Does farming pay?

Clifford Shambare

This is Part Three of “Does farming pay?”.

In this article I want us to consider the viability of a medium sized commercial farm in Agro-ecological region 2 of this country with twenty hectares of arable land and thirty hectares of grazing.

Here I have decided to use a 20 hectare arable farm in Agro-Ecological region 2 arbitrarily since it serves well as some sort of median.

But before proceeding with this discourse, I want to make one point clear here. Originally, for the land reform programme, it had been decided to plan farm sizes based on region and viability criteria. But it appears that as time went on, the planners abandoned this scientific approach for two reasons. One reason was political expediency while the other was the desire to settle as many people as possible on the land concerned. So in a way, these reasons were somehow interlinked.

Under the new scenario, the previous communal farmer’s condition improved somewhat in two aspects—that is better soil and more land to farm.

But obviously, the large scale commercial farmers, who were mostly white, suffered considerable loss. Under those conditions some of them accepted to be co-opted in the new system while others either voluntarily quit or were forced out by circumstances.

So now here we can see already that this kind of approach was going to, and actually aroused, considerable controversy on both the commercial and political fronts.

Naturally, the West did not take kindly to that kind of situation since it played havoc on capitalism with its system of agricultural financing (that is) based on title deeds.

But don’t get me wrong here; I am not saying, nor am I implying, that land reform should not have been implemented. All I am saying is that such a situation as is pertaining even now, should have been prepared and catered for in advance. If not implemented at the appropriate time, then a system of corrections should have been designed and implemented without delay, concurrently or soon afterwards.

So, back to our 50 hectare farm size for which 20 hectare arable and 30 hectares grazing. Here, at 5 LUs per hectare the maximum number of cattle that can be reared with minimum land degradation is approximately 8 head. This is a herd that, if the farm is mechanised, can only contribute minimally to the commercial operation. However, if not fully mechanised, this contribution becomes significant.

In order to get to the base of our current challenges in this realm, let us start by carrying out some budgeting process in which, for convenience, we ignore the livestock component.

First of all, such a farm needs an average sized tractor of say, 70 horsepower. This costs about US$23 000. If the farmer does not have the tractor it will cost them US$2 200 per year to hire land preparation services — that is 110 by 20. If they happen to get a loan to purchase the tractor, in the past they would only be granted a medium term loan of three years. But under normal accounting practice, five years is used to calculate depreciation, so we use that figure here.

In addition, they will need basic equipment to operate, with the tractor providing the motive power. These are a plough/disc, a planter, a boom sprayer.

A disc costs US$7 000, planter at least US$10 000, a boom sprayer about US$5 000. Therefore total depreciation costs before interest will be 9000 per annum — that is, US$ 450 per hectare.

In practice such conditions may well prove difficult for many farmers to meet. So they may have to purchase second hand equipment since the new (one) may be too expensive for them.

In a country such as Zimbabwe, either method is difficult to apply whereas in South Africa, banks go out of their way to provide such services.

As an example, here is an advert from Standard Bank in that country made by the bank through the mouth of a South African farmer: “There is a lot more to think about when it comes to growing crops( . . . ). That’s because agricultural medium to long term loans are structured to meet my requirements, so when I need money for any major capital expenditure I talk to Standard Bank ( . . . ). They offer loans on a fixed term basis. Loans I can repay over an extended period which means I can plan for the future and get on with farming without having to worry ( . . . )”.

And closer to home, here is a quote by Robin Cooke from head of Zimbabwe Tobacco Association in a Tobacco Today magazine issue of April/June 2011: “There is too, an awakening that capital investment needs more leeway on repayments. Perhaps three year borrowing in the cold light of day needs five years to cater for the ‘average’ grower ( . . . )”.

After acquiring and paying for all his (necessary) equipment a farmer is assumed to run his farm at a more manageable cost.

In addition, if they are growing maize, they will need to hire and pay labour at say, 60 labour days per hectare. This will cost them approximately US$80 per ha that is US$1 600 per season. They will also need to pay management at US$300 per mensem. This works out at US$3 600 per year and US$180 per hectare.

But before we proceed with our analysis, let us briefly look into this aspect of the matter. Here the manager’s salary will depend on the size of the farming operation as determined by the total budget of same.  Here I have used an approximate cost figure which can be modified accordingly.

Overall, it costs approximately US$900 in direct costs, before interest, to farm one hectare of maize (see Part Two) including interest at 49,8 percent, but excluding depreciation, labour and management costs. If we factor in these three, it will cost the farmer approximately US$2292 per hectare. But if we factor in insurance and machinery maintenance costs at 2 percent and 3 percent respectively, as well as 2 percent crop levy, the figure goes up to US$2 452,44 per hectare. (However, today, the insurance aspect for crops other than tobacco, seems to have been abandoned. Hopefully, we shall have time to delve into this subject at some point through these articles).

So here is where the matter thickens up, but why? You may want to know. This is where the crop price becomes critical. Here whether the farmer will make a profit, let alone survive, will depend on the price he is paid, say per tonne of maize. Today in this country this has become a contentious issue.

At this juncture, let us play around with maize price figures in order to see how they affect the whole system. Currently the GMB is paying the farmer US$90 plus $100 000. Now due to the unstable exchange rate, the RTGS part presents its own challenge to the equation. Here let us use the current auction rate of 1: 546,8254 for 30/8/22. If we do that US$182,873 will be realised from $100 000. Add US$90 and you get US$272,873 per tonne.

This is a price that augurs well with the import parity price of maize. But at this price, one needs approximately 9 tons per hectare to break even. Now, in practice this is not an easy yield to achieve. At this point I know you are querying why I came up with a break-even yield of 4,8 tonnes per hectare in the Part Two of this piece. But in that case I had deliberately left out depreciation plus management, insurance, equipment maintenance costs and levy.

So to achieve such a break-even yield will depend on a number of other conditions being met. Here are some of them: Is the exchange rate going to stay where it is? Does the farmer have adequate equipment? If not, is he getting the services he requires and on time and at a commensurate cost? Is the farmer getting a whole package of funding that he requires including working capital? Is he getting the inputs in time and adequate amounts of same? Are input prices affordable and at prices that enable the farmer to remain viable?

A close look into the matter shows that currently, very few of these questions can be answered in the affirmative.

Then there is another critical aspect to this matter — that is, that of co-ordination at both the policy and operational levels. Here let us zero in on one critical example. This concerns the matter of funding and/or (agricultural) financing.

On the one hand, concerning this matter, one often hears the authorities accusing the farmers for their unwillingness — or is it inability — to pay back debt. On the other hand, at the same time, the farmer is complaining of the inability of the GMB to give him the sort of crop prices high enough for him to go back to the land.

On looking closely into this matter, we can make the observation that during the early 2000s, the price of maize was about US$399 per tonne. So what has caused the tumble to current levels?

Obviously, at some point, the Government must have removed the subsidy on the crop, but why? Here most likely, the former may have been advised against this practice by someone, most probably, some financier or some donor. But then, why move to such extremes, cutting subsidies by something like US$127?

Ultimately, here is my overall assessment of this matter. On his own part, the farmer seems to be (being) unable to articulate the true extent of his challenges. Considered from another perspective, the farmer is failing to join the dots here. He appears to be concentrating on the matter of the price whereas he should point out that it is the low price that is causing him to fail to repay his loan in full.

On the other hand, the authorities seem to be deliberately ignoring — or maybe they are not even aware — of this predicament of the farmer.

As it turns out, concerning such a matter, in “Why Nations Fail”, the authors, Daron Acemoglu and James A. Robinson do not have much good to say about marketing boards which they term ‘extractive institutions’ that deprive farmers of the rewards of their sweat.

Here is a quote from page 338 of the book; “( . . .) Many expected the worst of practices of colonial rule in Sub Saharan Africa to stop after independence and the use of marketing boards to excessively tax farmers to come to an end. But neither happened. In fact, the extraction of farmers using marketing boards got much worse ( . . .)”.

Up to now, many people in this country seem not to realise that the role of the marketing boards here is to extract farmer’s income as tax for its own purposes. Instead, they believe these boards are there to assist the farmers.

For example, when the Command Agriculture Programme was launched, local financial experts through, The Standard newspaper, alluded to the manipulation of AMA bills meant for that purpose by some parties in high places. But at that time nobody seemed to bother following up on this matter. In the end, it was alleged by the same experts, that the buyers of those bonds were trading them on the market in violation of the contract conditions that forbade them to do so. This explains why the interest rates on this funding are untenable to the farmer.

So, from now on, we all know why the agriculture boards behave the way they are doing in this country — working against the interests of farmers. In fact, this explains why the South African farmers fought the government demanding to have their boards privatised.

But other governments, particularly those in the developed world, behave differently when it comes to such matters.

They endeavour to ameliorate the situation with farmer subsidy packages as a matter of course, thereby keeping both the farmer and the industry in a functional state. Without this sort of intervention, enormous challenges can beset the whole economy.

So, from this analysis it becomes easier to appreciate the dilemma in which the Zimbabwe government finds itself. It needs to balance its budget while at the same time ensuring that there is food self sufficiency (and more) in the country. But then, one cannot say with confidence, that the latter is currently in a healthy financial position to perform its functions effectively.

So now, it becomes a matter of priorities. To my mind, whatever, the case may be, the government should not seem to abandon the farmers because of the critical role played by this industry in the economy — a role that does not need rocket science for one to appreciate the criticality of.

The current Zimbabwean situation speaks to a generally dysfunctional agricultural system in the country at the moment. It therefore, speaks to the need to go back to the drawing board by the authorities.

The vagaries that are always embedded in the agricultural industry at both the national and international levels make it imperative for whole governments to intervene. Therefore, any government can only ignore this need at its own peril.

Shambare is an agriculture economist reachable on 0774960937