FARMING AND COSTS.

Waikato Times, Volume 111, Issue 18641, 20 May 1932, Page 12

FARMING AND COSTS.

OVERHEAD CHARGES. EFFEOT ON PROFITS. I I FALL IN INCOME. Estimates of the current value of the various types of land in occupation and the offer of advice on such matters as the most profitable methods of management, average land valuations and the actual producing value of different classes of land, are contained in the latest bulletin of the Canterbury Agricultural College. The subject dealt with is the nature and significance of overhead charges on the farm. It is pointed out that on average farming land, and in normal times, overhead expenses, including charges for the owner’s capital, the labour of the farmer and his family and 7 per cent, interest on the Government valuation of the land and improvements, have varied from a third to a half, and averaged about 4.5 per cent, of all charge and of all farm income. When income suddenly falls, as has happened through the fall in prices since 1929, these charges may absorb ■all or more than all of the farm income unless overhead costs can be reduced. For the year 1930 overhead charges of 6s 7d a sheep absorbed 98 per cent, of the farm income on wool ■country. On average South Island grazing country overhead charges of 8s 8d a sheep absorbed 67 per cent, of the farm income. For 1931, where production has not increased, overhead charges of 9s per sheep would absorb over 100 per cent, of the farm income on North Island grazing country, while overhead charges of £7 per cow, on average good North Island dairy land would' absorb 60 per cent, of the farm income. Determination of Value. There Is a constant tendency, the bulletin says, for overhead charges to Increase, especially in periods of rising prices. This increase is not always within the farmer’s control. For instance, in a period of rising prices, land tends to increase In value and those who commenced farming during this period are obliged to purchase on a rising market. Some loss Is Inevitable for -such people if a period of falling prices sets in. Hence, buyers of land are warned to avoid borrowing to the full extent allowed by the market. The value that is justified for any particular farm at any given time can be determined in the following manner:—An estimate of the most profitable method of running the farm over a reasonably long period must be made. Normal production and normal prices for the farm production obtained under this fmethod must be estimated. On the basis of the foregoing, an estimate can be made of normal farm Income, say, £2OOO. From this must be deducted an estimate of normal farm expenditure, including rates and land tax, interest on the value of stock and plant and on working capital, all working expenses, costs of repairs, renewals, depreciation, wages of management, and an allowance for contingencies say, £I4OO in all. The balance of £6OO represents the amount available for payment of interest on the value of the land.

This sum capitalised at the current rates of interest represents the capital sum of which interest can be paid, hr the productive or interest-earning value of the land. The capital value in turn, divided by the number of acres will give the productive value of the land per acre. If more is paid than this, if prices do not remain as high as was anticipated, if production is less, or if expenditure Is higher, then loss must result. If less is paid than this, if prices rise, if production is higher, or if expenditure is less, then profit results.

Advloe for the Farmers. Farmers are advised In future to start on a smaller area, which will not necesitate heavy borrowing on the security of land and stock. Whenever possible the money borrowed should be secured by a long-term amortised loan. If 1 per cent, is allowed for amortisation it will wipe out the debt in about 36 years. Borrowing against stock and plant, except possibly for working expenses, should be avoided as far as possible, as interest on current accounts is necessarily more expensive than a flxed loan. Even though overhead and working charges were reduced in proportion to the decline in export prices, the present fall in farm income would, it is contended, necesitate at least temporarily reductions in land values of the following order:—On high sheep country, selling wool only, land that was capitalised for 1925-29 on the average at £2 JOs per sheep carried, or 10s per acre, has now theoretically a capital value of about £1 per sheep, or 4s per acre; on halfbred sheep country selling wool and some store sheep, land that was capitalised at £4 10s per sheep carried, or £2 per acre, lias now theoretically a capital value of about £3 per sheep, or £1 6s 8d per acre; on belter-class sheep country soiling both wool and surplus stock, including .some fat stock, land that was-capitalised at £6 6s per sheep carried, nr £5 per acre, has now theoretically a capital value of about £4 per sheep, or £.'! per acre; on North Island sheep counttry, land that was capitalised at £5 per sheet carried or £7 per acre, lias now theoretically a capital value of £3 pec sheep, or £i per acre; on good North Island dairy country, land that, was capitalised at £BO per cow milked, or £3O per acre, lias now theoretically a capital value of £SO per cow, or £2O per acre. Mooting Present Position. The values of land given are called theoretical because unless other overhead costs, including interest on stock and plant, rates and taxes, together with working costs, are also correspondingly reduced, tho whole of the reduction consequent upon the decline in prices is likely to fall on land values. Until 'other overhead and working costs are adjusted, much farm land, and particularly the lowerpriced land, is a liability rather than an asset, for its net productive value 1» less than nothing. The present position of many farniW», particularly sheep, is extremely difficult, continues Ihe bulletin. To meet this position cither costs must lie reduced or income increased, or both. Overhead costs can be reduced by reductions made under privalo arrangements, under schemes such as Ihe Chamber of Commerce scheme or under the provisions of the Mortgagors’ Belief Act. The National Expenditure Adjustment Act is calcu-

lated still further to relieve the position. income can be increased by two methods, first, by increased production, which both Increases income and causes lower per unit costs, and, second, by an increase In the net market price of farm products. Offer of Advloe. Much attention has been given at Canterbury Agricultural College to nv’thods of increasing farm production and of lowering farm costs. Information bearing on these matters has been built up from economic research, farm management 'surveys and studies of farm costing and farm accounts. From tho study of such' data it is possible to reach estimates on mailers, such ns the most profitaide. methods of management, average land valuations and Ihe actual producing values of various types of land. Advice on these matters is available to these farmers who desire it. Any inquiry should he accompanied by a full description of the locality of the farm, the proposed method of management, and particulars of actual or estimated income and expenditure.