STUDY OF DEVELOPMENT OF HILL FARM

Press, Volume CIX, Issue 31967, 19 April 1969, Page 8

STUDY OF DEVELOPMENT OF HILL FARM

“I think that this study does indicate the sensitivity of the farming industry to changes in prices and costs,” said Mr R. A. Milne, senior farm advisory officer of the Department of Agriculture at Rangiora, after describing the development of a North Canterbury hill country farm and looking at the likely future course of progress on the property under varying price and cost situations at a seminar on farm development held this week by the North Canterbury 7 Agricultural Advisory Committee.

The farmer, he said, hadi little control over the prices: » that he received for his products add not a great deal of control over his cost structture. If farmers were to continue - to expand production . at the rate required a more , stable prices and costs situ- . ation would be desirable to enable more effective longI term planning. As in other businesses rapid development and expansion could only proceed with the use of long-term finance. Development from revenue was in many cases too slow and this study had showo that under adverse price situations there was little surI plus available for further in- : vestment. Mr Milne said that the proI perty under study was one I where development had been j in progress at an accelerated i rate since the present owner | took possession five years ago. It was in North CanterI bury in a 28 to 30in rainfall ■ area. It was a hill farm of 1900 acres rising to 1500 ft above sea level and included 1200 acres of moderately steep tussock hill, 500 acres of ploughable downs and 200 acres of steep, eroded gullies. The hill country faced the south-east, had good contour shelter and would hold on well into dry periods. At the outset the property was in 10 paddocks, which included most of the steep gullies, and one'hill block of 1200 acres. In 1964, it was obvious that development would be necessary if the enterprise was to survive. The programme call- | ed for regrassing the downs i which had run-out to browntop. Subdivision, oversowing and topdressing of the hill country and gullies were also to be included. The hill was covered in a dense mat of browntop and dantbonia and it was decided to clear this out with heavy stocking with sheep and cattle in preparation for over-sowing. Before this could be done, in addition to new subdivision fencing, renovation and cattle proofing of existing fencing was required. To improve access on the property tracks were essential. Water supply, cattle yards and a hay bam were also needed. And extra I stock would be needed to re- : coup the development expenditure. Up to this year 360 acres of the downs had been regrassed. All of the cultivation had been done by contract. The pasture in all cases

i had been sown down with ! turnips and this had supplied the major part of the ■ winter feed up to the present. These pastures had established well and under higher stocking and fertiliser; rates were still improving/ Two paddocks had yet to be regrassed and one of these had been overdrilled. Eight hundred acres of hill had been oversown and topdressed. This had been extremely successful and the subdivision into smaller blocks, which ranged from 130 to 400 acres, had meant that this part of the farm, be-, cause of its favourable aspect J was contributing a good deal to the increased stock rates.' Even the undeveloped block’ of 400 acres had improved under mob-stocking at various times of the year. The 200 acres of steep, eroded gullies had also been oversown and topdressed once. Three miles and a half of new subdivision fencing had been erected. All boundary fences and some of the internal fences had been cattle proofed and all internal fences had been brought up to a reasonable standard. The existing water supply on the property was sufficient to meet stock demands in the early stages of development. Stock numbers had, however, more than doubled and to meet the increased demand the water supply had been extended. The existing scheme had been coupled to the rural water supply scheme and an adequate supply was available now in ail paddocks. Development was now slowing down and the acreage of new-sown turnips and grass had declined. When large areas of winter crop were grown this was sufficient for normal winter supplies. The smaller area of winter feed was being augmented by bay made on the property and a hay barn had been erected. Cattle had been purchased initially to do a clean-up job on the heavy cover on the hill blocks prior to oversowing. The cattle had been retained and yards built to handle the 100 breeding cows and supporting stock. The property had been almost without access tracks and several miles of track have been cut to improve the handling of the farm. At the take-over, stock numbers were 1400 Corriedale ewes, 400 hoggets and 30 other sheep. Since development started stock numbers had steadily in-

creased and new Included' 2800 ewes, 700 hoggets, and 100 other sheep, 100 breeding eows and 43 other cattle—a total of 4120 stock units compared with 1700 at the outset. By the time the purchase of the property had been completed and stocked little finance had been available for development. Consequently a development loan had been obtained from the State Advances Corporation. This amounted to $24,000 for regrassing, oversowing, fencing. tracks, and stock. Later a further loan of $6OOO was granted for stock, cattle yards, water supply, and hay bam. The total development Io date had cost $39,000 in borrowed capital. This was an •expenditure of $39,000 for an increase of 2360 stock units or $l7 per stock unit. The capital situation at the end of the 1968-69 year was expected to show that the current account would stand ;at a debit of $9OOO. There was a first mortgage of $24,000 ■and development loans totalling $30,000. This Was a total indebtedness of $63,000. Assets totalled $148,000. ' As to the course of events iin the next four years. Mr. Milne said that cattle numjbers would remain static at: ! today’s figures of 100 breeding cows while ewes were ■calculated to increase progressively to 3500 at the end ■of 1972-73 and hoggets to 11000. Explaining why cattle numbers were not being in-, creased. Mr Milne said one’ factor was the type of country and the other was the capital cost and that more sheep could be put on the property relative to eattle for the same cost. Development was to be resumed in the second year at a moderate level and was to be financed out of revenue. It would consist of subdivision. oversowing and topdressing of the remaining native block. This development was expected to cost $5OO in the second year and $lOOO in each of the two succeeding years. Cultivation and regrassing would remain at a standard 60 acres a year throughout the period. Mr Milne then proceeded t<r examine the financial position on the farm under varying price situations for the next four years. Taking prices at about present levels with wool at 30c net and store lambs at $4. Mr Milne said the cost situation of this farmer would improve considerably over the period. Not taking into account the effect of offsetting past losses during the development period in calculating tax, which would improve the net eash situation, the improvement in cash for the period —the amount available to the farmer for reduction of current account or for capital expenditure—would be $9BOO. In the case of tax not being payable the effect on the cash available would be to show a surplus of $12,671, or a total improvement of $21,671. This was a relatively favour able situation. But if the price of wool was 25c and of lambs $3.50 there was a very different picture. At this level the current account would improve by only $4225 during the

perioa u tax was payauic. and even in the event of no tax being payable during the period the current account; would only show a small ere-: dit. At this level of prices there was little margin in the event of any adverse condition such as a poor lambing percentage, a drop, in wool yield or a major expenditure on feed in the event of prolonged drought. v However, if woo) rose to: 35c and lamb was at $4.50, a rapidly improving cash position was shown. Even where tax was payable the, current account would be in a healthy state at the end of the period and where no tax was payable would result in an improvement of $33,821. In either case the farmer would be in a sound financial position and could embark on further development if desired. These calculations Mr Milne said, had been based on expenditure at current levels. In the unlikely event of farm costs remaining stable for the next four years this property could remain solvent with prices at current levels. Then looking at the effect of an annual increase of 3) per cent in farm costs with wool at 30c and lamb at $4. Mr Milne said the position

. nao cnangeu quite markedly >;from that where farm costs >;were stable. The farmer at I the end of the period would - have $3186 less cash available. and would still have a , debit in his current account. [ Without tax the difference t would be $7359. An even worse situation de- . veloped if prices fell to 25c I for wool and $3.50 for lamb ! and costs rose by 3) per cent. In this case the cash surijplus fell sharply. Because i drawings, capital payments . and stock increases were add- ; ed to the surplus for tax purl poses the farmer was still ■ faced with tax payments In I the first year the available . cash surplus was sufficient to! - meet tax payments anil rei duce the current account! I slightly, but in each of the! . succeeding years, because of; i the cumulative effect of in-’ . creasing costs, surplus cash, was insufficient to meet tax! : payments and as a result the . current account would have: i increased by the end of the; : period. This was not an unusual situation in recent years. ■ < 1 Most sheep farmers had ;, heen faced with this situa- ! lion over the past few years '. when wool prices fell, and indeed the position had only ; been relieved by improved ;■ returns from meat and the ■

wix-siu ivwarus UlVCTSinca* tion on many farms. The position of the farmer in this study would be sound if prices remained at present levels and costs did not rise. Even if costs rose at the rate suggested his position would be reasonably good in the period under review. Increasing output should take care of rising costs. But in the event of a price drop the position could become serious if prices remained at a low level for too long. This might force an even greater increase in production and to do this further development borrowing might be necessary to meet ■ the situation. Mr Milne concluded that should the fari mer wish to borrow further ! for development, or anv other l purpose, there was still some ! borrowing margin. The investment return on I the farmer’s capital of $85,000 ■in 1969-70 was 7.7 per cent. ; but on the 1972-73 capital the ■ return rate would drop to 7.3 I per cent at present prices ' and costs. This represented a I reasonable rate of return on ■ capital but the position ■ changed if the situation was : taken where prices fell and costs rose. At this level the ireturn on capital would be 4 | per cent at tbe start and ; would fall to 1.2 per cent in (the final year.