EFFECTIVENESS AND FINANCIAL CONDITION OF PRIVATE FARMS IN RELATION TO AGRICULTURAL LAND AREA

Mirosław Wasilewski
Department of Economics and Rural Farms' Organization, Warsaw Agricultural University, Poland

ABSTRACT

The paper presents analysis of connections between effectiveness and financial situation of private farms and agricultural land area (AL). Farms of the largest area had the lowest land profitability than the smallest farms. However, these differences had significantly changed. In accordance to economic labour effectiveness, the largest farms dominated absolutely on smaller farms. Moreover, these farms had the largest current financial liquidity, which was the lowest in the smallest farms. According to own capital profitability there were no fundamental dependencies between area’s groups of farms. Possibilities of taking profits from own capital were not fundamentally dependent on AL area of a farm. According to dues management, there were no essential differences between farms, and period of the rotation did not exceed three weeks. Good financial situation of the farms was confirmed by low rate of general debts. Financial situation of the largest farms was significantly improved by the lowest amount of financial means frozen in stocks in relation to AL area.

Key words: private farms, economic labour effectiveness, profitability, financial liquidity, management’s of dues and stocks efficiency.

INTRODUCTION

Land management has had essential meaning while adjusting Polish agriculture to market economy requirements and gradual meeting the European Union (EU) parameters by agrarian structure [7]. Important issue is also collecting knowledge on how – at present – is area structure of farms in Poland developing in spatial aspect. The structure defines to a large extent competitiveness of Polish agriculture towards other EU member countries [6]. Agrarian structure gives a picture of some pattern of farms according to their area. The main production mean is land, and the other means are linearly correlated with it [12]. The structure presented in such a way is charged with special failure, because it presents only grouping of farms within their physical potential (in ha), not including quality of land or equipment with other production means, as labour or capital. This problem was tried to be solved by working out suitable conversion units to different aims. Usefulness of physical and conversion AL area could be increased by correcting their amount with organization intensity rate [5, 9]. Apart from production potential, open attitude of a farmer to a market, because farms that are more commercial usually gain better economic results [3]. Market exchange has decisive impact on incomes and expenditure development in farms and therefore on life standard of families running them.

One of the most essential aspects of running production based on land is increase of its use effectiveness. According to Klepacki [4], effectiveness of land use in Poland is lower than in most of “old” EU member countries, apart from Scandinavian countries, which have especially hard conditions for agricultural production. It is well-known regularity in economic practice, that when area of a farm increases, amount of production and income per an area unit decreases [1, 2, 13, 14]. However, categories of production and agricultural income do not have to decrease as a farm’s area increases, if following issues would remain adequate to a farm’s area: labour technical equipment with tractors and agricultural machines, enough equipment of other fixed assets and similar to smaller farms – current assets’ inputs [1]. However, it ought to be remembered, that smaller farms, even with higher level of land productivity, do not are not larger farms’ equal at amount of income (on a scale of a whole farm). In extreme cases, incomes of the largest farms are several times higher than in small-area farms [2]. Furthermore, a scale of own capital amount, which is a stable source for financing the activity and develops farms’ economic results, becomes more and more important [10].

AIM AND METHOD OF RESEARCH

Aim of the research was to define dependencies between effectiveness and financial situation of private farms and their agricultural land area (AL). To estimate farms’ effectiveness were used categories of final net production and agricultural income. Moreover, economic labour effectiveness, land and own capital profitability, financial liquidity, debts, effectiveness of dues management and land stocks’ absorption capacity were calculated. All value sizes were presented in current prices. Research was carried out within 95 individual farms, functioning in central-west region, according to regionalization system of the Institute of Agricultural and Food Economics (“IAFE”), which includes wielkopolskie and kujawsko-pomorskie voivodships. Central-west macroregion has high level of organizational and economic characteristics of agriculture on the national scale. The research included all farms running continuously agricultural accountancy in years 1998-2001. As a criterion of farms’ classification, the author chose agricultural land area (AL). The first group of farms had area from 15.00 ha to 19.99 ha, the second – from 20.00 ha to 49.99 ha, whereas the third group – 50.00 ha and more.

RESULTS OF RESEARCH

The land profitability rate was calculated as a relation of agricultural income value to agricultural land area. The rate expresses effect of production factors’ involvement in the farm and – at the same time – it defines profits of agricultural land’s use in production. It should be emphasised that depending on agricultural type of a farm*, relation between production effects and agricultural land area can be diversified [11]. Farms of area larger than 50 ha AL were characterised in the analysed period by lower land profitability than the smallest farms (graph 1). The greatest difference in that case had place in 1998 and came to 26.5%. Furthermore, in the largest farms the land profitability rate was generally lower (apart from 2000) in comparison to the middle group. However, it should be emphasised, that such differences between these groups became smaller, from 33.5% in 1988 to a very similar level in 2000-2001. It proves that large farms increased significantly their effectiveness of land use in comparison to the groups of smaller farms. In agricultural production, the scale effect of farm’s area appears with relatively great delay, what is caused by long production cycle and rotation of capital.

The second graph presents changes of economic labour effectiveness, calculated as a relation of final net production to labour expenditure on agricultural, renovation and investment works expressed in person-hours. Regarding this, the largest farms (with the area larger than 50 ha AL) dominated. In this group, economic labour effectiveness was estimated around 48.6 PLN/person-hour in 1999 and 73.3 PLN/person-hour in 2001, what means that it increased by 50.8 percentage points. In other groups, dynamics of changes was slightly lower, and labour effectiveness did not exceed 26.0 PLN/person-hour. Domination of the largest farms over the smallest ones was four-times, while over the second group – about three-times. The lowest level of economic labour effectiveness concerned the smallest farms and came to 12.3 PLN/person-hour in 1998, whereas the rate was higher by 324.3 percentage points in the third group of farms then. According to this, relations concerning economic labour effectiveness were different from land profitability. It may be supposed, that one of reasons is a possibility of running production partly without the land. According to that, small farms with smaller area of land, use additional purchased means for production and generate added agricultural income, which increases the land profitability.

Current financial liquidity should be understood as a farm’s ability to settle liability with a high level of demandness, usually until three months, and maximally until one year. This indicator is calculated as a relation of value of all elements of current assets (reserves, accounts receivable, short-term investments and inter-period settlements) towards current liabilities and its recommended, optimal value is 1.5-2. Recently it has been stressed that standard values are not suitable for branch conditions. It concerns also farms [8]. Aspect of rotary herd is also debatable as an element of reserves in farms. It is specific reserve, in case of which decision making in aspect of financial liquidity is a bit different from in case of traditional reserves. A rotary herd can be sold at any moment but it is most rational in final weight (planned). That is why there was made an attempt to evaluate influence of a rotary herd’s value on a level of current financial liquidity. It was made with a herd and without a rotary herd in relation to farm’s area. It was founded out that indicators of current financial liquidity in farms diverge significantly from determined standard value (graph 3). It proves the difference of farms in this aspect. With the exception of the year 1998, current financial liquidity was highest in the largest farms. Declining tendency in the indicator of current financial liquidity is noticeable in smaller farms, whereas there was small increase of this indicator in the biggest farms to the value of 7.4 in 2001. I can mean that big farms enable to keep current financial liquidity on a relatively high level. The largest decrease of this indicator’s value took place in farms from area group 20-50 ha AL (by 8.5); whereas in the other two groups of farms it declined by 2.8. In all analyzed years a higher indicator of the current financial liquidity was characteristic for the largest farms than the farms from the area group 15-20 ha, to the largest extent in 1999 (by 3.5).

Taking into account rotary herd’s value in calculations of current financial liquidity contributed to increase in level of analyzed indicator in all farms, to the largest extent in the second group of them in 1998 (by 6.4) (graph 4). The most stable level of influence of rotary herd’s value on increase in the indicator concerned in all years the smallest farms (by about 2.7-3). On the other hand declining influence in this field took place in farms from other area groups (2-3 times decrease in the years 1998-2001). The largest decrease in the indicator’s value occurred in the medium area group (by 12.7), whereas the smallest concerned the smallest farms (by 3). Indicators of current financial liquidity in all area groups in the interval 7.2-9.2 in 2001 mean high current financial liquidity, which is boosted by owned rotary herd and can be sold in case of absolute necessity.

Own capital profitability in determined area groups of farms was presented on the graph 5. This indicator was calculated as a relation of agricultural income’s value towards the level of own capital. Relationships in this field were not distinct. The second group of farms (20-50 ha AL) dominated in the years 1998-1999, whereas in the next years respectively the smallest farms and the largest ones (in 2001). There occurred a increasing tendency of analyzed indicator in all area groups of farms in the years 1999-2001, to the largest extent in farms with more than 50 ha AL (by 4,1 percentage points). Profitability on the level of 8.5% was the highest one in this group of farms in 2001. Especially in the years 2000-2001 alignment of level of own capital profitability in analyzed groups of farms. It means that big farms are more and more efficient in this field, which concerned also land profitability. There is better and better synchronization of production and organizational factors in these farms, which enables their more efficient use. Own capital profitability of farms’ group should be evaluated as low against a background of non-agricultural branches, even in relation to interest rate of bank deposits being in force in this period. Taking into account long turnover of capital in agriculture it should aimed at significant increase in the level of this indicator.

Dues management is one of significant issues in process of financing economic activity. Therefore, paid due of a firm is a direct financial payment, and shortening of dues vindication periods is very desirable. It was stated, that in the farms there was relatively short dues rotation period calculated in days. The rate was calculated as a relation of incomes of sale to dues value on the end of the year. The rate informs of number of dues’ rotation during the year. Furthermore, the rotation in days was calculated as a quotient of 365 days and the rotation dues rate. Apart form the largest farms in 1999; time of dues’ regulation did not exceed three weeks (graph 6). The shortest time of dues’ regulation characterised the smallest farms (7-10 days), what could be connected with a lower level of commerce and scale of sale. In years 1998-1999, the highest (rising) dues rotation rate concerned the largest farms, what means that the farms managed their dues not efficiently in that term. Although in next years the longest term of dues rotation concerned the middle group of farms, the level of the rate was satisfactory. In years of 2000-2001, such differences between the farms’ groups were relatively small, and there was significant improvement of promptness in the largest farms. To sum up, in the analysed farms policy of dues management was satisfactory and resulted in current financial liquidity improvement.

Level of debts of the analysed groups of farms was small as a relation of general debts level to the value of farms assets (graph 7). It was stated that general debts level was rising with increase of a farm’s area. Level of debts in the analysed groups of farms was relatively constant, however in the second group and in the largest farms; there was a slight rising tendency of debts. The greatest level of debts occurred in 2001 (9.3%) in the largest farms, while there was only 2.7% in the smallest ones. Predominance of debts in the middle group of farms over the first group was rather small (2-3 percentage points). Therefore, it could be stated, that the managers created relatively cautious financial strategy, using mainly their farms’ own capital (rarely loan capital). Positive profitability rates inform that loan capital was used effectively so the farms took profits from financial lever effect in effective production.

On the eighth graph there were presented changes of a land reserves’ absorption capacity rate, calculated as a relation of reserves general value (with value of a rotary herd) to an AL area. The rate informs what value of products or purchased means for production in form of reserves is per one of the major production factors – agricultural land. It was stated, that the land reserves’ absorption capacity rate in the smallest farms was higher during the whole period than in the farms of area larger than 50 ha AL. the group of the largest farms had usually lower level of the rate in comparison to another group – 20-50 ha AL (apart from 2000). In the other groups, there was increase of the rate by 38% and 8.7% in years 1999-2001. On the other hand, in the largest farms in 2000 there was decrease of the rate level by 16.6 percentage points. These farms had the greatest possibilities of large amounts of products’ sale, i.e. good quality cereals – interventional purchase by Agricultural Market Agency (ARR). However, small farms often cannot accomplish quality and quantity requirements and their products reserves has been decreasing much slower. The greatest difference between the largest and the smallest farms, according to the rate, had place in 2001 and came to 675.4 PLN/ha AL (for the bigger ones). In comparison to the middle group of farms, the difference was relatively similar and the largest occurred in 1998 – about 369 PLN/ha AL.

To sum up, the level of reserves per one AL unit in smaller farms was rather high, whereas in the largest farms land reserves’ absorption capacity was smaller. On the scale of a whole farm, the level of reserves in the largest farms was the highest, because it was adequate to their production scale. The farms should rationalize a level of reserves, searching for costs’ limits. It would directly lead to decrease operational costs, increase effectiveness, and their competitiveness on the market. Moreover, their current financial liquidity would improve because of cash payments.

CONCLUSIONS

The paper presents the analysis of relations between effectiveness and financial situation of private farms and agricultural land area. The major attention was paid to following issues: profitability, financial liquidity, debts, effectiveness of dues management and labour effectiveness. On the base of the research, following were formulated.

1. The largest farms were characterised by lower land profitability than the smaller ones, while that difference had been significantly decreasing what is a very positive tendency. Production in smaller farms might be run with wider use of purchased means of production, what could misshape real situation of the rate. Scale of production is increasing without any changes in land area. Such relation might be confirmed by general predominance of the largest farms (three-four times) in economic labour effectiveness. Moreover, these farms were characterised by the largest current financial liquidity, what means, that the managers could regulate the most demanding, short-time debts. In the smaller farms, although they had the largest level of land profitability rate, their current financial liquidity was the poorest. It was stated that financial liquidity in the analysed farms was at a high level, exceeding the standards of agricultural branch. Value of a rotary herd influenced to the smallest extent financial liquidity of the largest farms.

2. In according to own capital profitability, there were no important relations between the farms. Levels of the rate were similar and relatively low. In addition, possibilities of generating profits from own capital do not essentially depend on a farms’ AL area. Nevertheless, total value of own capital in large farms is appropriately higher, what significantly increases their possibilities of development and defines their economic power. What is more, there were no essential differences between the farms in dues management, and time of their rotation did not exceed three weeks. Good financial situation was confirmed by low level of the general debts rate, not exceeding 15% in 2001 (9% in the smallest farms). The largest farms’ situation considerably improves the lowest freeze of financial means in reserves in relation to AL area.
   

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   Footnote
   * Standard Gross Margin is a surplus of production value of individual agricultural activity on direct costs’ value, in average for a region’s production conditions. It is calculated on the base of average values of three years. These farms, where share of one of activities exceeds 2/3 SGM are called as “specialist”. Moreover, these farms, where share of two activities takes from 1/3 to 2/3 SGM are treated as “farms specialized in two activities”. Furthermore, these farms, where there is no activity, which exceeded 1/3 of SGM, are defined as “mixed farms”. In the analysed population, there were following agricultural types of farms: type 1 – field crops of agricultural plants, type 6 – animals fed with concentrates, mainly pigs, type 7 – mixed production, mixed animal production or mixed plant and animal production

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   Mirosław Wasilewski
   Department of Economics and Rural Farms' Organization,
   Warsaw Agricultural University, Poland
   ul. Nowoursynowska 166, 02-787 Warsaw, Poland
   email: wasilewski@alpha.sggw.waw.pl
   

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