ha of land to sow.

The total of 50 ha should be well within the capacity of the tractor.

The usual way is to list all the members in order of a convenient route.

That is A is near C who is near F who is near B. From this we have an order say A, C, F, B, D etc.

One name is then pulled from a hat.

That is the first member to have the tractor.

The tractor then passes to the next person and so down down the list.

The time each member has the tractor is determined at the general meeting.

It may be a day or more. The actual time used in a day is not limited. In that way members are encouraged to use the tractor for as many hours in the day as possible.

If a member cannot use the tractor when it is his turn it passes to the next on the list or to another member down the list who can use it.

This occurs after rain when farmers with light soil will be able to work the land much sooner than those with heavy land. 

The member who failed to use the tractor when he was entitled to moves down one position. He does not move to the end.

Next year the list begins one or two members down.

If there are 10 members for example it would move down two places.

This would means every member would be number one or number two over a five year period.

This is different from a contractor where he may always be at the bottom of the contractor's list of clients.

Say each member has the tractor for a day.

The first cultivation is carried out in 10 days for all 10 members.

The tractor then returns to the first member and the second cultivation is carried out in another 10 days.

Sowing starts after 20 days and is completed in 30 days.

This sounds perfect but in fact there are delays due to a lack of rain or excess rain.

5 ha per day is a very low rate of working even allowing for travel from one farm to another.

Using the machinery with teams of two or three driver it would be possible to cultivate and sow 5 to 7 times that area in a day and build up the capacity so all farmers will receive the tractor at nearly the optimum time.
 

   Example 3

    Example 2 is too easy to be true.

Farmers are not all equal and the rosters need to be a little more complex without becoming a set of bureaucratic rules.

Let us say that a group consisted of 5 members with 5 ha. and 1 member with 25 ha.

The member with 25 would find it difficult to justify a tractor and machinery or if he did it would be second hand.

He might decide that joining a group with a modern seeder capable of seed and fertiliser placement is a better option.

He will not join the group on the same basis of one day in six.

The group will need to adjust its roster to allow him more days on the list.

They may also put pressure on smaller farmers with less than 5 ha to combine their working into a single day.
 

    Charges. 

    The charges will depend on the type of machinery.

A tractor will typically be charged at a rate per hour shown on the tractor clock.

A baler will be charged per bale.

A medic pod harvester may be charged on a per day basis.

    The rate per unit is based on a budget.

    The objective is to run the cooperative as a not-for-profit organisation.

That is the costs and the charges should balance over a few years.

If this can be achieved the machinery group remains flexible.

It can take in new members or members can retire without the need to pay compensation for assets or for new member to make capital contributions.

    For example.

    A machinery group purchases a tractor and combine seeder with a bank loan over five years.

At the end of five years the equipment is sold and new machines purchased.

    The costs are:

    The annual repayments to the bank.
    The fuel for the tractor.
    Oil and other tractor costs such as filters.
    Points for the combine seeder.
    A contingency fund for breakdowns.

    These costs are then divided by the estimated hours worked.
    The charge is then provisionally set.

    At the end of the season the accounts are prepared and the members decide on a number of options.

    * If there is a deficit.

    The cooperative may increase the charges to cover the deficit.

This should be limited to a small amount.

If for example there is a drought and the tractor is used for only half the estimated amount of time by half the member it would be unfair to make them pay double.

The group has no alternative. It must carry the deficit forward.

The fees will need to be set at a higher rate in future to pay off the deficit.

    * If there is a surplus.

    This can be held to cover the possibility of drought mentioned above or may be refunded to the members if it is considered that there are sufficient reserves.

    Machinery groups can also hire their machinery to non-members for a higher charge and without a place on the list.
 

    Getting started.

    To start a machinery group requires the participation of some innovative farmers.

They may decide to launch such a group or be encouraged by an extension agent.

Outside the extension service there are other sources of information and encouragement.

The farmer organisations may encourage the formation of machinery groups (and offer support through loan guarantees), existing managers of groups may develop more groups and machinery sales outlets may encourage them.

    The first stage for a group of interested farmers is to develop a budget to test the feasibility of the machinery purchase.

    * Choose the machinery.

    Usually medium-sized machinery is the most practical.

Small machinery may be cheaper but cost more per unit of potential work.

Large machinery may be cheaper per unit of potential work but requires a large group.

A large group creates more administrative problems and farmers may be unwilling to trust other members in a large group.

    Let us say for example the group chooses a tractor of about 50 HP and a combine seeder and scarifier of 16 sowing tines. The group then needs to find out the cost of the machinery.
 

    * Draft budget.

    From the cost of the machinery a draft budget can be draw up.

    Variable costs - these relate to the use of the machinery.

The principle cost is fuel but there is also oil, filters, points etc.

These are calculate back to a cost per hour shown on the tractor clock.

    Fixed costs - mostly the loan repayments and interest but also an annual maintenance check, insurance and payment to the manager.

    The farmers in the group need to estimate the amount of work they require. The Fixed Costs are divided by the estimated work and added to the Variable Costs to give a Total Cost per hour.

    Variable Costs may be Dinars 2 per hour.

    Fixed Costs may be Dinars 2000

    Estimated use 1000 hours

    Fixed Cost per estimated hour = Dinars 2

    Total Cost 2 + 2 = Dinars 4

    * Estimated hours.

    The farmers must decide whether the estimated hours are reasonable.

Given variations in the weather and other factors can the farmers achieve their working program within the optimal sowing period.

They may also consider whether they have surplus time available.

Should they seek more member to spread the Fixed Costs over a greater number of working hours.

    * Making a comparison.

    The benchmark is the local contractor charge.

Obviously the charge made by the machinery group for the use of the machinery must be less than that charged by contractors.

The contractor includes labour which is supplied by the farm family when the group machinery is used.

    In addition to a cost saving compared to contractors the group should be able to provide a better availability for small farmers.

It is difficult to translate this into cash but research on seeding dates shows that after December there is a yield decline on average for every week of delay.
 

    Calling a meeting

    If these initial discussion are successful the group will almost certainly need more members in order to spread the Fixed Costs over more work.

If these additional members can be found the group can be launched at a meeting.

   Model agreement and checklist.

    The larger meeting will need to decide the following:
 

Name of group:

Usually the name of the locality. For example: "Green mountains machinery group."

Names of members:

Members names, addresses, and bank details are listed. Also each member must sign this agreement. They will also sign the bank loan document.

Estimated use by each member

This information is most important for the drafting of the budget. Members will not necessarily be able to estimate hours - rather they will state area of various crops to be sown.

President:

President is elected at the annual general meeting each year. It should be a secret ballot. There should be ballot even if there is only one candidate. If he fails to obtain a majority of the votes a new candidate for president should be nominated.

Committee

Depending on the size of the group it may be useful to form a committee to negotiate the loan etc.

Manager:

The manager is elected by the members at the general meeting each year in a similar manner. The manager does not have to be a member of the group.

Bank account:

The bank account for the group needs to be established and the people who can operate it.

Bank loan:

The details will be negotiated once the group has been formed but at the the initial stages it is important to explain to members before they sign that the group intends to take out a loan for  X amount. That the members are required to sign the guarantee.

Insurance:

Insuring the machinery may be requirement of the loan.

Machinery to be purchased:

This needs to be stated in broad terms. That is a tractor of X H.P. and a combine seeder of Y tines without necessarily stating the brands.

Unused reserve portion of loan:

This should be stated in general terms. 

Annual meeting and other meetings

The date of the annual meeting. How it is called. Other meeting.

Quorum of members present to approve accounts and charges.

This is most important as all members are obliged to pay the charges approved at annual meetings.

Charging system / per hour /per bale /per ha etc.

This is usually straight forward and according to the type of machinery. Tractor and tillage/sowing machinery usually by hours shown on tractor clock. Medic pod harvester by the day. Cereal seed cleaners by the day. Baler by the bale. 

Out of season charges

With seasonal machinery such as a tractor and combine seeder there may be a rate for the autumn period and a lower rate for other periods of the year. For example cultivation for spring fallow in the Zaghouan 4 rotation could be a lower rate.

Use by non-members

Additional income will reduce charges for members. There is no reason why the machine cannot be hire out provided no member requires it. The members must decide whether it is to be driven by a member and the charges. The charges must be higher than those paid by members.

Payment of charges.

Charges are due on a certain date. Late payment may carry interest. Even later payment means the member is down graded on the roster. If charges are not paid before next season the member cannot use the equipment.

Order of use:

This can be a complex  matter and should only be included in the agreement in general terms. The details can be developed at further meetings. 

Arbitration

Disagreements over use cannot be settled during the working season by calling a meeting. The president needs to be give power to arbitrate.

Rule for passing over a member.

A member who cannot use the machine when it is his turn for whatever reason moves down the list. The number of places down needs to be stated.

Order of use in following years.

The roster is changed every year so each member gets an opportunity to use the machine first or second over the life of the loan.

Responsibility of members.

Of course there is a general responsibility to look after the machine but specific rule need to be stated. For example check oil. Grease. etc.

Log book

As the machine is passed from one member to another the relevant information (hours on clock etc.) are entered in the log book. These form the basis of the charges.

Payment for fuel:

For a tractor it is more convenient for fuel to be paid for by the group and included in the charge rather than each member trying to fill the tractor just for his own work. 

Changing the points:

The points need to be changed on tillage machinery. It is unfair on the member who receives the machine in need of new points to do all the work. Arrangements need to be made to compensate him.

Annual maintenance:

A schedule for annual maintenance needs to be drawn up to ensure the group machinery is working at an optimal level of efficiency. 

Payment to members for work:

If work on the machinery can be done by members a level of payment needs to be determined.

Payment to manager:

This can be a fixed fee per year or a percentage of the turn over.

Storage of the machinery:

Where will it be stored when not in use.

Loan agreement.

    Once the members have signed up to the group the next stage is to sign the loan agreement. This will usually be drawn up by the bank or credit union but the group needs to check the following.
 

* Amount of loan

This must cover the purchase price of the machinery, fuel and spare parts (such as additional points) for the first year.

Depending on the type of loan it is a good idea to negotiate an additional reserve amount that can be drawn on if the season is poor and the expected area is not worked.

* Interest rate and annual repayment.

Usually the time is about five years.

If the group is operating at an optimal level of usage it is worthwhile keeping the machines reasonable new.

After five years they are sold and new ones purchased.

* Nature of guarantee.

Usually the personal guarantee of all members.

This needs to be explained to members.

If the groups fails the procedure would be as follows:-

    + The machinery would be sold.

    + The deficit between the price obtained and the balance of the loan would be paid by members.

    + The members would decide among themselves on a system of payments to meet the deficit.

    + If they failed to come to an agreement the bank could demand an amount from each member.

In the event of one or more members not paying the bank could demand payment from the others for their share and the share of the defaulters.

* Early repayment.

    Overall the purpose of the group is to provide low cost machinery to its members not to build up assets.

The objective of the budgets is to try and balance income and expenditure.

Obviously there are seasonal variations.

In a bad year there may be a need to draw on reserves in order to keep the charge rate roughly the same.

In a good year there may be a surplus which can be used to make some early repayments of the loan. It is important to ensure this is possible.

* Insurance.

    Most lending institutions will require insurance.
 

Budget.
 

     A more detailed budget can now be draw up as there is a complete list of members with their estimated use.

Charges can be set.

My experience with machinery groups is that most members are conservative in their estimates.

They actually use the machines more than they estimate.

This means that the fixed costs are spread further and the charges are lower than estimated.

Provided there are reasonable reserves the surplus is refunded to the members which creates considerable goodwill.
 

Accounts.

    Once the group is operating the manager needs to keep accounts.

These are simple.

Expenditure is recorded and the income from charges as well as the amount owed by members but still unpaid.

The bank will probably need to see these accounts.

It is unlikely that a qualified accountant is needed but that depends on the size of the group.

Record of meetings.

    The manager will need to keep a record of the decisions taken at the meetings.
 

Short cuts

    The procedure described above may sound complex and time consuming.

In fact it is not that difficult but there are a few ways of simplifying the establishment process.

    * Machinery hire

    If there is a machinery hire cooperative, company or government agency the group can start on a much more previsionary basis.

A group of farmers can come together and underwrite the hire charges for a year.

From this experience they can go on a establish a group that purchases the machinery.

    * Standard models.

    A great deal of the budget is standard.

The Ministry of Agriculture or other extension organisations can prepare standard budgets where most of the figures are supplied and the farmers only need to fill in the area of land to be worked.
 

    Harvesting

    A farmer cultivating and sowing 100 ha of land will have economies of scale compared to a group of say 10 smaller farmers.

The same combination of tractor and combine seeder and scarifier may cultivate only 75 ha on the small farms because of the time wasted in transferring from one farm to another.

There is time wasted in additional turning in small fields and when the crops are sown in filling with small amounts of seed and fertiliser.

The wasted time can be off set by two or three small farmers working together to run the tractor for longer periods during the day and night.

Even without this additional capacity the economies of scale are not enormous.

When it comes to harvesting with large cereal harvesters there are much greater economies of scale.

These machines can efficiently harvest hundreds of hectares in a season and even large farmers employ contractors or share machinery.

For small farmers the efficiency of the harvesters is low because there are small fields and different crop.

There is soft wheat, hard wheat and barley as well as grain legumes (although these are not yet harvested on a large scale in the WANA region with machines).

To establish a machinery group consisting of hundreds of small farmers would be impractical.

It would not be possible to find such a large group which shared mutual trust.

The price of the harvesting machinery is so high that small farmers would not sign the guarantees.

The harvesters cannot be driven by individual farmers as they do not have the skills. 

Once the group employs drivers and in effect becomes a contractor there is considerable doubt whether a group contracting service can be run as efficiently as a private contractor.

    If however a Stripper is used instead of the large combined harvester group ownership is a reasonable option.

A stripper is easily operated by relatively unskilled drivers and as it has a smaller capacity could be owned by a group of 5 to 10 farmers.

Work exchanges make the stripper more effective.
 

    Social impact

    Machinery groups can have considerable social impact.

In one part of Australia where they were used most successfully by small to medium sized farmer they became quite controversial.

They allowed the farmers in the groups to purchase new modern machinery.

Traditionally they had purchase second-hand machinery discarded by the large farmers.

The farmers in the groups made greater profits and these were at time displayed in the purchase of new cars which again had traditionally been the prerogative of the larger landowners.

The large landowners began a whispering campaign against the machinery groups accusing them of been a form of communist subversion!

Livestock

    There are economies of scale with livestock.

In the WANA region most livestock are grazed with shepherds.

A shepherd can handle 100 to 200 sheep compared to the 10 sheep found on many small farms.

This is a considerable economy but there are some other factors that can improve the efficiency of small flocks and partially offset the cost (these costs are family labour costs and if the opportunities for other employment are poor the cost is low).

Shepherds in small flocks can pay more attention to the health of individual animals. Farmers can separate out young sheep each night and feed them selectively. More care can be provided at lambing.