This article throws light upon the three important capital assets required in a farm. The capital assets are: 1. Farm Buildings 2. Irrigation 3. Farm Machinery.
Capital Asset # 1. Farm Buildings:
Livestock need to be protected from the in-clemencies of weather. If the livestock is kept in the open it shall require extra energy to fight against rains, heat and cold which would necessitate extra feeding and care. The economics behind this is that in case the provision of building costs more than the cost of feeding and care then it is uneconomical to build structures for the livestock.
The building costs comprises of depreciation, interest on capital invested in building and its care and maintenance. The construction and cost of building depends on the nature of climates conditions and the building material needs.
The store rooms are meant for protection of food-grains from deterioration by the rodents, moisture, insect pests and pilferage. The machinery and implement shed be constructed keeping in mind the comparison of its cost and the loss of machinery and equipment’s if exposed to nature.
Capital Asset # 2. Irrigation:
Irrigation is the life blood of farming but it should be owned if its cost is less than what you could buy from others but assured irrigation is what should be the first consideration.
Capital Asset # 3. Farm Machinery:
“For the farmer severely limited on funds, interest cost on machinery is the rate of return his money would yield when used for other investments on the farm, this rate is particularly appropriate for the machines which require a high initial investment and whose services can be hired on a custom basis without inconveniences and loss of yield.”
In other words the opportunity cost of the limited capital is kept under consideration and custom hiring is resorted to.
Now, the question arise which machine to use?
(a) Machine with high annual use—this will reduce the cost, if owner farmer has less command area to cover, the machine could be given on custom hire to neighbouring farmers.
(b) Machines requiring low initial investment.
(c) Machines providing timeliness of operations, for example, in multiple cropping timeliness of operation is very important reducing losses and another example is combined, of course, owned on cooperative basis so that before the setting in of monsoon harvesting and threshing is completed.
(d) The question of size of machine to buy is that in case the labour is expensive big machine would reduce cost.
The key point to consider, if one uses this guide:
(a) The difference is the first cost of large and small machine,
(b) Full annual use of machine be made,
(c) The amount of labour saved by the large machine,
(d) The relative value of labour and capital on one’s farm.
The first cost makes the difference in the sense that if the depreciation, interest and taxes, insurance etc., (as a fixed cost) are greater than the labour saved then the labour saved does not affect the cost. The annual use of machine also makes the difference whether to buy large or small machine. If the annual use is larger than the high cost machine will be cheaper as its fixed cost will spread over large units.
In case of kind and size of power unit—when deciding on the kind of power to use, we take into consideration the principles of opportunity cost. If a tractor can bring higher net returns than animals power then it is profitable to use machine power. In order to judge this “partial budgeting” exercise should be undertaken.
Taking up a machine power demands a lot of adjustments like arranging the land in a manner so that mechanization is facilitated. An economic adjustment will require an increase in the size of farming unit.
In order to construct budget the information needed are:
(i) The substitution rate between animal and tractor power,
(ii) The physical inputs and their costs the rates for two different kinds of power used, and
(iii) Estimated physical production and its value from mechanized and non- mechanized farming.
Regarding the size of tractor to buy it would be economical to buy large tractor if it can be used to its near capacity. A small tractor, of course, gives low power cost but takes more time in jobs performance. The question of size also depends on the crop rotation as well as the capital and labour position.
Another question is supplementary power which may add to cost. Machine could be substitute from labour when labour value saved is more than the machine cost.
Substitution can be done by:
(i) Changing from hand to machine,
(ii) Changing type of machine,
(iii) Increasing the size of machine.
If machine is changed for labour, future labour and machinery costs are taken into consideration. Changing machine does not minimize costs but increases profit from hand operated spade work to machine tillage.
There may be a low cost combination of labour and machinery which depend on:
(1) Substitution rate between labour and machine,
(2) Cost or value of labour as compared with the cost of machinery,
(3) The annual use of machine each year.
While changing the machine size due consideration should be given whether the value of labour power saved by larger machine is enough to offset its higher costs and also depends on the capital availability to invest in larger machine, for instance, a choice between two rowed and four rowed tillers.
Machines in Relation to Meeting the Risk:
The unfavorable risk is a paramount factor and therefore machines are bought which have extra capacity to meet unfavorable weather conditions but also we have to look into the availability of capital.
Extra machine tie up capital for their total life and therefore it should be calculated how much future return from investment in machine are worth now and also alternative income opportunities. For this we make use of “Discounting Principles.”
Besides, the weather risk there are price risk—if a machine is purchased during the high price cost period its fixed cost will be high and when the price drop they cannot be adjusted. It is, therefore, advisable to postpone the purchase when prices are high and make use of the custom hire in.
Again, in this case there are two situations:
Limited capital or unlimited capital supply. In case of limited capital supply adopt the “Principles of Opportunity Cost” and find out which would be to his advantage whether to buy a machine or invest in the purchase of inputs like fertilizer, plant protection chemical etc.
While deciding on whether to own or custom hire the opportunity cost principle will be applicable. If the owner uses the machine on his own farm or and others farms, the income derived from both the sources be compared. But on small farms the full capacity of both labour and machinery could be used on others farm so that the cost on his own farm gets reduced.
Again, while deciding on hiring or owning a machine—One should choose the method which minimizes the opportunity cost of the service performed.
The important points to consider are:
(i) The annual use to be made of the machine;
(ii) The labour and capital available;
(iii) Expected charges of hiring and owning;
(iv) Timeliness of operation; and
(v) Quality of work.
There is an economic advantages in hiring those machines which:
(1) Have a low annual use per farm,
(2) Requires large investment,
(3) Perform those operations in which timeliness is not important.
Ownership or Partnership:
It is always advisable to share the use of costly machines. But an important question arises in sharing the cost amongst the partners in case equal amount of work is not performed. If the amount of work is equal no problem.
New or Old Machine:
When a new machine is purchased large amount of investment is for longer period is tied up. So, one must consider the amount of capital available and its opportunity cost in alternate usage.
It is advisable to buy an old machine with its service equal to those of the new one, when:
(i) The cost of a used machine now; and
(ii) The future cost of used machine discounted at the opportunity cost rates of return to the present are less than the cost of new machine now.
Again the question of buying new or old tractor under the limited and unlimited capital situation is discussed as follows:
(a) With Limited Capital:
The farmer has a choice between a new or an old tractor. The life of the two are ten and five years respectively and as such the second hand tractor shall be replaced after five years and once again the same amount will be spent after five years (provided the price remains the same).
The farmer by buying an old tractor can invest the other half amount which he would have spent in buying a new one will use in other inputs viz., fertilizer and gets a return of 20% and spends the same amount again after five years to buy another old tractor. This means that buying an old tractor is profitable or least costly.
(b) With Unlimited Capital:
If the capital is available with the farmer to invest in new tractor, if his money invested elsewhere does not get more than 5% returns then, the farmer must invest in new tractor because buying an old tractor after five years will be costlier.
Whatever is the machine, new or old, it should be given proper care and maintenance which cost little but the returns of the good management is a clear profit. Timely care and maintenance of machinery gives them longer life.