Economic Factors in Hill Country Development

New Zealand Journal of Agriculture, Volume 94, Issue 1, 15 January 1957, Page 40

Economic Factors in Hill Country Development

By

R. H. SCOTT,

Land Utilisation Officer, Department of Agriculture, Wellington

r%EVELOPMENT of hill country has been brought to such a high state of efficiency by some farmers in some districts that estimates of potential carrying capacity on some hill-type soils made about 8 years ago are already being exceeded. Development methods that, have enabled one ewe equivalent per acre more than the estimated potential to be carried on a southern Hawke's Bay hill country property on two typical soil types are described in. this article and the financial aspects discussed.

IN the Soil Bureau Bulletin (n.5.)5 “A General Survey of the Soils of the North Island” information is given about the present and potential carrying capacity of the various soil types. This information was supplied in 1948 and 1949 by field officers of the Extension Division of the Department of Agriculture and was based on the knowledge at that time of the capabilities of the soil types. For instance, among the hill country soils, of which there are extensive areas in southern Hawke’s Bay, two, the Atua silt loam and the . Taihape silt loam, had an estimated potential carrying capacity of between 2 and 2-1 ewes and between 2 and 3 ewes per acre respectively.

Today these estimates are obsolete, for carrying capacities equivalent to 3g ewes per acre have already been achieved on these soils, and the ultimate carrying capacities have not yet been reached.

The farm is about 40 miles southeast of Dannevirke and is of 610 acres, which is typical of the size of most of the hill country farms in the Hawke’s Bay and Wairarapa districts. There is very little flat land on the farm, most of which comprises rolling to moderately steep country, with some steep parts. About 400 acres, or twothirds of the area, can be disced, the remaining 200 acres being too steep for cultivation. The average annual rainfall is about 45in., which is fairly evenly distributed throughout the year, except for a dry summer period typical of the Hawke’s . Bay area generally. Condition of the Farm When the present owner took possession of the farm in 1947 it was in very poor condition and fences were poor and mainly ineffective. The only stock water supply was from one dam and a creek at the back of the farm, these having to serve 610 acres, divided ostensibly into 15 paddocks. Pastures comprised mainly browntop, danthonia, Yorkshire fog, flatweeds, and moss, and there was scattered manuka over the whole property. Fertiliser had never been used and

the buildings were in a poor state. The sheep taken over with the property were of a type one would expect to find on such a farm.

Development Programme The owner started his development programme in the first season (194748) by topdressing by hand the whole farm with 2cwt. of superphosphate per acre, and a vigorous start was made on scrub cutting. In the 1949-50 season oversowing with white and subterranean clover was begun, again by hand, 230 acres, or about 40 per cent, of the farm, being treated that season. To accelerate the development programme a beginning was made 5 years ago to clear some areas of stumps,

cultivate, and sow to pasture. The table sets out the development work which was completed in the 8 seasons ending 30 June 1955: —

TABLE I—IMPROVEMENTS EFFECTED IN 8 SEASONS ENDED 30 JUNE 1955 Area oversown with subterranean and white clover .. .. .. 434 acres Area cultivated and sown to pasture .. .. .. • • 187 acres Dams constructed for stock water 15 Farm access tracks constructed .. 4 miles Additional subdivisional fences .. 40 chains Air strip 16 chains x 2 chains constructed

Development Costs Most of the clearing and cultivation work has been done by agricultural contractors with heavy equipment. The'first paddock, of 35 acres, which was cleared of stumps, broken up, and sown to pasture in April 1952 cost £24 ss. per acre. The work consisted of clearing stumps and logs with a blade attached to a heavy tracklaying tractor, two discings with giant discs, a cut with tandem discs, levelling, harrowing, and sowing to pasture. Another paddock worked out at £2O Os. Bd. per acre, and an area of 40 acres sown to pasture in March

1955 cost £22 19s. 3d. per acre. The cost components for the paddock which cost £2O Os. Bd. per acre were as follows: .

£ s. d. Land clearing, cultivation, and sowing costs .. .. 10 9 10 Lime (1 ton per acre) .. 2 5 6 Superphosphate (3cwt. per acre) .. .. . . . . 2 010 Pasture seed .. . . . . 5 4 6 20 0 8

The cost of constructing dams for stock water has ranged between £39 and £45 each, new subdivision fencing has worked out at £7 per chain, and constructing and sowing down the airstrip accounted for £4BO. Of the total land development expenditure of £8720 incurred in the 8 years to 30 June 1955 no less than £6966 or 80 per cent, was for improving existing pastures by oversowing and topdressing and establishing new pastures.

Physical Results The main factors to measure the physical results achieved on this farm are (a) the stock carried per acre and (b) the wool production per acre.

All stock on the farm have been converted to the common denominatorthe ewe—and from a carrying capacity equivalent to 1.6 ewes per acre in the winter of 1947 a carrying capacity equivalent to 3.7 ewes per acre was - achieved by the winter ■of 1955. Table 2 sets out the increase over the period.

TABLE 2—CARRYING CAPACITY PER ACRE Ewes Ewes per per acre acre 1947 .. .. 1.6 1952 .. .. 3.0 1948 .. .. 2.2 1953 .. ..3.1 1949 .. .. 2.5 ' 1954 .. . . 3.5 1950 .. .. 2.4 1955 .. ..3.7 1951 .... 2.4

Not only has wool production per acre nearly doubled, but the quality of the wool has improved considerably, and in the 1955-56 season the clip obtained the highest price at the first Napier wool sale. The trend in wool production per acre is given in Table 3.

TABLE WOOL PRODUCTION PER ACRE Lb. Lb. per per acre acre 1947- .. 17.0 1952-53 .. 24.2 1948- . . 19.5 1953-54 . . 26.3 1949- .. 21.7 1954-55 .. 29.6 1950- .. 19.1 ' 1955-56 .. 32.9 1951- . . 23.1

The farm had been run as an extensive pastoral enterprise, with farm revenue coming from the sale of wool and store and breeding stock. . However, with the improved pastures it has been possible to fatten lambs, and in the 1952-53 season a draft of 128 fat lambs was sold, these being the first lambs ever fattened on the property. In 1953-54 198 fat lambs were sold and in 1954-55 202 were sold.

Financial Aspects To appreciate the initial financial difficulties of the farmer it is neces-

sary to look at the capital limitations of the enterprise when he took over. As a returned serviceman he obtained rehabilitation finance, which was at a lower interest rate than the normal State Advances Corporation lending rate, and the margin between the value of. the security offered for the loan and the amount of the loan was much less than that required under the Corporation’s normal lending policy. In June 1947, at the time he took possession of the property, the position broadly was as set out in Table 4.

TABLE 4—CAPITAL STRUCTURE OF ENTERPRISE IN JUNE 1947 . £ £ Value of land Mortgage .. 7,250 improvements 5,700 Value of livestock . . 1,600 Cash .. ■ .. 600 7,900 7,250

This was not an inspiring financial picture for any lender, nor was it a very encouraging one for the farmer, for he was faced with two immediate problems: — 1. The necessity to begin building up the fertility of the property, and . 2. The necessity to replace the poor ewe flock. With the £6OO cash and no other equities, but with hope for the future, a capacity for hard work, and innate ability in judging the quality of livestock, the farmer cast the die by purchasing a line of good, though old,

ewes, selling most of those taken over with the property, and purchasing sufficient superphosphate to topdress the whole farm with 2cwt. per acre. In spite of what some considered to be foolhardiness, the results for the year were satisfactory; there was a cash surplus of £317. Also during the year a stock firm with knowledge of the good personal factor supplied some short-term seasonal finance. In the following year the owner began his cattle enterprise by buying some breeding cows, and today about 60 Aberdeen Angus breeding cows are carried as well as replacement and dry stock.

To analyse each year’s financial transactions makes tedious a study of this nature, so the figures set out in Table 5 apply to the 8 years ended 30 June 1955.

TABLE S—RECEIPTS AND PAYMENTS FOR 8 YEARS FROM 1947-48 TO 1954-55 £ £ Farm running Cash receipts 34,910 expenses 13,130 Additional capiInterest on tai obtained mortgage 2,220 from outside Principal re- sources .. 2,510 payments on mortgage 1,170 Taxation . . 3,380 Capital Expenditure Land development .. 8,720 Improvement to dwelling . 900 Livestock . . 4,030 Equipment 1,310 34,860 Cash surplus 2,560 37,420 37,420

In Table 5 some of the figures differ from those disclosed in the farm records. As indicated earlier the mortgage was one with the special low interest rate to returned servicemen. To bring the mortgage payments more in line with what many farmers were paying, the mortgage was recomputed on the basis of one for £7250, repayable over 30 years, with interest at 4j per cent., payable half-yearly. Taxation was also recomputed, mainly because of the different annual mortgage interest payment which was used. The figures show that after taking into account the additional capital of £2510 which was injected into the enterprise over the period, and meeting all farm running expenses, most overheads, taxation, development expenditure, and the cost of additional livestock there was a cash surplus of £2560. However, no allowance has been made for the living expenses of the farmer over the 8 years and the ■cash surplus met this. However, the figures demonstrate that the cash receipts from the property were sufficient to meet just over 80 per cent, of the capital expenditure of £14,960. ■ If the farm is regarded as a business enterprise, one overhead item, depreciation, has been neglected. On plant the depreciation over the period amounted to £630 and on buildings £375. (Only one-quarter of the depreciation on the farm dwelling has been charged against the farm.)

Mortgage Repayments . Table 5 shows that £ll7O was paid off the mortgage during the 8 years, the mortgage being repayable on the amortisation principle; that is, it is repayable over 30 years by equal annual amounts, these annual amounts comprising part of the principal and interest on the unpaid balance of the mortgage. In this case if the £ll7O

had not been repaid, the additional capital required for the enterprise would not have exceeded £1350, whereas the actual amount was £2510. Where the resources to develop a property are limited it appears illogical for a farmer to be making principal repayments on a mortgage and at the same time to be reinvesting the greatest possible amount of surplus

revenue in the enterprise to increase its productive capacity. Where a property has a considerable productive potential and the occupier wishes to attain the potential, there appears to be a case for institutions which provide long-term farm mortgage finance to consider placing mortgages on a flat basis for a period until the productive capacity has been increased, at which stage the mortgage could be placed on an amortisation basis. Taxation Taxation payments amounted to £3380, of which £2460 or about 72 per cent, comprised income tax. Though the amount is considerable, it cannot be claimed that its payment has been a hindrance to the development of the farm, particularly as a considerable amount of the surplus revenue reinvested in the property has been

treated as an allowable expense for taxation purposes. Since 1950 to encourage farmers to carry out land improvement work concessions have been made for expenditure for such work. For instance, where unimproved land is cultivated and sown to pasture all expenditure is allowable as a deduction when taxation is assessed, and in addition farmers can expend an aggregate of £3OO in any one year (increased from £2OO in 1954) on such items as the construction of farm access tracks and aeroplane landing strips, the sum being an allowable expense item. On this farm the expenditure on land improvement work met from farm revenue over the 8 years was £6210, and except for £740 this was an allowable expense for taxation purposes. In other words, most of the capital expenditure on land improvement work has been allowed as farm running expenses.

Accelera+ed Development Where resources are limited and the cost of improvement work is being met out of surplus revenue stock carrying capacities cannot be raised quickly. On this farm it took about 4 years to raise the capacity from 1.6 to 2.4 ewe equivalents per acre, and between 6 and 7 years to double it. When he began farming the owner had no equities which could be used as security for additional capital from outside sources and he was untried in developing hill country, and was therefore an unknown credit risk. His prospects at that time of being able to obtain additional capital to expedite development would have been very poor. Though it appears obvious that when expenditure is incurred on developing land to create more and better grass some money must also be spent on

additional livestock to utilise the grass, this simple fact is sometimes overlooked by those who advocate the rapid development of unimproved land. On this farm for every £lOO spent on land improvement work over the 8 years until 30 June 1955 an additional amount of £46 had to be spent on additional livestock, or alternatively the farmer had to forgo some immediate revenue by retaining stock to build up the productive flock. The economist explains the position by saying that the productivity of one resource depends on the amount of other resources with which it is combined. If too much capital is employed in pasture improvement and there is insufficient left to purchase stock and obtain a return from the investment in pasture improvement, there is an unbalance of resources and profits cannot be maximised in as short a time as possible.

Economics of Development Programme The farm management economist’s tools of analysis such as marginal analysis have not been adopted to test the economics of the development programme on this farm, mainly because in most land development projects increasing inputs of capital and labour do not necessarily result in an immediate financial return, even if prices, for farm products and farm costs vary little during the period. In land development projects there is usually a considerable lag between expenditure and resulting maximum returns. In this case the farm has been regarded as a business enterprise and two factors have been computed to test results. The first factor is “owner surplus per acre” and the second the percentage return on the owner’s investment in the enterprise. On this farm owner surplus per annum is the amount available to the owner after meeting farm running expenses, depreciation on assets, interest on the mortgage, and interest on the addi-

tional capital invested in the enterprise. In effect owner surplus is theamount available to the owner to meet living expenses, taxation, and investments such as principal repayments, on the mortgage as well as reinvestments in the enterprise. This ownersurplus is converted to the index owner surplus per acre. Table 6; shows the owner surplus for 1954-55.

TABLE 6— OWNER SURPLUS FOR 1954-55. ' £ £ Receipts .. . . .. 5,800 Stock inventory increase .. 490 6,290. Farm running expenses .. 2,390 Depreciation . . .. .. 205 Interest on mortgage .. 260 Interest on capital invested in enterprise by owner from revenue, and interest on additional capital injected into enterprise .. 685 3,54Owner surplus .. - ... 2,756 Owner surplus per acre £4 10s. 3d.

The chart at right shows the trend in the components of the gross farm income per acre since the owner took possession of the property. In the first two seasons the owner surplus per acre gradually increased and in the 1950-51 and 1951-52 seasons there was a considerable increase owing to the high wool price obtaining in the 1950-51 season. Part of this amount was paid out in that season and the balance comprising wool retention moneys was paid out the following year to enable the farmer to push ahead with his development programme. In the 1952-53 season receipts from wool were lower, but since then wool receipts have been higher owing to the greater quantity produced, and also to the better quality of the wool. The result during the 1953-54 and 1954-55 seasons has been an owner surplus per acre of between £4 10s. and £5, comprising a little over 40 per cent, of the gross farm income per acre.

To arrive at a percentage return on the farmer’s own investment in the enterprise the following computations, though subject to error, were adopted. They actually understate the percentage return on the investment.

TABLE 7—FARMER’S INVESTMENT AND"" RETURN Investment in Enterprise Over 8 Years to 30 June 1955. £ *Total amount reinvested from surplus farm revenue in the property for development and improvement work .. .. .. 7,110 Total amount reinvested from surplus farm revenue in equipment, less depreciation on the equipment .. .. .. .. 780 Total amount invested in additional livestock .. ~ .. .. 4,030 Amount of principal repaid on the mortgage, thus increasing the farmer’s equity in the property 1,170 Total investment by farmer up to 30 June 1'955 .. .. .. 13,090

Amount Available in 1954-55 as Return on Farmer’s Investment £ £ Farm receipts .. .. .. 5,800 Less: —■ Farm running expenses .. 2,390 Depreciation . . . . 205 Interest on land mortgage 260 Interest on additional capital investment in enterprise .. .. . . 125 Wages and management reward to farmer .. 920 3,900 Amount available as a return on farmer’s investment 1,900

Though not a perfect assessment, the wages and management reward was computed by allowing the farmer an amount equivalent to the ruling farm wage rate and to this was added 2 J per cent, of the total capital investment in the enterprise. This latter was regarded as a reward for managing the capital. The percentage return on the farmer’s investment was therefore about 14. With farm prices on the present basis the return to this farmer will be sufficient to encourage him to continue his land development work, and he will consider it to be a worthwhile investment. The Future Raising the carrying capacity of a property brings in its train a number of problems and increases the decisions which the farmer must make. On this farm the major problem to be faced in the immediate future is the one arising from the fact that the property has nearly reached the limit of a one-man unit. The question the

farmer must now ask himself is: “Shall I expand, further and what are the problems associated with this expansion?” The employment of labour will be essential if production is increased further and this means either the provision of adequate accommodation on the farm or the prospect of a farm worker being provided with a rented house elsewhere. It is likely that the only satisfactory stable labour will be provided by a married man, and to erect another dwelling on the farm may result in an additional capital outlay of about £3OOO. The cost of labour and the interest on this extra capital could well result in an immediate reduction in the owner surplus from about £4 10s. per acre to a little over £3 per acre. With the increasing land development work which is being done in the district the question of obtaining additional farm labour will become an issue, and consideration may eventually have to be given to the establishment of a group of houses in the county village for a labour pool, the

wages of the workers to be guaranteed by some farmers’ organisation. There would be problems associated with such a scheme in this locality, such as the transport of the workers to and from farms, as the distances to travel are likely to be considerable. No doubt this could be solved. The use of labour from a pool would help considerably to keep down the capital expenditure on a farm such as this. The farmer, of course, could carry on for a period without doing any further development work and endeavour to build up a reserve fund for an additional dwelling and for further development work. This would take several years, and only by careful budgeting can the economics of the alternatives be assessed. This question of having to employ and house labour to increase the productive capacity of a farm beyond the one-man unit stage is a serious one from the point of view of national production. There are cases where a farm can be made into a full two-man unit, but for a number of reasons the farmer is unwilling to house and

employ the necessary additional labour unit. There are also the cases where production can be raised, but not to the point where two full-time labour units are required. In these cases, if no . labour is employed, from the national point of view latent potential is left untapped. A study of one farm cannot be expected to show up all the problems associated with developing hill country, but it appears: — 1. At present it should be possible to develop economically considerable areas of hill country from surplus farm revenue. 2. In most cases where resources are limited and development is being done from surplus revenue raising of the carrying capacity cannot be rapid. 3. Taxation concessions to farmers should be some stimulus to land improvement on hill country. 4. Sympathetic administration of mortgages is a requisite to sound development of hill country.

5. The problem of increasing thecarrying capacity of a hill farm beyond the limit of one labour unit is a major one in many private landl development projects.

Poultry Keepers’ Course of Instruction

A COURSE of instruction for both; commercial and household, poultry keepers will be held at Massey Agricultural College on 5, 6, and 7" February. Copies of the programme of thecourse will be supplied on request by secretaries of poultry clubs, by the Registrar of Massey Agricultural. College, Private Bag, Palmerston North, or by the Secretary, NewZealand Poultry Board, P.O. Box 379,. Wellington. A similar course of instruction will'., be held at Canterbury Agricultural! College, Lincoln, in May.

* The actual amount spent on land development and improvement work was £9620, but £2510 of this was obtained from outside sources and does not represent an investment by the farmer.