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Risk and cost

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Risk for small farmers.

     Risk has a much greater personal impact on small farmers compared to large ones.

Farm losses have a direct impact on the farm family and can cause considerable hardship.

Small farmers will take decisions that avoid risk rather than maximise profits.

Placing such a high priority on avoiding risk creates problems for the application of new technology to small farmers in the WANA region.

The emphasis over the last half century has been on high-input / high-output farming.

While cost reductions have not been totally ignored there is no doubt that greater emphasis has been given to increasing output.

This research and development priority has suited large farmers more than small farmers.

In the WANA region there is the added factor of greater climatic risk that puts the whole strategy in doubt. For large farmers with sufficient resources to plan over a five year period high-input farming is probably profitable but not for small farmers who do not have the resources to carry them through a period of poor rainfall.
 

Measuring the risk

    The Break Even Budget

    The Break Even Budget is the classic means of assessing risk.

The starting point is the Partial Budget.

The Partial Budget estimates the income and costs from a change in the farm enterprise. Only changes are included not permanent overhead costs.

The Partial Budget will show if the proposed changes produce an increase in gross returns.

The Break Even Budget uses the same approach but calculates the figures in a different manner.

Instead of a final gross return as in the Partial Budget the gross return is assumed to be zero.

That is because zero represent a pay back of costs and therefore no risk of loss.

The figures for increased income are recalculated in the Break Even Budget to provide the minimum amount of increase needed to cover the cost of the proposed changes.

For example an increase in the use of fertiliser may show a profit of 50% over expenditure in the Partial Budget with expected increase in yield due to the additional fertiliser but the farmer is also interested in the minimum yield increase needed to cover the fertiliser cost.

This is provided by the Break Even Budget.

The Break Even Budget is good for new investments such as the expenditure on fertiliser mentioned above but is not so easy to use on cost savings.

Cost savings are win-win situations.

The use of shallow cultivation instead of deep ploughing is cheaper.

There is no break even increase in yield necessary. It simply reduces cost in all circumstances.
 

Low cost farming 

     Reducing the cost reduces the risk for small farmers and large farmers alike.

For small farmers the risk can be further reduced if outside cash costs are replaced with internal family labour.

The secret is to reduce costs without reducing output. There are many way to do this.
 

    *  The cereal enterprise

    Livestock versus cereals

    For small farmers the cost of additional livestock production is very low indeed.

They already take their flock to graze every day.

If the output can be increase through better feed or the numbers increased the additional cost to the farmer is very small.

A shift from cereal growing with outside contractors (paid in cash) to more livestock will reduce cash costs and risks.

The best means of doing this is through a change in the rotation to the Zaghouan 4. This rotation allows the small farmer to make a major shift from cereals to livestock without reducing cereal output.

    Cultivation.

    Farmers can save a considerable part of the cereal costs by adopting shallow cultivation with the appropriate implements.

The cost saving are achieved directly as it costs less to cultivate to a depth of 10 cm compared to 20 cm.

The dilemma has always been that farmers believed they would sacrifice yield if they reduced the cultivation depth.

In Buyers' guide to scarifiers and Deep plough bad for profits we show that there is no yield reduction if the implements used for shallow cultivation have been designed for that task.

Shallow cultivation also saves money compared to deep ploughing by reducing the need for further cultivation. If the further cultivation is carried out to control weeds there is a definite benefit. If the further cultivation is carried out to break down clods and level the ground created by the first deep cultivation it is a waste of time and energy.

It is better not to produce the clods and waves.

Throughout the WANA region farmers are faced with the cost of further cultivation to produce a good seed bed or sowing into a poor one and using more seed. See also Returns from shallow cultivation

The third aspect of shallow cultivation that has been ignore in every WANA country except Libya is that faster cultivation means early sowing.

Early sowing (provided weed control is not sacrificed) in the cereal zone below 500 mm annual rainfall is a critical means of reducing climatic risk. See Deep ploughing overview.

    Seeding.

     Better seed beds and more precise seeding means that germination is better.

The seeding rate can be reduced by 20 to 40 kg/ha without reducing the density of seedlings.

Quality cereal seed that has been treated with fungicide is costly and such a saving in cost is worthwhile. The cost of good cereal seed is roughly double the sale price for cereals. A saving of 40 kg of cereal seed is equivalent to an increase in yield of 80 kg when translated into cash.

    Fertiliser application.

    The placement of the fertiliser near the seed will improve the efficiency of use.

Fertiliser rates can be reduced for the same yield response or if the rates are low the same amount is used and the yield increase is greater.

    The combination of shallow cultivation, rapid seed bed preparation, precision seeding and fertiliser placement can be carried out with a combined scarifier/seeder.

This is not an advanced piece of technology.

It has been used by Australian farmers is various forms for about 100 years.

While it costs more than existing seeders in the WANA region it cost no more than the package of deep ploughs, cultivators, seeders and fertiliser spreaders currently used to carry out the same task.

    Harvesting

    The harvesting of cereal crops even on small farms is increasingly carried out with large harvesters imported from Europe or America.

They are inefficient when used to harvest the short and brittle crops normally produced in the WANA region.

They are particularly inefficient in low yielding crops.

Their efficiency can be improved - see Harvesting

For small farmers there is an added problem as these machines work even more inefficiently in small fields and with a variety of crops. The alternative Stripper is a harvesting machine well suited to small farms.

    Rotations.

     The fallow cereal rotation is a low cost means of growing cereals.

It is however a low output method also. When fallow first began and there was accumulated fertility in the soil it was a low cost high output rotation. Now the fertility of the soil has been exhausted it in a low input low output system.

While it is low cost as far as cereals are concerned it is not low cost for livestock.

The weedy fallow and cereal stubble are low cost sources of feed but are so inadequate that they are supplemented with hay and grain.

As livestock production is increasingly important with low cereal prices and high sheep prices the fallow rotation has become a costly option.

There are a number of possible alternatives to the fallow cereal rotation.

They have different levels of costs.

While the use of grain legumes and vetch or other forage crops can produce high gross returns they also have high levels of cost. If the farmer is relying on contractors paid in cash to cultivate the land and sow the crops the risks will be high.

Small farmers will be reluctant to change. The medic rotation and the Zaghouan 4 rotation have lower cost levels and therefore less risk for small farmers.

    Flexible farming.

    Current weather predictions cannot tell whether a season is going to be good or bad in sufficient detail to help farmers with their cropping decisions.

While a good season can always turn bad, a bad season does not need prediction - it is happening.

Rotations that have flexibility will reduce risks for small farmers.

It is pointless to sow cereals crops or forages if the season is very poor but farmers are faced with a loss if they sow and perhaps an even great loss if they do not.

If they do nothing production is zero and some production is better than zero.

Medic pasture regenerates from seed reserves in the soil without seed or seeding. It provides a fall back in a poor season. If farmers decide not to sow crops the medic will still produce from whatever rain does fall. This is explained in more detail - Decision time in autumn
 

   *  The livestock enterprise

    Low cost pastures

    The efficiency of sheep production in the WANA region is low.

That is the output of meat or milk from each sheep is low.

Most of the feed is used to maintain the animals not produce a saleable surplus.

Pastures such as the weedy fallow and the cereal stubble are cheap but the quality is low and higher production levels are not possible from these feeds.

Hay and grain is expensive.

Sown forage such as vetch is a high risk option for small farmers.

Medic pastures provide a low cost alternative. They regenerate and do not require land preparation or seeding - only fertiliser. For the small farmer they provide greatly increase production at low risk.

    Drought reserves.

        Drought is a risk for the livestock enterprise as well as for the cereal crop.

The farmer has a number of options.

He can sell his livestock when the feed supply fails.

He can purchase feed for them.

He can set aside reserves of feed.

There have been a number of attempts to model the three management options and it is impossible to reach firm conclusions because price fluctuations in each drought are different.

They do follow a similar pattern and the general conclusion is that farmers should try to keep their breeding stock.

Selling cheap in a drought and buying back new breeding stock after the drought is costly.

Buying back a lesser number and increasing them through breeding may be one option for a small farmer without cash reserves but is has an adverse effect on income for many years.

        Selling surplus non breeding livestock even at a low price may be better than feeding them on expensive feed.

        For the breeding flock it is better to accumulate some drought reserves in the form of hay, medic pods and cereal straw - see Hay production.

    Agistment - IN

        Another way of reducing the risk of drought for the livestock enterprise is to have a smaller flock and sell the surplus pasture on agistment.

"Agistment" is not a well known word outside Australia. It describes the sale of a pasture on a per animal basis.

Of course pastures and failed cereal crops have been sold in the WANA region for centuries but the sale is for a fixed sum.

It is the equivalent to a short term lease of the land.

The owner sells the grazing and the flockowner naturally enough grazes as much as he can from the land. He may even feed grain to the animals while they are grazing.

Agistment means selling the pasture (it is not important for cereal stubbles) on a per animal per week basis.

It is therefore possible to manage the pasture.

Firstly the buyer has no interest in over grazing. Why should he pay the full weekly charge for a pasture that is no long producing adequate feed.

More important the owner can change the stocking rate.

Usually the agistment agreement allows the owner to reduce or terminate the agreement provided a reasonable notice is given.

For example an owner might let out a field of dry medic on agistment to a flockowner.

Each sheep pays a fee for each week of grazing.

As the pod supply fall the owner carries out a count using the sampling disc (Measuring the pods). When he estimates that the minimum level will be reached in the next two weeks he gives notice to the flockowner to remove his sheep by that time.

The flockowner will have reached a similar conclusion on economic grounds (if not at the precise same time). Once the pod supply runs low the pasture is not providing the good quality feed he is buying each week.

By selling his pasture on agistment the farmer reduces his return but also his risk. In a poor season he does not sell any pasture and keeps it all for his own flock. He only sells the surplus in good years.

    Hay production

    Hay production in good years can be used in a similar way but agistment is more flexible as it can be for shorter periods and on all types of pasture - even rough grazing that is unsuitable for hay production.
 

Reducing the cost of inputs

    Farmer buying groups.

    These have had a long history.

In developed countries farmers' cooperatives were formed to buy inputs for farmers.

The markets at the time were controlled by large manufacturers who insisted on a fixed price for their products.

Agents and resellers were not allowed to discount the fixed price.

The only way farmers could circumvent the market manipulation of the manufacturers was to form a cooperative. The cooperative sold the product to the farmer at the fixed price and paid him a dividend from the generous margins allowed by the manufacturers.

Once new competition laws were introduced to break price fixing the cooperatives withered away.

Farmers did not have the time or the skills to run the cooperatives and the professional managers were not as hungry for efficiency and profit as private traders.

Farmers deserted the cooperatives for private merchant who offered good discounts.

The best discounts were offered to large farmers for large orders.

Again small farmers found themselves at a disadvantage. Even where the discounts were available on small quantities they were not always easy to find.

For the large farmer it was worth contacting many merchants for the best deal but for the small farmer the cost of travel or phone calls can quickly become greater than the amount of money saved.

Farmer buying groups are an alternative.

They are quite different from the cooperatives that supplied fertiliser, tractor fuel and many other inputs.

They do not actually handle the products.

They do not require capital, distribution systems or warehouses.

They act more in the manner of brokers.

A group of farmers (usually less than 20) put their purchases of fertiliser etc. into the hands of a member. That member has a greater quantity to negotiate better discounts.

The savings are small but significant.

The member who does the research is paid a small commission and further savings can often be made by consolidating the transport arrangements.
 

Share farming 

    Traditionally share farming has exploited small farmers.

In central Italy for example share farmers lived and farmed small farms and had to provide a half share of their crops to the land owner.

In other parts of Italy share farming was even more exploitative as the share farmer had only an annual agreement and was not provided with a house.

Share farming was prohibited under the land reform laws of the 1950s and 1960s.

The exploitative nature of share farming reflected the unequal power of the land owner and the share farmer.

The land owner had many farms, ample resources and the support of the state.

There were many poor families seeking land to farm and they had no surplus resources to support them in a strike or other form of protest.

In the WANA region share farming can play and important role in reducing risk.

It is not the European model of share farming but the Australian one that should be considered.

The Australian model was share farming essentially among equals.

Different family farmers had different amounts of labour and machinery.

These resources could be exchanged by share farming rather than employing contractors.

Share farming on this basis is a win - win arrangement as far as risk is concerned.

The small farmer and land owner can share farm a field with a neighbour who has surplus machinery and labour.

The owner reduces his risk.

Instead of paying cash for the cultivation and seeding these are paid for with a share of the harvested crop.

The neighbour undertaking the share farming does not take on a great deal of risk.

Most of the cost of the machinery is covered by his own farming.

The additional work costs only a marginal amount extra in wear and tear.

The labour is family labour and is not paid a cash wage.

Other than the tractor fuel there are few cash cost that he is putting at risk if the crop fails.

More on Share Farming   -  Small farm mechanisation

                                      Share farming agreements
 

Insurance

    Normal insurance.

     Insurance has been used to reduce risk for centuries but there are some characteristics of insurance that make it suitable for only some types of risk.

Insurance works well if the risk is small but the effects for the individual farmer great.

For example the risk of fire or flood may be very small - say one year in fifty or even less - but the effect on the farm family is most destructive. 

This type of risk is covered by insurance and premiums can be kept low yet the cover is good.

For small farmers the major problem is the administrative costs.

Large insurance companies are not interested in thousands of tiny policies that are costly to administer in proportion to their premium income.

Again small farmers will need to establish groups similar to the buying groups to arrange insurance. The insurance company writes a larger policy and the farmers themselves carry out some of the administration (collecting the small premiums).

This is simply a transfer of cost from the company to the farmers but the fact that the farmers can do the work more cheaply than a large organisation.

The "cost" of collecting the premiums and other work carried out by a member of the group becomes an "income" for that member.

I will show that these groups (the buying group, the insurance group, the knowledge group can be run on a professional basis and provide income to some of the members.

The other members will still pay less than they would if they purchased the goods or services individually. 

Insurance risks that could be included in these groups would be car and tractor insurance, fire and flood for houses and crops and perhaps hail damage for crops.
 

    Drought insurance.

    There have been some attempts to insure cereal crops against drought risk.

They have failed.

The reason is that insurance is designed for high losses with a low frequency.

People pay small premiums for the possible total loss of their house through fire. The incidence is small but the cost to the individual is great.

Drought risks are quite different.

They are too frequent to fit into the normal insurance pattern.

Conventional insurance schemes fail for another reason.

They remove the incentive to adapt (see below) as the farmer says why bother when he anticipates a drought.

If the crop fails the insurance company pays.

Assessing crop yields adds a considerable administrative burden to such schemes.

Farmers would be better off to pay their premiums into a drought reserve account which they can draw on in a drought without any elaborate claims procedure.

    We believe crop drought insurance could work and be valuable to farmers.

    For such a scheme to work the following should be borne in mind:

    * It is pointless to insure all droughts.

They happen too frequently.

Drought reserves in the form of cash saving, grain or hay are a better methods of coping with a single drought.

    * It would be useful to insure a series of droughts.

If for example one expected a drought frequency of 1 in 5 it is easy to calculate that 2 droughts one after the other can occur reasonably often but to have 3 droughts is truly exceptional.

Farmers could pay relatively small premiums to insure against the third drought.

Farmers would need to develop a management plan that allowed for the first drought.

The second drought would need additional credit.

The third drought in succession would increase the farmer's debt to an insupportable level.

An insurance scheme could then step in with the knowledge that such a succession of droughts is not common and pay out would be in the acceptable 1 in 25 or 1 in 50 range that would allow premiums to be kept low.

    * Premiums would have to be paid over a period longer than a year.

It would not be possible to join the scheme after two droughts and then leave and rejoin again.

    * An army of assessors are needed to measure individual crop if the pay out is on the deficit between the drought yield and the average (or insured) yield. Instead the payments could be made on a district average basis with farmers choosing their own level of cover.

If the district average is 10 qx. per hectare for wheat the drought insurance could make a payment if the district average yield was less than 5 qx. for two successive years. In the third year of drought the insurance scheme would make up the balance to 10 qx. Say the district yield was 4 qx. in the third year the payment would be equivalent to 6 qx. Farmers could make a choice. If they wished to insure for a higher or lower level. Farmers would not be penalised if they had a yield above the district average.

District average yield of cereals.

Response

Year 1.   10 qx./ha.

Average yield. No action.

Year 2.    5 qx./ha.

Drought alert - stage one. Farmer should use saved funds for this drought.

Year 3.    5 qx./ha.

Drought alert - stage two. Cash reserves exhausted more credit needed. 

Year 4.    4 qx./ha.

Insurance pay out equivalent to 60% (deficit between 10 qx. average and 4 qx. actual yield).

    For the individual farmer the pay out would be 60% of the yield insured for.

    * There would be no inspection of the farmer's field.

If he gets a higher yield through good management or good luck the pay out is the same.

    * The yield insured for could be less or more than the district average.

The farmer's yield may be less or more than the district average and he can insure accordingly.

Alternatively he may only wish to insure for the Break Even Yield that covers his cash cost.

If he insured for 10 qx., he would obtain a payment equivalent to 6 qx. If he insured only for 5 qx. he would obtain a payment for 3 qx.