SANTA CRUZ MISSION SCHOOL, INC.

COLLEGE DEPARTMENT
LAKE
SEBU,
SOUTH COTABATO
Telefax # (083) 228 – 2313* Email address: scmsilakesebu2yahoo.com
www.scmsi-lakesebu.com

HANDOUTS IN AGRI5: AGRIBUSINESS

Chapter 5: FARM ORGANIZATION AND MANAGEMENT

In organizing a farm enterprise, a farm manager applies the principles of business

organization. A farm enterprise is also a form of business organization. He has to take into
consideration the various factors affecting the economic viability of the projected farm enterprise. In
the same manner, management of a farm enterprise involves the use of modern management
principles and practices in business organizations.

Not a few small farmers in agricultural countries have been merely producers. Such traditional
role has considerably contributed to their poverty. They are not business-oriented and therefore, they
do not exert efforts toward profit maximization. And the worst part of it is that those who do not
participate in farm production are the ones who get most of the profits.

Farm Organization

refers to the manner or method of arranging and utilizing efficiently the resources of the farm,
such as labor, machines, money, and materials, in order to attain profit maximization. The duties of a
farm organizer, among other things, are:

1. Select the farm enterprise

2. Choose and combine properly the factors of production

3. Plan the physical layout of the farm

4. Provide a system of records and accounts

How to Choose a Farm Enterprise

The proper approach to determine the most appropriate farm enterprise is to conduct a project
study. The economic technical, geographical, and financial aspects of the project are to be identified
and evaluated. Through this study, its economies viability can be determined. Here are some of the
essential factors which influence the selection of a specific farm enterprise.

Geographical conditions.

These refer to the differences in soil, climate, topography, and other physical endowments
such as the presence of rivers, lakes, seas, natural resources, etc. Obviously, economic activities are
determined by the geography of a particular region. For instance, people who live along coastal
communities are engaged primarily in fishing. Those who live in mountain villages naturally have a
different means of livelihood. In other words, their main occupations are greatly dependent on their
own geographical environment. Evidently, this is one reason why the various regions of the
Philippines have different industries.

A farmer who intends to set up a farm enterprise has to study the geography of the community.
Certain crops are only suitable to a particular soil and climate.

Economic conditions.

A farmer has to evaluate the cost of production and market prices in relation to his planned
farm project. He has to study the demand and supply profile of farm products. Since profit is the
principal objective of the farmer, he has to analyze the effects of both economic and geographical
conditions. For instance, tobacco may be most suitable to his farm but market conditions may not be
favorable for that crop. The farmer has to raise an alternative crop, that may be less adaptable to the
soil and climate but it will give more economic returns for his investment.

Peace and order situation.

This is a basic consideration in the choice of farm enterprise. The project may enjoy a more
favorable geographical and economic conditions but if bandits and other bad elements roam around
in the area, the safety or security of the enterprise becomes unstable. Investors prefer to put up their
farm projects in more peaceful regions. At least, they are sure that their operations are not disturbed,
and their resources are not stolen or destroyed.

Local government policies.

Some municipal and provincial governments offer attractive incentives to investors. Their
objectives are to promote their economic and social conditions. Their programs are in the form of
cheap land rents, less taxes, good roads, available cheap electricity and communication facilities,
peace and order, etc. Such external economies of scale stimulate the growth of production, trade,
and commerce and this enhances the viability of a farm enterprise. It can take advantage of cheaper
inputs and an expanded market, and other economies benefits brought about by product
specialization.

Selection of Factors of Production

An important function of a farm organizer is to combine the factors of production in their right
proportion. These are land, labor, and capital.

Resources which are abundant are cheap. In agricultural countries, labor is cheap because
there is an oversupply. Thus, they use labor-intensive methods in production for economic reasons.
Besides, they are not in a position to utilize capital- intensive techniques because these are
expensive. China, for example, has been maximizing the employment of its vast labor resources in its
agricultural and industrial development pro- grams.

On the other hand, industrial countries have more capital resources than labor. This proportion
determines their choice of method of production. Since the use of machines is much cheaper, they
utilize capital-intensive technology. For instance, in the United States, farmers prefer to use
machines. The cost of labor is high, especially in manual jobs. And in some instances, labor supply is
not enough. They have to import from the poor countries where there is plenty of labor supply.

A farm organizer has to apply the proper factor proportions in his farm production. Obviously,
in the Philippines, farm labor is very cheap because it is abundant. The problems of unemployment
are rampant in agricultural areas.

Some years ago, a noted economist, Prof. Ranis, conducted a survey on our economic
conditions. He recommended to the Philippine government the development of the rural areas and
labor-intensive projects. This was envisioned to reduce mass poverty in the countryside.

Factor payments such as rents, wages, and interest vary from region to region. There are
places in the country where factor payments are cheaper. However, a farm manager has to evaluate
such economic advantage in relation to the availability and cost of marketing facilities and outlets. In
any case, the final consideration is the highest return of investment.

Planning the Layout of the Farm

Economy is not only essential in the management of business organizations but also in
arranging the layout of the farm. In designing a blueprint of the farm, three steps are involved:

1. Planning the internal arrangement of buildings to make sure that there is sufficient
space for the livestock and for the storage of crops. Such arrangement should ensure
economy of time and labor.

2. Planning the location of the buildings for a convenient arrangement with one another
and the fields

3. Planning the shape and location of the fields to suit the rotations and the lay of the
land so as to ensure economy of works

Considerations in Farm Planning

1. Farm buildings should fit the type and size of the farm. For instance, a livestock farm
requires a different build- ing and facilities from those of a vegetable farm.

2. There should be an adequate supply of clean water. This is necessary for almost all
farms.

3. Buildings should be arranged and equipped in a manner which saves labor. The
layout of buildings, facilities, and equipment should be such that it reduces time and mo- tion in
farm work.

4. The farmstead should be conveniently located with respect to water supply, roads,
and fields. This is not only to save travel time but also to minimize the use of long lanes to the
fields or the highway.
 5. Buildings should be placed in a compact form for easier supervision by the owner or
manager.

Planning the Field Layout

Crop rotation. Most production systems require planting a crop on different fields year after year.
Crop rotation is resorted to when results are better in terms of production. The ideal layout for
a level land will be three to five rectangular fields of the same size.

Economical operations. Rectangular fields take less time in plowing and cultivating than those with
irregular shapes. The latter are found in areas where there are forests, streams, and rough
hilly lands in which an ideal layout is difficult to realize.

Soil conservation. Farms that are not level are cultivated by a different method to prevent soil
damage. Contour farming, with or without terracing, is acceptable practice for soil
conservation. This type of farming plows and cultivates the fields not in straight rows, but
rather follows the contour or varying levels of the fields in order to minimize soil erosion or
gullying brought about by heavy rains.

Systems of Records and Accounts

Records are essential in any form of organization. In fact, they are important in business enterprises
like farm projects. In farming, records should indicate expenses, incomes, proper- ties, crops,
animals, workers, and farm activities, such as pro- duction, processing, marketing, etc. These data
are recorded daily, weekly, monthly, quarterly, or yearly depending on the nature of the record. For
instance, the labor report is done daily. For poultry or piggery projects, a weekly or monthly feed
report is applicable. Such records are important in:

1. Planning the operations of the farm

2. Measuring the economic performance of the farm

3. Identifying the weak or problem areas

4. Helping in the proper allocation of farm resources

5. Providing the basis for improving the operations of the farm

6. Other uses such as for income tax and other government requirements

FARM MANAGEMENT

Farm management is a science as well as an art. Both are applied in farm enterprises for the
purpose of maximizing profit. Farm management is the actual operation of the farm business. Just
like in any other types of business, the farm manager also performs the functions of management,
such as planning, organization, coordination, controlling, directing, and staffing. His final objective is
profit maximization.

An efficient manager must be able to immediately identify the problems in the farm. Then he
must be able to analyze accurately such problems and proven sound alterna- tive solutions. And
finally, he must be able to choose the best solution. However, a more desirable role of a manager is
to prevent problems from occurring. This is more efficient than solving problems as they appear.

The Job of a Farm Manager

1. Choose the method of production

2. Select, train, and supervise farm labor
3. Control and direct physical resources
4. Adjust farm operations
5. Prepare operation plans
6. Keep farm records and accounts

Characteristics of a Desirable Farm

A farm manager should not only be competent in choosing the proper resources of his farm,
but he has to also consider the external factors which influence the viability of his farm operations.
Some of these are local government taxes and the different institutions in the community, such as
schools, hospitals, churches, neighborhood, banks, and economies of scale. Here are some of the
characteristics of a desirable farm:

Fertility of the land. All other things being equal, fer- tile soil has an advantage. It is capable of more
harvests. Moreover, it is more economical in the sense that there is little or no need for fertilizers,
which reduces the cost of production.

Topography. The shapes and contours of the land fit certain farm enterprises. If the topography of
the farm is suit- able to the planned farm enterprise, there is no need to change it. However, if it is
not, the owner has to develop the land to conform to the requirements of his farm enterprise. Such
land development is expensive.

Improvements. In buying a farm, one has to consider the existing improvements, such as the fences,
buildings, and water supply. If these are in good condition and are adequate for the needs of the farm
enterprise, the buyer has been saved the additional expenses on improvements. On the other hand, if
major repairs or improvements are required, the price of the farm has to be evaluated in relation to
the cost of improvements. That is, the price of the farm plus the cost of improvements show whether it
is a fair purchase.
Farm layout. The physical arrangement of the resources of the farm, such as buildings, work
animals, equipment, and fields have a considerable contribution to the efficient operation of the farm.
A farm with a poor layout is a source of not a few problems in terms of time and motion. This
evidently increases cost of production. If one intends to acquire a farm with this condition, he should
consider the expenses in restructuring the physical resources of the farm. Transferring buildings and
constructing new roads are expensive.

Weeds and stumps. Removing weeds, rocks, and stumps means additional labor and money. In
fact, there are types of weeds which are difficult to remove or destroy. Obviously, a more desirable
farm is one which has no weeds, stumps, rocks, or boulders.

Location of farm. An ideal farm should be accessible to external economies of scale, such as roads,
transportation, raw materials, credit facilities, and other supportive industries. These external factors
help much in the economic viability of the farm enterprise. One reason why investors are reluctant to
put up their enterprises in the rural areas is the lack of economic infrastructures, like transportation,
electricity, and marketing facilities.

Taxes. The government can encourage the growth of farm enterprises through appropriate tax
exemptions as incentives. Such favorable policies stimulate the farmers to set up small-scale
industries, all other things being favor- able. Local governments differ in their taxation programs.
Some provinces offer attractive tax schemes to attract investors. Such places appear to be a good
site for a farm enterprise.

The community. The economic, social, educational, and religious institutions in the community affect
the viability and growth of a farm enterprise. For instance, a friendly neighborhood is an advantage in
farm operations. The farm enterprise has no problem of peace and order and community relations.
The presence of schools, churches, and hospitals in the community is definitely a plus factor. The
farm employees and their families can avail themselves of the services of such institutions. There is
no more need for the farm enterprises to construct schools, chapels, and hospitals. Moreover, they
can get their manpower needs from the community. This is more economical than hiring laborers from
far places. A progressive community can favorably affect the growth of a farm enterprise because its
products can be absorbed by the community.

The Farm Manager as a Decision-Maker

The farm manager is very much involved in the decision- making process. He makes decisions
every now and then regarding the operations of his farm enterprise. He should know the steps in
making decisions; these are:

1. Defining the problem

2. Analyzing the problem

3. Developing alternative solutions

4. Deciding the best solution

5. Implementing the decision into action

 Clearly, a manager can only make good decisions if the right and sufficient information are
available to him. Hence, the importance of farm records should not be taken lightly. They serve as the
basis of decision-making. Nevertheless, it is also necessary for the farm manager to be
knowledgeable on eco- nomic principles. He deals with problems of allocation of scarce farm
resources, production, and profit maximization. His knowledge of economics helps him in choosing
the best alter- native solution and its proper implementation.

The Role of Planning

Planning is a vital function of management. A plan is set of objectives to be achieved in the

future, and the procedures on how to attain them. Since planning deals with the future, it depends on
calculated predictions of future conditions, such as population, technology, and preferences and other
market conditions. Planning is based on the objectives of the enterprise. However, a farm manager
has to plan on the following basic problems:

1. What products are to be produced and in what quantity?

2. How will the products be produced?

3. For whom are the products produced?

4. How will the products be sold?

5. What equipment, machines, plants, and personnel are needed?

Farm Planning Decisions-

There are two main types of planning decisions: organizational planning and operational
planning. Organizational planning deals with farm layouts, drainage, and mapping of soil productivity.
It also includes an inventory of the resources of the farm, such as land, labor, and capital. For
instance, it shows the number of hectares of rice land, carabaos, machines, and workers, and the
fertility and topography of the farm land, the conditions of the machines, etc. Organizational planning
decides on questions such as what kind of enterprise to organize, what buildings and machines are
needed, and the like.

The other type of planning is operational planning. It is concerned with problems on how to
combine properly the factors of production, how to operate the farm, how to harvest the crops, how to
store the produce, and how to raise poultry or livestock.
Problems of Farm Manager

Aside from problems on the selection of a suitable farm enterprise, efficient method of
production, and the proper allocation of farm resources, a farm manager is confronted with the
following specific problems:

1. Lack of or inadequate current information. A farm manager should be well-informed on

prevailing prices which affect his farm business. The changes in the prices of equipment and
fertilizers, insecticides, and other farm supplies should be analyzed in order to minimize the cost of
production. This can be done through factor or resource substitution. A farm manager should be
aware of existing or probable competition and new technology in farm operations. His failure to keep
abreast with current information is likely to place his farm enterprise at a great disadvantage. He
makes the wrong decisions because his information is not correct.

2. Response to institutional changes. A farm manager should be able to adjust favorably to

changes in government programs on agriculture, such as agrarian reform, cooperatives, corporate
farming, etc. These institutional changes affect the viability of certain farm enterprises. Obviously,
those whose farm business is adversely affected by the government programs are not happy. Such
problems could have been avoided if they were only quick to make the necessary adjustments.

3. Risks. A farm enterprise is subject to many risks. Decline in demand for agricultural products,
natural calami- ties, plant pests, and the like constitute big problems for a farm manager. At any rate,
crop, fire, and livestock insurance has somehow reduced the risk. In the Philippines, there is a new
government crop insurance system. Refer to the chapter on farm insurance.

4. Choice of proper alternatives. A farm manager is often confronted with problems of choosing
economic opportunities wisely. For instance, he has to decide whether to sell his farm products at
harvest time or in the near future; to spend his income on family needs or for business needs; to
spend his savings on a poultry project or a vegetable farm; and other similar alternative ventures.

5. Proper combination of fixed and variable factors. Profit maximization is the goal of a farm
manager. To achieve this, he has to arrange the most efficient combination of the factors of
production, like land, labor, machines, and buildings. The economic success of a farm manager
depends on his ability to combine the fixed factors, such as land, machines, buildings, and the other
physical capital with the variable factors, such as laborers, seeds, fertilizers, livestock, etc. He has to
evaluate the advantages and disadvantages of the labor-intensive methods of production or the
capital-intensive type. However, it is very evident that farmers in underdeveloped countries greatly
depend on labor-intensive farming. They have no choice. They cannot afford mechanized farming
methods like those practiced in the United States.

Other Management Functions

Production management. The selection of the type of farm is the first decision that a farm manager
must make. He has to decide whether to set up a cropping system, a piggery project, or a livestock
enterprise. He can also combine all these projects in his farm. However, his choice of a particular
farm enterprise depends on several factors such as geographical, economic, and other variables
which affect the viability of the enterprise. A farm manager has to evaluate his own produc- tion
resources and the conditions affecting the profitability of his enterprise. For instance, if he prefers a
cotton crop because it is the most profitable venture, his next job is to determine the best method of
producing cotton.

Marketing management. There are several marketing problems which confront a farm manager.
Some of these are price fluctuation, storage, transportation, competition, and market prospects. He
has to identify his market target and then decide how and when to sell his farm products. Obviously,
he has to sell his products in a manner, place, and time which give him the maximum profit. For
example, a farm manager has to determine whether it would be better for him to sell his crops in the
market or right in his farm. To do this, he has to evaluate the cost of transportation, storage, labor,
and the difference in price between market and farm. Likewise, he has to decide whether his farm
products should be standardized or not. It is therefore very important for a farm manager to keep
abreast with price variations in different places, and the best marketing channels for his products

Financial management. Compared to non-farm business, cash income from farm enterprises is
irregular. A farm manager may get his income from his crops once or twice a year. If it is a piggery
project, he gets an income every six months. This nature of farm income requires appropriate
planning. There should be adequate cash to meet day-to-day financial liabilities.

The responsibility of the farm manager is to finance the organization and operations of the
farm enterprise. He records business transactions and he see to it that the financial condition of the
enterprise is safe and stable. It is necessary for him to be familiar with elementary accounting,
finance, and economics. It is his job to know the sources of funds, capital investments, and factor
substitution, and he should be able to analyze a financial statement.

MANAGEMENT OF AGRIBUSINESS ENTERPRISES

In the field of agricultural development, the concept of agribusiness is quite new. This
particular type of business is concerned with providing the farmers with farm supplies which they
need in the production of their crops, poultry, or piggery; and in the processing and marketing of their
farm products.

Many years ago, farmers produced their own farm inputs and they performed the processing
and marketing of their own farm products. With the commercialization of farm enterprise and the
economic advantage of specialization, not a few agricultural activities have been transferred to
business organizations which specialize in supporting the modernization of agriculture. These are the
fertilizer firms, insecticide companies, farm machinery corporations, food processing enterprises, and
marketing organizations. In the Philippines, there is the Planters Products, Inc. and several firms
engaged in the sale of fertilizers, chemicals, tools and machines for agriculture. We also have rice
mills and cooperative marketing organizations.

The management of an agribusiness company is more specialized than that of an agricultural

enterprise. In fact, the former has a more complex organizational structure and operations. In a farm
enterprise, a single farmer can perform all the phases and functions of management. This is not the
case in an agribusiness enterprise. It is a big company, and one man cannot possibly manage its
operations efficiently. Management functions are departmentalized and these are delegated to
several competent persons. On the top of the management of the agribusiness firm is the general
manager. He is assisted by his division or department managers for finance, production, marketing,
and administration.

Thus, it can be said that managing an agribusiness corporation is just like running a modern
business organization. Its programs and operations are anchored on modern and relevant principles
and practices of management. Its managers have to be creative and dynamic. Otherwise, the viability
of their business organization could decline in the midst of competitive market conditions. And more
important, they should not neglect their social responsibility. A good business organization is not
solely concerned with profit maximization. It has a responsibility to develop its human resources and
the com- munity. Such a business organization is more likely to achieve its economic goals.

FARM RECORDS

A farmer is not only a producer but also the business manager of his farm enterprise. He buys
his farm inputs, such as fertilizers, tools, insecticides, etc. from dealers. In some cases, even a small
farmer hires laborers on a daily basis to assist him in his farm work. He also deals with businessmen
in selling his farm products. In all his business transactions and farm activities, the need to keep
records becomes necessary for the farmer. These greatly help him evaluate the problems, needs,
and the viability of his farm operations. Moreover, the farmer can utilize such records for planning and
decision- making in relation to the improvement of his farm enterprise. Small farmers usually rely on
memory and past experiences in making their decisions on their farm problems and projects.
However, there is no better substitute for written records. These are more accurate and convenient.

The Records to Keep*

1. Personal and documentary records.

Important documents such as land titles, deeds of sale, leases, wills, trans- fer of rights,
birth certificates and the like should be kept. Although some of these are officially recorded in
government offices, not a few are destroyed by fire, flood, termites, and other forms of
damage. In fact, many farmers have no land titles to the lands which they inherited from their
ancestors. Many of them have no original birth certificates because these were destroyed
during the war. Whenever birth documents are needed, farmers have to produce affidavits and
other supporting papers in lieu of their birth certificates. Such inconveniences can be avoided if
the farmers keep their important papers secured.

Many disputes in boundary matters arise due to the lack of proper documents. Also,
there are many cases of land-grabbing. Many lands of poor and illiterate farmers have been
taken from them. This has been made possible because such lands have no titles. Said painful
experiences could have not possibly occur if the farmers have the necessary documents.
Hence, vital documents should not be neglected.
2. Business records.

Data on business transactions and farm operations are very important, especially credit
transactions. Business records are classified under three categories:

a. Inventory - A list and description of farm proper- ties, such as real estate,
equipment, livestock, crop and other farm supplies.

b Records of receipts and expenses including capital outlays - The income of the
farmer from the sale of his products and his farm expenses are listed. This is the
financial record of the farm operations.

b. Production, performance, and other incidental records - These fit in with the
inventory and financial records. All these combined data can be used in planning the
changes in the farm operations.
 SANTA CRUZ MISSION SCHOOL, INC.
COLLEGE DEPARTMENT
LAKE
SEBU,
SOUTH COTABATO
Telefax # (083) 228 – 2313* Email address: scmsilakesebu2yahoo.com
www.scmsi-lakesebu.com

HANDOUTS IN AGRI5: AGRIBUSINESS

Chapter 6: FARM CREDIT

Small farmers have very little access to credit facilities. This is a big problem for the poor
farmers. Their incomes are very low because of very low production. Obviously, it is next to
impossible for them to save. Their financial problem can be aggravated further by a long series of
inflation in which the prices of production inputs like fertilizers and pesticides have increased. To
finance their farming, they have no option except to borrow money. The painful reality, however, is
that most small farmers are not qualified to borrow from lending financial institutions.

Of course, the PNB, rural banks, and the Land Bank have their own credit programs for the
poor farmers. But the amount is limited and the loan conditions are very discouraging to the small
farmers. Thus, they go to the unlicensed moneylenders who usually charge much higher interests. In
spite of this, it is more convenient and, in some ways, more economical for the farmers to deal with
informal moneylenders.

Somehow, the poor farmers have a responsibility. They have to use their loans wisely. Not a
few of them divert their productive loans into personal consumption. Perhaps, poverty has given them
no choice. Another negative attitude of poor farmers is their reluctance to pay off their government
loans. They still feel that is the duty of the government to extend financial aid to poor people like
them. Such dole-out mentality is still pervasive in the rural areas.

To minimize the high rate of nonpayment of government loans by the poor farmers, and to
promote the proper use of credit, the government has instituted programs such as credit
consciousness and supervised credit. These are envisioned to improve the economic and social
conditions of the poor farmers. This chapter explains the principles in the use of credit, guidelines in
obtaining farm credit, requirements of supervised credit, and other relevant topics. In addition,
criticism of the credit program of the government is discussed.

The Meaning of Credit

Credit is defined as the ability of an individual to acquire goods, services, or money at a

certain time in exchange for a promise to pay at some future time. The promised payment may take
the form of goods, services, or money. There are two parties which are involved in credit transactions.
One is the creditor who provides the thing borrowed and the other one is the debtor who receives it
and assumes the obligation to pay. In the field of financial institutions, credit transactions usually
involve either a promise to pay or an order to pay a definite sum of money. Obviously, the most
important and biggest credit transactions are those which involve the use of money.

Credit means debt. They are the same thing derived from two different points of view. Both
are obligations to pay at some future time, usually in the form of a fixed sum of money. Credit refers
to a person or institution to whom future payment is to be made. Debt refers to a person or institution
which is obliged to pay in the future.

Not everyone has the ability to obtain goods or money through credit. Trust is the basic
element in credit transaction. This means that the creditor has faith in the ability and willingness of the
debtor to fulfill his obligation. It is not enough that an individual is willing to pay. The ability to pay is
more important. And this ability to pay is based on the character, capital, and capacity of the
borrower. The latter offers a collateral in the form of land title or other valuable assets as security for
the loan. In case a borrower has no sufficient support for his credit, he is required to present two co-
makers or guarantors who have the capacity to pay off the loan.

Why Farmers Need Credit

To small farmers, financing their farm operations or farm enterprises is a big problem. They
cannot rely on their savings because they have none. With the high cost of living, the income of the
farmer is usually barely enough to support his family. His financial problem is further aggravated
when he begins sending his children to college if it is still possible for him to do so. Obviously, they
have no more money to spend for their farm inputs and other capital investments. This situation does
not only exist in the Philippines, but also in all other agricultural economies. However, even farmers in
rich countries depend also on credit institutions for their farm operations and projects. Here are some
of the reasons why farmers need credit.

Farm machinery.

In places where mechanized farming is practiced, old tools and obsolete machines have to be
replaced by new and modern ones to keep abreast with changing technology. Farmers have to use
better machines to improve their production.

In the Philippines, some farmers use small machines in plowing their fields. Most of these are
acquired through credit or on installment basis. There are other tools and kinds of equipment a
Filipino farmer needs to efficiently farm his fields, such as irrigation pump, sprayer, weeder,
wheelbarrow, etc. Most farmers cannot afford to purchase such tools of production in cash. So, they
resort to credit.

Commercial fertilizer.

The scientific method of farming introduced by the government agriculturists requires the use
of commercial fertilizers. Even the high-yielding rice variety needs fertilizer. Farmers claim that this
variety cannot produce well without the use of commercial fertilizers. They have been complaining
about the very high cost of chemical fertilizers which have greatly reduced their farm income. Since
the application of a fertilizer is a must in production, they have to borrow money just to buy this input.
Otherwise, they fear the consequence of a poor harvest.

Livestock.
 The production of livestock and its products in countries with commercial farming has
considerably increased. The purchase of cattle requires a large investment or financing. In the case
of Philippine agriculture, the government encourages the establishment of piggeries, poultry,
fishponds, and cattle industries. As a policy of attraction, the government, through its financial lending
institutions, grants loans to individuals or corporations who would like to venture into such projects.

Land and buildings.

Additional farm operations require more areas of land and more buildings. Farmers with
inadequate financial resources have to resort to credit to finance their expansion programs. The
concept of corporate farming is a relatively anew venture in Philippine agricultural development
programs. Firms which are intending to set up corporate farming need millions of pesos to finance
their huge capital investment, such as the purchase of thousands of hectares of land, road
construction, installation of facilities, and the erection of plants and buildings. Such a project depends
on long-term credit scheme for its realization.

The Price of Credit

Interest rates vary depending on the nature and conditions of the credit. If the risks involved
are great, the interest rate is high. Loans without securities or collateral naturally require high interest
rates. For the protection of the loan applicants, the government through the Bangko Sentral ng
Pilipinas has regulated the cost of credit. However, in circum- stances where the laws of economics
prevail, the price of credit is dictated by the law of supply and demand. In view of the widespread
poverty among the people, there has always been a great demand for money. Thus, the business of
lending money to desperate borrowers is a very lucrative venture for not a few unlicensed
moneylenders in our society. Unfortunately, most farmers are the easy victims of usurious practices.

The Loan Sharks

Since ancient times to the present, usurers or loan sharks have acquired wealth by charging
exorbitant interest rates. They have improved their economic conditions at the expense of the poor
people. They are found everywhere in the markets, barrios, factories, offices, etc. They do not force
or convince people to borrow from them. It is the poor who desperately need money for their
emergency needs or essential needs such as medical expenses, tuition fees, or farm production
expenses.

Poor people cannot borrow money from financial institutions because they have no collaterals.
And so, their last re- course is to obtain loans from the unlicensed moneylenders. The practices of the
latter are of course illegal. But the government appears powerless to stop their business. There is a
great demand for money and this further bolsters the profitable trade of the loan sharks.

Many years ago, poor people in Europe organized credit unions as a solution to their financial
problems. For instance, the famous Rochdale pioneers of England were able to contain the
capitalistic exploitation by forming their own consumers cooperative. Another example: Mayor
Raiffeisen of rural Germany saved the farmers in his community from the clutches of the loan sharks
and from starvation by organizing the first agricultural credit union. In the Philippines we have the San
Dionisio Credit Cooperative which was organized in 1961. It is now one of the biggest of its kind in
Asia. The credit union has driven away the loan sharks from the barrio of San Dionisio in Parañaque.

Aware of the economic and social contributions of credit cooperatives, the Cooperative
Development Authority has en- couraged the poor people, particularly the farmers, to form their credit
cooperatives. This can greatly reduce or eliminate the economic exploitation of the loan sharks.

Determinants of the Cost of Credit

Interest. This is payment for using the money of other people. In banking institutions,
the loans come from the savings or deposits of individuals. The borrowers pay interest to the
bank, and the latter gives interest to its depositors. Hence, the bank acts a middleman
between the suppliers and users of money.

Fees. Aside from interest, there are other charges which financial institutions impose on
borrowers. For instance, they charge fees on clerical and administrative expenses, such as
inspection fees. Securities such as lands, buildings, and other properties are inspected by a
representative of the bank. Such expenses are passed on to the borrower.

Usually, interest and other costs of credit are deducted upon the granting of the loan.
For example, P100 interest plus P20 service fee are deducted from a loan of P1,000.
Therefore, the borrower gets only P880. In this case the real interest rate is higher than when a
borrower obtains P1,000 and pays P1,120 after one year.

Method of repayment. The manner of paying off the loan affects the cost of credit. For
example, if a one-year loan is to be paid on a monthly basis, the effective rate of interest
becomes higher, unless interest is imposed on the remaining unpaid monthly balance.
Supposing the amount of loan is P1,000 at 10 percent interest rate per annum. If this will be
paid after one year, it will be P1,100 plus service fees. But if the loan is to be paid on a monthly
scheme, then the loan of P1,000 cannot be used for the whole year. And yet the 10 per- cent
interest rate has been charged for the whole amount for one year.

Size of the loan. Credit which requires a constant rate of interest and a fixed service
charge is not favorable to small loan borrowers. For illustration, a farmer borrows P10,000 at 5
percent interest rate plus P20 service charge. Interest is P500 plus P20 equals P520 or P5.20
per P100 of the total loan. Another farmer borrows only P100 with the same cost of credit. He
pays P5 for interest and P20 for service fee. So out of his total loan of P100, he pays P25.
Clearly, his cost of credit is much higher than the farmer who gets a P10,000 loan who pays
only P5.20 per P100.
Principles in the Use of Credit

Productive enterprises. Loans should be used for productive projects. The income which is
generated from the projects should be sufficient to repay the loan. For a viable project or investment,
a reliable feasibility study should be conducted. In the case of farmers, it is not only the economic
viability of the project that should be considered. A farmer has also to plan well the timing of the use
of his loan in order to minimize possible risks. For example, bad weather conditions and the decline in
the prices of farm products provide adverse effects on the use of farm business of the farmers.
Likewise, such conditions reduce the ability of the farmers to settle their loans with banks. Clearly,
good judgment is necessary in programming farm operations to be able to realize maximum. profits.

Time of repayment. Farmers should arrange with the bank for a proper time of repayment of
their loans. It should be at a time when it is possible for them to pay. That is when their income which
comes from their projects is available. Borrowers are likely to encounter financial problems if they do
not follow this principle. It is obvious that an extension of credit means additional cost of credit. They
have to pay more interests. And in case borrowers cannot pay their debts, the bank forecloses their
pledged properties. This is not only humiliating but also a big loss for the poor farmers.

Rate of repayment. The rate of repayment should coincide with the useful life of the machines
which were purchased through credit. Machines which are usable for several years should be paid off
gradually until they are still useful. The idea is that once a machine is no longer useful the farmer has
to buy another machine. It would mean financial problems for the farmer if he has not yet fully paid his
old machine.

Size of repayment. This includes both the rate and size of repayment. The annual repayment
of the principal and interest should be in proportion to the varying net incomes generated by the
project or enterprise which was funded by credit, in order to make it easier for the farmer to repay his
loan. For example, a loan is payable in 10 years. During the first 3 years of the project its net income
is only 60 percent of its total productivity. However, in the remaining years, productivity declines
progressively. The example shows variation in the productivity of the project. To suit the financial
ability of the farmer, the yearly payments should correspond to the decreasing output of the project.

Guidelines in Obtaining Farm Credit

1. Know your credit needs. Plan your project well. Consult your loan officer about the credit
needs of your project.

2. Prepare your farm plan and budget. This can be done through the help of a production
technician. To accomplish a good farm plan and budget, you should keep a complete and accurate
record of your resources, income, and expenses. The record should show the performance of your
project during the previous years. Also, it will determine if your credit, was applied properly.

3. Acquire your loan from an authorized bank. It is advisable to get your credit from only one
bank for simplicity in planning your credit needs. The bank employs an agricultural technician to
assist you on modern concepts and better methods of production.
 4. Be honest in providing credit information. Inform the loan officer about the true facts of your
project and its financial requirements. This enables him to give you the right advice.

5. Use your credit for the intended project. The loan should be used only in accordance with
the approved farm plan and budget. Borrow only the actual cost of the project.

6. Prepare a repayment plan in advance. Before applying for a loan, you have to prepare a
repayment plan. Repayments should come from incomes generated by your project such as the sale
of crops or livestock’s. Estimate your incomes and expenses to indicate your probable profit. Do not
spend more than what your income can afford. Limit your credit within your ability to repay the loan.

7. Comply with the instructions of an agricultural technician to improve your crop or livestock
production. Discuss the problems of your project with your agriculturist and your loan officer. Attend
farmers' seminars, training programs, meetings, and the like to gain knowledge and improve your
skills in farming.

8. Maintain good savings and repayment habits. Prompt repayment of your credit enhances
your credit rating. This means you can easily borrow again. If you save regularly in the bank, you
reduce your dependence on credit. This is more economical.

9. Use your credit wisely. Your loan should be applied only on projects which increase
production and income. Engage in supplementary farming activities for additional earnings, such as
backyard gardening, piggery, poultry, and mushroom culture.

Requirements of Supervised Credit

Credit is granted to loan applicants in adequate amount and at a time they need it. It is
supplemented with farm and home management guidance under an agriculturist. The loan is not
given in its full amount. Instead, partial releases are granted to the borrower during the various stages
of the project development. Supervised credit is used to ensure the proper application of the loan for
the intended project. Under this program, the loan applicant has to comply with the following:

1. Apply proven practices which are necessary for the conservation of the land

2. Improve the fertility of the land and its production

3. Follow the approved plan and budget jointly prepared by him and a duly accredited
supervised credit technician

4. Insure his palay crop at the nearest branch office of the Philippine Crop Insurance
Corporation (PCIC) or its underwriters

Steps in Supervised Credit

1. Analysis of the project

2. Preparation of the farm plan and budget

3. Periodic inspection and follow up of the project

4. Evaluation of the project upon its completion

Credit Consciousness

For not a few banks which extend loans to small farmers, credit collection has persisted as a
problem. For this reason, the Bangko Sentral ng Pilipinas has launched a credit-consciousness
program. Its objective is not only to improve the paying habits of bank borrowers, but also to educate
them on the proper use of credit.

The dole-out mentality has not been erased from the minds of many farmers. This attitude was
spawned many years ago by politicians who forgot their good sense of values in their desire to win
elections. They bought the votes of the poor farmers with money or materials. This destroyed the self-
reliance and sense of responsibility of the rural poor. Thus, whenever the government extends loans
to the poor farmers, their willingness to pay is weakened by their dole-out attitude.

An important aspect of credit consciousness is the proper use of credit. Since credit funds are
precious and scarce, there is a great need for their wise utilization. As much as possible, an individual
who borrows money from a bank should use it only for productive or income-generating activities.
Otherwise, if the borrower is a poor man, it be quite difficult for him to repay his loan. Evidently, this
kind of situation occurring on a large scale has a negative impact on the rural banking system.

During the previous years, the poor record of repayments by the great majority of small
farmers considerably ruined the viability of most rural banks. Even the Land Bank of the Philippines
has experienced credit collection problems from its farm credit program and from the installment
payments of tenants under the agrarian reform program. Such delay or non-payment of loans
deprives other poor borrowers of the chance to use existing credit facilities. This means that their
opportunity to improve their economic conditions through bank credit is likewise delayed or
eliminated.

In the long-run, if most poor farmers cannot pay their loans, the financial resources of the rural
banking system will be reduced to a level where it is no longer possible for them to engage in farm
credit activities. Obviously, such an unfavorable situation will hamper the agricultural development of
the country which is the foundation of national economy. Hence the importance of credit
consciousness.

Agricultural Credit in Other Asian Countries

It has been noted that the basic aim of credit policies of the other Asian countries is to increase
agricultural productivity and to improve the quality of life of the small farmers. In the case of the
Philippines, it has focused its credit policies on further agricultural development which is now the main
thrust of the government. It is not only concerned with farm productivity but also with the increase of
farm export earnings in order to improve our balance of payments position. In all the Asian countries,
agricultural cooperatives are encouraged to play a vital role in channeling credit to the small farmers.
Taiwan, Korea, and Japan have been successful in the development of agricultural cooperatives. The
small farmers of these countries enjoy a good standard of living.

The banking system, consisting of commercial banks, savings banks, rural banks, and
development banks, provides most of the credit needs of agriculture in almost all of the Asian
countries. However, in view of the rigid requirements of the banking system, not a few small farmers
still depend on informal sources of credit like the professional moneylenders, traders, middlemen,
landlords, and relatives. Among the Asian countries, Singapore has a unique agricultural credit policy.
It is not the banks which supply the main agricultural loans. The traders and suppliers of agricultural
inputs like seeds, fertilizers, and farm equipment provide almost all funds for Singaporean farmers.

In conclusion, countries with weak farmers' associations, like cooperatives, and whose farmers
live below the poverty line have not been successful in the implementation of their farm credit
policies. The loans and sales proceeds of the poor farmers have not been utilized for their intended
purposes in the production process. Obviously, there are more urgent needs like food, education, and
medical care which prevent them from using their loans for productive activities. Their nonpayment of
their loans endangers the viability of the whole credit pro- gram. Hence, the extension of agricultural
credit to the small farmers is not enough, and it is not the first solution to the improvement of
agricultural output and the quality of life of the small farmers. Basic agricultural infrastructure like
feeder roads, irrigation systems, storage facilities, and markets should be developed first. Moreover,
the most important factors are land tenure and the proper education of the farmers on the use of
credit. Farmers are not expected to improve their yields if the land does not belong to them.

Credit Program - Not for the Poor

(Materials of this particular section have been derived mostly from Perverse Development
authored by Dr. Ernest Feder, an agricultural consultant of various United Nations agencies and
professor of agricultural development in different universities in Europe and Latin America.)

The World Bank had formulated an "assistance program" for the rural poor, and persuaded the
less developed countries to adopt it. Robert McNamara, former World Bank president, has noted the
worsening economic conditions of the rural poor due to the expansion of commercial farm
enterprises, Despite the miserable situation of the poor farmers, McNamara believes that the small
farmers can be a good market for the various agricultural inputs (fertilizers, insecticides, pesticides,
etc.) being manufactured and sold by the multinational agribusiness corporations. He then proposed
to the Board of Governors of the World Bank to extend more loans to the small farmers on condition
that they would use the agricultural in- puts of the multinational corporations and the seed varieties
(miracle rice) of the International Rice Research Institute (IRRI).

The multinational corporations (also known as transnational corporations) are owned by the
richest countries in the world like the United States, Japan, France, Germany, and Great Britain.
These countries are also the biggest stock- holders of the World Bank, International Monetary Fund,
and Asian Development Bank. In the case of IRRI, it has received generous financial assistance from
the World Bank in its re- search and development programs.
Discrimination against Poor Borrowers

Not a few big landlords use their agricultural loans for speculative purposes. They invest their
loans on non-farm business ventures because the returns are much higher. Such diversion of money
has deprived many small farmers of more supply of credit. The lenders do not mind such loan
diversion by the rich landlords because of the good economic, social, and political connections of the
borrowers. Besides, they make prof- its and pay their loans. In view of the excellent social and public
relations between the lenders and the rich borrowers, the lending institutions (including government
financial institutions) have been inclined to assign funds officially allocated to small farmers to their
preferred clients, the big landlords. Evidently, such malpractice constitutes a departure from the basic
objectives of the credit program.

Small farmers are also guilty of misusing their loans. Extreme poverty has given them no
choice. They usually use a portion of their bank loans for their consumption needs. When- ever the
poor farmers divert their loans, they are penalized by depriving them of the right to borrow again. The
reason is that such loan diversion from production to consumption defeats the objective of the lenders
which is profit.

The products of the multinational corporations have not been bought by the small farmers as
envisioned by McNamara. Obviously, the credit program which is mainly funded by the World Bank
has been geared towards the economic interests of the multinational corporations which supply the
irrigation pumps, fertilizers, herbicides, insecticides, pesticides, and farm equipment and not for the
welfare of the poor small farmers. Dr. Feder noted:

The case of the poor cultivators is altogether different. For generations, credit has been used
against them by landlords, merchants or moneylenders to make them dependent so that they and
their output can be manipulated. Poverty reinforced by indebtedness forces the borrowers into a
humiliating state of dependence. This has not changed with the appearance of institutional credit and
poor-credit schemes, and in some respects, the peasants are worse off than before.