Topics

Farm Management: Farm Valuations and Insurance

1. Farm Valuations

Farm valuations are essential for understanding the current value of a farm's assets. They involve preparing an inventory of all assets, calculating opening and closing valuations, and determining depreciation of farm machinery.

1.1 Preparing an Inventory of Farm Assets

An inventory is a comprehensive list of all assets on the farm, including:

Fixed and Part-Fixed Capital Assets: Land, buildings, plant, and machinery.
Purchased Stores: Seeds, feed, fertilizers, and chemicals.
Harvested Produce on Hand: Produce stored for sale or as animal feed.
Growing Crops and Livestock: All animals and crops currently growing.

Example: Livestock Inventory

The following is an example of a livestock inventory, listing different classes of cattle:

4 bulls
200 breeding cows
40 in-calf heifers
150 calves
350 steers
80 heifers
30 oxen

1.2 Opening and Closing Valuation

Valuation involves estimating the value of assets at the beginning (opening valuation) and the end (closing valuation) of the financial year.

Opening Valuation

New Farm: Calculate the total value of all assets at the beginning of the financial year.
Ongoing Concern: The opening valuation is the closing valuation from the previous financial year.

Closing Valuation

This valuation is done at the end of the financial year, similar to the opening valuation. It determines the value of the farm's assets to update the balance sheet.

Methods of Valuation

Asset Type	Valuation Method
Fixed and Part-Fixed Assets	Replacement cost less accumulated depreciation
Purchased Stores	Cost price or net realizable value, whichever is least
Harvested Produce	Cost of production or net realizable value, whichever is least
Growing Crops and Animals	Cost of production or net realizable value, whichever is least
Breeding Stock	Replacement cost less accumulated depreciation

1.3 Depreciation of Farm Machinery

Depreciation represents the loss of value of an asset over time due to use, age, and technological changes. It is important for setting aside funds to replace machinery in the future.

Methods of Calculating Depreciation

Straight-Line Method: The cost of the asset minus its salvage value is divided by its useful life, resulting in equal depreciation amounts each year.
Example: An asset worth K5,000,000 with a scrap value of K1,200,000 over 5 years has an annual depreciation of K760,000.
Reducing or Diminishing Balance Method: Depreciation is calculated as a percentage of the asset's remaining value each year.
Example: An asset worth K5,000,000 depreciating at 5% per year.
Sum-of-Digits Method: Depreciation is calculated based on a fraction of the remaining useful life of the asset.
Example: An asset with a useful life of 10 years using the sum of digits formula.
Annuity Method: Adjusts the straight-line method to account for the interest on the reducing balance of the asset.
Use-Adjusted Method: Depreciation is based on the machine's usage rather than time. It depends on factors like the number of hours operated or the distance traveled.
Revaluation Method: Annual revaluation of assets based on current conditions, with the difference in value recorded as depreciation.

2. Insurance in Agriculture

Insurance helps farmers manage risks and uncertainties by providing financial protection against potential losses.

2.1 Risks and Uncertainties

Risk: A measurable event with a probability of occurrence (e.g., drought, fire, theft, accidents, pests).
Uncertainty: An unpredictable event with an unknown probability of occurrence (e.g., natural hazards, market fluctuations, state actions).

2.2 Adjustments to Uncertainty

Farmers can adjust to uncertainties by:

Using Irrigation: Reduces dependency on rain and mitigates drought risk.
Agricultural Insurance: Covers losses due to natural hazards.
Adopting Resistant Varieties: Using crops and animals bred to withstand diseases and adverse conditions.
Diversification: Engaging in multiple enterprises to spread risk.
Flexibility in Production: Using versatile production methods that can adapt to different conditions.

2.3 Types of Insurance Policies in Agriculture

Crop Insurance: Protects against loss or damage due to fire and lightning for various crops.
Livestock Insurance: Covers animals against all risks of mortality, including diseases and theft.
Farm Pack Insurance: Comprehensive cover for fire, buildings, livestock, machinery, vehicles, and more.
Aquaculture Insurance: Customized cover for fish farming operations.
Game Ranching and Ostrich Farming Insurance: Covers game animals and ostriches against mortality risks.

Importance of Insurance in Agriculture

Provides financial protection against unpredictable losses.
Helps in stabilizing income and sustaining farm operations.
Encourages farmers to adopt innovative farming practices by reducing financial risks.