Farm Productivity Dwindling

Kenyan grain farmers have defied a long term decline in their terms of trade by making nation leading gains in productivity. Statistics show the average productivity growth for a cereal farming to have been losing in hectares to real estate. The cropping subgroup includes wheat and other grain producers and has out-performed despite the slow expansion.

In terms of the cropping operations, three quarters of these productivity gains have come technology. The magnitude of some of these changes is evident as you walk into farms.

The introduction of alternative crops such as canola has also been important as often such crops have a different planting and harvesting window to the cereals. Effectively this increases the amount of time labour and machinery resources can be used for a particular task in any given season.

Whilst productivity growth has been a good news story for farmers, figures indicate that since the turn of the century, the rate of productivity growth has slowed . Recent droughts do impact upon these figures however the slowing trend also raises questions about whether the major gains from past have been made. If this is the case, we will need to look for new technologies and methods to keep ahead of the terms of trade.

Analysis of benchmarking data for grain farmers in reveals two distinct trends regarding asset values and farm profits. The movement over time of farm assets and farm operating profit indexed against previous levels. Given that on average, 70% of total farm assets are comprised of farm land, reasonable inferences about farm land values can be made from this data.

It is clear from this data that, farm assets (and therefore farm land values) have increased at a faster rate than average farm profits. Since the 1990’s, it appears the discrepancy in rate of growth between the two has widened.

The other trend evident is the increased volatility of farm profits in the last decade. Partially this can be attributed to two severe droughts; however these seasonal fluctuations shouldn’t be ignored or excused because they have a very real effect upon financial returns in those years.

It cannot be ignored that farm inputs have also become very expensive. This can be attributed to high government taxation, financial crisis and EU regulations on what molecules to use and which not to.

Additionally, resistance by pests diseases and weeds has also affected inputs negatively.

Used as a proxy for farm land affordability, this figure shows that previously, farm income as a percent of land value was increasing indicating that farm land was becoming more affordable. However since 2000, the trend has reversed with farm land becoming more expensive when measured against farm income.

At this point in time, farm land appears to be holding its value despite the effects of the global financial crisis. In terms of future land price movements, history would suggest that if land is to become more affordable, it would be the result of a stagnation of land values rather than an increase in farm incomes.

Basically it has become evident there were two aspects that needed defining. These are: What is meant by efficient? And what exactly is a farm business?

Efficiency
The concept of efficiency is defined in the Collins dictionary as “functioning or producing effectively and with the least waste of effort”. Therefore to become more efficient in this context would require increased output from the same inputs or maintaining the level of output whilst using fewer resources.

In a financial context, efficiency also has connotations relating to risk. When constructing an investment portfolio, consideration is given to the mix of assets included in the portfolio because this affects both the long term rate of return as well as the short term volatility. An efficient investment portfolio is one where investments are made in a way where the long term rate of return is optimised for the amount of volatility (risk) from year to year (Painter and Eves 2008).

In the context of a farm business, if operating profits have become more volatile over the past decade, it can be argued that farming as an investment has become less efficient because volatility and risk have increased without a corresponding increase in longer term average profits.

What is a Farm Business?
Over the duration of my travels, it became evident that the “business of farming involves a combination of two very different activities. One activity is an operational business involving the production of food and export crops (and potentially fuel).

The second is the business of investing in rural real estate. Depending upon where in the world you travel, the degree to which these two activities are combined to form a “farm business varies greatly.

These two activities tend to happen in conjunction with each other. Typically the person who owns the land is also the person using that land in their operational business. If that person ceases their operational activities, then they would most likely also sell their farm land.

Conversely, there are farmers who run an operational business without owning any of the land. At the same time, there are others who are also considered farmers because they own large amounts of agricultural land but take a very limited (or no) role in the operational business utilising that land.

It became obvious that the factors driving success in the operational aspects of the farm business were not necessarily required for success in the real estate business and vice versa.

Therefore, if farmers are to optimise the returns for both aspects of their farm businesses, they need to start looking at each in isolation as well as a combined unit.