The calculation component comprises of sequences of interrelated calculations. This component forms the structure of the calculation model therefore needs to adhere to two principles. The first
is to accurately simulate the processes on the farm being simulated to return a trustworthy
outcome regarding the impacts of certain factors, in this case the impact of CA principles on other components of the farm and the whole farm. The second is to structure all the physical/biological factors and interrelationships into the format of standard accounting principles to generate financial results that are universally comparable. The calculation component thus incorporates various input components to determine the results presented in the output component. For instance the gross margin calculation of individual crops will use data sheets from the input component to calculate the, per hectare gross margin. The gross margins are used in the calculation of the net annual flow after fixed cost and net annual flow after capital expenditure. This annual net return is used to calculate the IRR and NPV for the various production systems.
4.5.4.1. Farm inventory
The inventory is a register of the anticipated capital requirement of the whole farm to operate sustainably. The capital requirement is essentially the sum of all the farm assets and typically include items such as; land (being the biggest contributor), fixed improvements, machinery and equipment, and livestock. Annexure J depicts the typical Middle Swartland inventory. An inventory typically includes physical and financial descriptions of all asset items. The physical information includes; number of items for each category, capacity, age, annual usage, depreciation, and current value.
The expert group advised that a farm size of 800 hectares for the Middle Swartland is typical. The price of farm land in the area was obtained from recent valuations of farm land in the Middle Swartland, and validated by the group. The prices of new agricultural machinery and implements were derived from the ‘Guide to machinery costs for Western Cape’, developed by local agribusinesses. This guide was used in preference to the national guide to machinery costs as it provided information specific to equipment used in the Western Cape. According to the local producers and agribusiness representatives the reason for the development of their own guide to machinery costs is discrepancies in prices of equipment and lack of consistency.
The number of machines and implements required for the typical farm was determined by the expert group. According to the guide to machinery costs, the norm for replacing machinery is every 12 years and bases annual machine use at 1000 hours. Producers in the Western Cape use machines for 300 to 350 hours per annum and often replace machinery after 15 years or longer, due to financial constraints (Hoffmann, 2010). This point was reiterated during the group discussions.
Investment in livestock is determined by herd size and composition, which in turn depends on available pasture land and grazing capacity. The group of experts decided on the area of land to be allocated to livestock in the typical farm model, as well as the assumptions on the herd composition. These include ram to ewe ratio, and ewe replacement policy. The relevant values of livestock were obtained from industry experts and validated during the group discussions.
4.5.4.2. Crop gross margin calculations
A separate gross margin (GM) calculation was developed for each individual crop in the farm system. For each crop a GM was calculated according to seasonal variation of good, average, or poor yields as determined by rainfall dispersion. Annexure K shows a typical layout of a gross margin calculation for an enterprise under the different tillage practices. The multi-period budget sheet would allocate, according to the frequency of seasonal variation, a corresponding GM for; good, average, or poor yield. This is then multiplied by the area under that crop as determined by land utilisation description. For each individual crop the GM is separately calculated under both no-till (NT) and conventional-till (CT). The result is two multi-period budgets, one for NT and one for CT, used to calculate the IRR and NPV under the three crop rotation systems. The GM is calculated by subtracting the total variable costs of, directly allocatable and non-directly allocatable costs, from the total production value, on a per hectare basis. This part of the whole- farm model is directly connected to the adapted research results described in Paragraph 4.4. The sequence for the seasonal variations experienced in the Middle Swartland denoted by good, average, and poor yields is completely unpredictable. Selecting a sequence, over the 20 years the budget model is run for, was derived through analysis of historical rainfall patterns obtained from weather stations. This was also validated during the group discussions. It was however agreed that, with the prevalence of good, average, and poor years, any other sequence could be just as likely.
4.5.4.3. Overhead and fixed costs
Fixed costs are the portion of total costs regarded as fixed in the short-term. These costs cannot be avoided or controlled over the short-term, irrespective of scale or intensity of production. Overhead costs refer to the portion of costs not allocated to an enterprise (Department of Agriculture, 2005).
Values of overhead and fixed costs were derived from personal communications with officers from local agribusinesses and their producer study groups. These values were validated in the expert group discussion. Fixed and overhead costs typically include administration costs, accountant’s fee’s, banking costs, communication costs, electricity, insurance, licenses, maintenance of fixed improvements and farm vehicles, and permanent labour. These values for each production system are shown in Annexure L under the heading overhead and fixed costs.