The Young Farmer: Some Things He Should Know Part 6

The various machines requiring horse power should be adjusted, as far as possible, to require the same number of horses. If the main unit is three horses, then, as far as possible, all machines should require three horses, such as plows, harrows, manure spreaders, harvesters, etc. If the activities of the farm are sufficient to require six horses then some of the tools may require three horses each, while others require a pair.

[Ill.u.s.tration: Mr. R. H. Garrahan, Kingston, Pa., is one of the most successful growers of celery in the United States. After graduating from the Wyoming Seminary he spent one year studying horticulture at the Pennsylvania State College. For several years he was a.s.sistant in horticulture at the University of Tennessee. He now has at Kingston 60 acres under intensive cultivation. His princ.i.p.al crops are celery, asparagus, cabbage, tomatoes and onions.]

[Ill.u.s.tration: H. H. Richardson, Brooklyn Heights, Ohio, agricultural graduate, Ohio State University, 1892. Fourteen years ago inherited 35 acres of land and an indebtedness of $1,750. He has raised a family of four children, has what is seen in the picture plus the land and $6,000 invested elsewhere. Mr. Richardson has held some local public office continuously during the past ten years, being at present member of school and water boards, member of advisory board of bank, secretary of Cleveland Fruit and Vegetable Growers' a.s.sociation and Ohio vice-president of the National Vegetable Growers' a.s.sociation.]

A farm with six work horses is rather a desirable one from several aspects. Among other things, it enables the farm owner to employ two men who can perform most of the team work with two three-horse teams, while at other times three pairs of horses may be arranged when the owner needs to use a team. This leaves the farmer time to attend to many activities not requiring horses, and time to plan the work and to look with more care after the purchases and sales. The size of such a farm will depend entirely on the nature of the activities. If it is a so-called general farm with a minimum of live stock, it would, perhaps, consist of from 150 to 180 acres of tillable land with some additional pasture and woodland. Ideally, every farm should have sufficient activity to make it something of a center. It should be an organism. It is difficult to organize one man.

It will be useful, when we come to discuss how profits may be estimated, to divide the capital into three general groups: (1) The plant, which in addition to the real estate, will include the machines and tools, horses used for labor, and other animals used for breeding purposes or for the production of animal products, such as b.u.t.ter, wool or eggs; (2) materials, which will include animals which are to be fattened for sale, and all seeds, fertilizers and foods intended to be turned into products to be sold; (3) supplies, which may include foods for teams, and money with which to pay labor, be this labor that of the farmer or his employees.

The purpose of this cla.s.sification is to bring sharply into view the fact that the nature of different kinds of equipment varies. All the things named under the plant are in the nature of an annual charge against income. The charge under materials may or may not be an annual charge. If a man invests $2,000 in 50 head of cattle, which he intends to feed and sell for $3,250 at the end of one hundred days, he does not have to calculate interest on $2,000 for a year, but only for 100 days. Cattle paper is held in large quant.i.ties by banks in the cattle feeding districts of the United States. The farmer would, in fact, be unwise to keep $2,000 in the bank nine months in the year in order to use it three months. Like any other business man, if he has the money, he invests it and borrows the money to buy his cattle. The same thing applies to food and fertilizers. If the food is fed to cattle, some of the money invested in the food must pay interest during the fattening period. Food fed to dairy cattle and chickens may be paid for out of each day's income. In practice, the amount of money invested in food for dairy cattle and chickens is dependent only upon the most economical unit of purchase. One may apply fertilizers to buckwheat, give a three months' note for the fertilizer, and pay the note out of the proceeds of the crop. If the fertilizer is applied to one-year-old apple trees, this investment may be required to pay interest for fifteen years.

The same principle applies to supplies. If one starts into raising horses for sale, he needs to have some money or other income on which his laborers and his own family can live, say for five years, this being the age at which a horse is supposed to become salable. More people would raise apples and horses if they could afford to wait for the return on the investment.

While this is a serious handicap, it is an advantage to the man who arranges his farming methods so that he can secure an income from some other source in the interim. The young farmer will do wisely to so arrange his farm methods that a portion, perhaps the major portion of his farm, will give him quick returns while making some long-time investments, which later in life will give him a greater return because so few people are sufficiently forehanded to make them.

CHAPTER XI

HOW TO ESTIMATE PROFITS

No man who engages in manufacturing or merchandising knows how much he is going to make annually during life. Much less does he know how much he will be worth when he dies. Neither does the man who works for a salary or practices some profession for fees know what his annual income will be even during the following decade. Neither one nor the other knows whether he will die a millionaire or a pauper. It is a problem too complex for any human mind to a.n.a.lyze. It is less certain than what the weather will be on this day next year, because it is the resultant of more variable factors.

In some respects there is more hazard in farming than in manufacturing or in merchandising, while in other respects there is much less. The profit which may be obtained from farming is neither easier nor more difficult to estimate than is that of other commercial enterprises.

However, there is no business in which more foolish estimates are made as to the probable profits, except, perhaps, in mining.

The purpose of this chapter is not to give advice as to possible or probable profits, but rather to point out the general character of the data required for any individual problem, where the data may be obtained and how it may be applied.

There are two forms or methods of stating the financial gain that has been obtained from farming or other business ventures during a year or other specific period. The first may be called the interest on the investment method, and the second the labor income method.

With the interest on the investment method, all expenses may be subtracted from all the sales. From the cash balance thus obtained the increase or decrease in inventory may be added or subtracted. This balance may then be divided by the capital invested, to determine the rate of interest received.

The rate of interest method is the usual method in the commercial world. The prosperity of the railroad or industrial concern is judged by the rate of interest it pays its stockholders on the par value of the stock. The stock itself takes on the capitalization in accordance with the present and prospective dividends. The fact that this method is generally used in the commercial world is evidence that it is well suited to its needs.

The young farmer who wishes to know whether the operation of a given tract of land in a certain manner offers him a worthy opportunity will not find the interest on the investment method the best suited for his purpose. This is especially true when applied to a single product. For example, it may be shown that 50 hens will, when properly managed, in connection with other farm enterprises, return a remarkable interest on the capital employed. It does not follow, however, that a man can make a living with fifty hens or even 500 hens. If a man has an investment of $5,000, on which he obtains 10 per cent, his income would be $500. If, on the other hand, he has an investment of $25,000 and obtains a return of only 6%, his income is $1,500, or three times the former amount. In neither case, however, does this form of statement tell a man how much of his income is due to his brain and brawn and how much to the capital invested.

What the young farmer wishes to know is how much will he receive for his own time, energy and skill, after deducting all expenses and a reasonable interest charge on his investment--such a rate of interest as he could get by placing his money in good securities or what he would be required to pay for his capital if he borrowed it. This is best obtained by the labor income method. With this method all expenses are subtracted from all sales and to the cash balance thus obtained is added or subtracted the increase or decrease in the inventory. This balance may be called the farm income. Thus far the procedure is just the same as the interest on the investment method.

From the farm income is now subtracted a reasonable interest on the investment, the balance remaining is called the labor income. This is the return which the farmer has obtained by and for his own efforts.

If this balance is zero, then he should change his methods or get into some other business.

This statement of his income, whatever it may be, enables him to compare his prosperity with that of the man who is employed upon a salary. Here, again, however, it is difficult to make comparisons because of the differences in expenses of living. The chief difference, however, in the expense of the wage earner in the city and the farmer is in the matter of house rent. For example, if the wage earner pays $300 a year house rent that must be deducted from his income in comparing it with the labor income of the farmer. It is often stated that the farmer also has his living from the farm. This was much more true formerly than it is at present. Under present methods of distributing food products and with modern types of farming, the amount of food supplied the table from the farm is comparatively small. The rancher in Montana eats foods canned in Maine or Delaware, while the New Hamps.h.i.+re farmer buys his vegetables from Boston commission merchants. The Minnesota farmer cannot supply his breakfast table with oranges, grapefruit or oatmeal. Many of them buy, if not their bread, at least their flour, and also their b.u.t.ter. The fact that the city man indulges in high living is no argument in favor of the country man expecting less wages. Some of those things which are necessary to make the country an ideal place to live are expensive. Some of them are more expensive to obtain in the country than in the city, as, for example, educational facilities. In justifying his purchase of an automobile, a young farmer recently stated that his wife had certain cares, responsibilities and even privations which her city friends did not have. He thought that the automobile would help to offset them.

To my mind there is no more ideal place to live and rear a family than in the open country when the conditions are what they should be and may be. I believe, however, it is well to insist that it costs something to live in the country as well as in the city if one lives as well as every farmer has a right to expect to live.

Let us now consider the steps necessary in order to arrive at a fair estimate of the labor income. To make the matter concrete, we will a.s.sume a farm of 200 acres worth $60 an acre located in central Pennsylvania on a limestone clay loam soil over 1,000 feet above sea level. This farm is to contain 20 acres of timber, a 30-acre apple orchard two years old, 40 acres of pasture, 96 acres of cultivated land divided into six 16-acre fields. The rest of the 200 acres consists of small yards, roadways and waste land. One-half of each of the six 16-acre fields is to consist of a rotation of maize, oats and wheat, each one year, and hay three years, the latter clover and timothy followed by timothy. The other half is to consist of maize, barley, followed by alfalfa four years. In the young orchard there will be grown for a few years potatoes, tomatoes, cabbages and garden peas. After the orchard attains a size which forbids these intertilled crops, a portion of the pasture may be broken up so that these market garden crops may be raised. There will be kept six horses, 20 milch cows, 20 ewes of some mutton breed of sheep, five brood sows and 50 hens.

First of all, let attention be called to the broad knowledge of farming required to operate this moderate-sized and comparatively simple farm. The crops to be raised are maize, oats, wheat, clover, alfalfa, timothy, potatoes, tomatoes, cabbages, garden peas and apples. The animal products sold will be chiefly b.u.t.ter fat, wool, mutton, veal, pork and eggs. This is neither a long nor complex list of products. They are all adapted to the farm which the writer has in mind. Yet the man who operates this farm to the highest success will need to have a knowledge of agronomy, or the raising of field crops, of horticulture, animal husbandry, including poultry husbandry and dairying. He needs to have a good understanding of the principles of agricultural chemistry, to have a knowledge of how to prevent and combat fungous diseases and insect enemies. To get the most out of his timber land he should know at least some of the first principles of forestry, and if he has gained some instruction in the study of landscape gardening, his home will be more attractive, and his farm a source of greater pleasure to him.

To proceed with the estimate, the first thing to be done is to make a record of the cropping system, giving the areas and the estimated production of each crop. How is the yield per acre to be determined?

Clearly, one cannot afford to estimate his profits on the basis of some unusual yields. If one could be a.s.sured of 40 bushels of wheat, 60 bushels of oats, five tons of hay, 300 bushels of potatoes, or 200 bushels of apples per acre, or 500 pounds of b.u.t.ter fat per cow, or 150 eggs per hen per year, there would be no difficulty about obtaining a snug labor income. Such results are possible and are appropriate ideals for which to strive, but are not safe as estimates on which to do business.

The year books of the United States Department of Agriculture contain the annual estimate of the yields, and the average December farm price of staple crops by states. These figures may serve as a basis for making estimates. If the natural conditions are about the average stated, one may properly a.s.sume that he can obtain an increase of 50%.

He may even hope to double the yield, although it is not safe to a.s.sume such an increase in making an estimate of profits. If the natural conditions are more favorable or less favorable than the average, he must take the fact into consideration in his estimates. In the same way he may consider whether the average December farm price represents fairly his expectation of the price, or whether because of favorable location or superior quality of the article purchased he can expect higher remuneration.

It is here a.s.sumed that the young farmer is himself going to be more than an average farmer. If he is not he will only get average results, in which case his labor income will be only that of the ordinary day laborer.

To repeat the idea in concrete terms. If the young farmer is located in central Pennsylvania and finds that the average yield of wheat for the state is 17 bushels an acre, he may safely estimate that his improved methods will bring him 25 bushels of wheat to the acre. He may even hope for 34 bushels per acre. At the Pennsylvania station several varieties of wheat have, during the past 18 years, averaged over 30 bushels per acre. One year one variety produced 43 bushels. It would not be safe, however, to use such figures in estimating profits.

Having outlined the cropping system and made a careful estimate of the total annual production of each crop, the next step is to determine the amount of food and bedding required for the live stock. From this data it may be determined what products will be available for sale, and what foodstuffs must be bought. Thus, it may be found, for example, that the amount of oats raised just meets the requirement, while more maize must be purchased, together with nitrogenous concentrates, and that a portion of the hay is available for sale. In the farm under consideration there will, of course, be wheat, potatoes, tomatoes, cabbages, garden peas and the animal products previously mentioned for sale, and later there will be apples and some lumber from the wood lot.

The data are now at hand by which to estimate the total receipts.

Having made the estimates of receipts, the expenses are estimated, and the difference gives the cash balance, if there is any. The most important items of expense will be labor, feed, seeds, fertilizers, harvesting and thres.h.i.+ng expenses, spraying material, s.h.i.+pping packages, blacksmithing and repairs. After all expenses that can be thought of are included not less than 10% should be added for incidental expenses.

The amount of commercial or natural fertilizers to be purchased is, of course, related to the yard manure which will be produced on the farm; therefore some estimate of the probable amount is desirable. In a roughly empirical way the amount of manure produced may be estimated at twice the amount of dry food and bedding used, provided it is hauled daily to the field. Where stored and drawn to the field at stated periods, the shrinkage in weight, although not necessarily in plant food, may be as much as one-half.

The estimate of what the inventory should be at the beginning and end of the year is not so simple a matter as it may at first seem to be.

The purpose of taking the inventory is twofold: First, to determine whether the inventory has increased or decreased, and second, to determine on what amount of capital interest is to be calculated. For example, one must carry forward each year seed for the next year's crop. Feed must be carried over to feed live stock until other food becomes available, and there must be money on hand with which to pay for labor unless there is a cash income from the sale of products sufficient to care for the labor bills.

In the case of the farm under consideration there is a young orchard of about one thousand trees. This orchard is not bringing in any income, but there is a constant expenditure of money on it, and a constant increase in its value. While, therefore, it decreases the cash income it increases the farm income and the labor income. On the other hand, it increases the interest charges because the plant or farm is increasing in value. How much will it increase in value? In some sections it is customary to consider that an orchard increases in value $1 per tree per year. If this is a correct estimate, this 1,000-tree orchard will increase the value of the farm $1,000 a year until it comes into full bearing. The farm under consideration was purchased two years ago for $9,500. On the a.s.sumption just stated, at the end of 15 years from date of purchase this farm should be worth $25,000, at least $15,000 of which will be due to a 30-acre orchard.

This is at the rate of $500 an acre for the orchard itself.

In order to bring out some of the phases of the inventory more clearly the following cla.s.sification of items is given below:

INVENTORY

A. PLANT.

The real estate, 200 acres at $60 per acre.

The live stock.

Work horses and breeding stock.

Machinery.

B. MATERIALS.

Seeds, potatoes, oats, maize, wheat.

Feed, hay for cattle and sheep, silage for cows, maize for pigs.

Growing wheat, 8 acres at $6 per acre.

Live stock, calves, lambs and pigs.

C. SUPPLIES.

Hay and oats for horses.

Money for current expenses.

In estimating the inventory at the end of the year, a deduction should be made for the decrease in the value of the live stock under the plant and also for the machinery. Perhaps 5% for the live stock and 10% for the machinery and tools will be a fair deduction. Under materials and supplies those items have been inventoried which are to be carried over each year from the preceding year. In the case of seeds the amount required must be deducted from the amount sold, or they must appear as a charge in the expense account. Ordinarily they are carried over from year to year and thus become a part of the permanent investment. Since on the farm under consideration there is a considerable monthly income from the sale of b.u.t.ter fat and eggs, it may be possible that no allowance will be needed in the inventory for current expenses, although it is always desirable to carry a bank account in order to be able to make favorable purchases when opportunity offers.

As a part of the work in a course in farm management, the writer asked each student to secure the financial history of an actual farm covering a period of three years. The financial history of 30 farms during the years 1901 to 1903, inclusive, and 28 farms during the years 1902-1904, inclusive, was thus obtained and is given herewith.