In this sixth article in my series dealing with the mitigation of risk in sheep farming and the motivations to continue seeking innovative solutions to these risks, I will discuss the range of introduced costs which are applied to the extended value chain. For the purposes of this paper, I refer to all costs directly related to the growing of wool or mutton as production costs. Those legislated costs levied by service providers in the process of ‘preparing the products for consumption’ and the fees and taxes exacted by all levels of government, I refer to as compulsory introduced costs. Post-production costs about which the farmer can choose, for example marketing costs, I will refer to as optional introduced costs.
Government is a sleeping partner of business, adding little to no value for the taxes, fees and other legislated, fixed costs for which it demands payment. This seems especially true for farming businesses. The production value chain for a sheep farmer, specifically mutton producers, is relatively lengthy when viewed from the perspective of compulsory introduced, legislative and other fixed costs. Here I am not referring to introduced, optional costs over which the farmer has a choice, but rather the legislated costs associated with ‘getting the meat to market’. The State Veterinary inspection fees, Health Dept. inspections of facilities, Grading and Meat Board fees, transport and abattoir related charges, most of which also attract VAT, can account for as much as a 20% ‘surcharge’ on the gross production cost of a kilogram of mutton. In the light of the high likelihood of increased taxation, levies etc., should this state of affairs be considered a risk worth mitigating?
Bureaucracy seeks ways to add taxes and other incomes so as to fill the fiscus or state coffers. Here the diligence, enthusiasm, creativity and passion of government knows no limits. For example, did you know that every sheep pays a ‘death tax’ on being slaughtered, and on the way to the abattoir, contributes its ‘unfair’ share per kilogram of weight transported, to the Road Accident Fund … plus fuel levy … plus VAT? Of course, these compulsory, legislated costs are passed all the way down the value chain until they finally meet the wallet, or these days the credit card, of the consumer. Do sheep farmers have access to interest groups or agencies who actively and successfully lobby government for the relaxation of, or exemption from, these onerous legislated costs?
Over the next decade, the government’s ‘hunt for taxes and other sources of income’ will increase in intensity. The risk of this ‘burden’ will be amplified and exacerbated by persistently higher levels of inflation and interest rates, a weakening currency, ‘business unfriendly’ labour laws, inappropriately high, legislated minimum wages, ever increasing fuel costs, the continued failure of the state to maintain the road and rail infrastructure, enforce existing laws to protect farmers and farming communities, not to mention the maintenance and security of an adequate supply of power. The costs of owning and operating a farming business will continue to rise, while margins and profits will come under increasing pressure as intermediaries in the value chain, i.e. those positioned between the producing farmer and the consuming public, will demand and claim ever greater percentages of the product’s value for ‘services’ delivered. Consumer debt, unemployment and a shrinking economy, will all add to the growing pressure on the price received by producers, as agents, brokers, speculators, wholesalers and retailers, all ‘reverse engineer’ their legislated, compulsory introduced and optional costs into the supply chain. In this regard ‘the buck has two stops’ – firstly at the farmer’s door at the production end, and then again at the consumer’s pocket at the consumption end.
When it comes to production costs over which the farmer has a choice, the list is equally daunting. Consider that the accurate hand-testing of the state of pregnancy of ewes is a challenging skill to master, and that the practicality of using this scarce skill on a breeding flock of 3000 ewes is questionable. However, in the absence of some degree of verification of fertility and pregnancy, the risk of supplying a ewe with supplemental nutrition and special attention, only to discover at the end of six to eight weeks that the supposed pregnancy was a ‘false alarm’, is real. Apply this ‘false alarm’ cost to 20% of a flock of 3000 and the financial and ‘lost time’ risk becomes serious with 600 happy, fat, and well-nourished but UN-pregnant ewes being returned to open-grazing. Also to be considered are the financial costs, labour and energy costs, and management time involved in synchronizing and timing of the lambing period of the ewes. Hand-held and larger, mobile scanners to identify pregnancy and foetal development are available, some battery operated, most rechargeable, and no doubt solar powered devices will also soon be for sale at your local co-op. An understanding of basic statistics now becomes a core skill of the sheep farmer as he endeavours to arrive at a valid number of ewes to select for testing from his flock. If all 3000 are to be scanned, this illustrates that there are sometimes significant costs involved and skills required to mitigate risks. Are these risks worth mitigating?
The Mitigation of Risk - a wolf in sheep’s clothing - Part 4
The four types of value chain costs we have discussed are:
1. Production costs directly related to the growing of wool and mutton
2. Introduced compulsory fees of service providers
3. Introduced legislated fees and taxes exacted by government, and
4. Introduced but optional costs incurred by the farmer to support or enhance the profitable and secure sale of his products.
All of these costs eventually find their way into being added to the final selling price of mutton or wool. The risk associated with the seemingly never-ending list of costs is the following: Is there a psycho-emotional ceiling or barrier in the mind of the consumer of mutton or wool products when it comes to the maximum price she is willing or able to pay? Will continued credit extension by banks and increased social grants by government forever succeed in staving off the dreadful, ‘debtful’ day of reckoning? If these are valid questions, then strategies to mitigate against the risk of a collapse in the price and market for the products grown by sheep farmers, are worth considering.
If you would like to communicate directly with the author, you are invited to contact PJ at the following email address: This email address is being protected from spambots. You need JavaScript enabled to view it.
