An economic evaluation of factors affecting the adoption of an income equalisation deposit (IED) scheme for commercial farmers in South Africa.
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Date
2001
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Abstract
Recent research suggests that an Income Equalisation Deposit (IED) scheme could be a feasible new
risk management tool for commercial farmers in South Africa. This prompted a study of practicing
consultants' (tax experts) views on the viability of an IED scheme, how it would relate to existing
tax provisions for farmers, and what types of farmers would be likely to use the scheme. Twenty-four
consultants based mainly in KwaZulu-Natal, and in the Maize Triangle and surrounding areas
(North-West Province, North-Eastern Free State and Mpumalanga), were surveyed in 2000 using
mail documents comprising of a questionnaire and a scenario section. Each consultant was asked to
answer eight questions that were compiled to obtain information on whether practicing tax
consultants think an IED scheme would be viable for commercial farmers in South Africa, whether
they would recommend it to their clients, and their perceptions of how it would fit with existing tax
provisions for farmers and, the tax deferral effects of such a scheme
Consultants were then asked to review nine scenarios of typical farms in the study regions and to
decide whether they would recommend an IED scheme for each scenario. A statistical experimental
design was used to structure the scenarios, allowing for main and interaction effects between
variables that could influence the potential use of an IED scheme by commercial farmers in South
Africa. These farms were depicted using four variables that showed different levels of farm business
leverage (debt/asset ratio), net farm income, business risk (index of net farm income variability), and
off-farm income, based on representative farm record data supplied by the National Department of
Agriculture. Discriminant analysis (n=192) was used to estimate which of the four variables best
distinguished between scenario farms that the consultants would and would not consider as likely
users of an IED scheme.
Consultants perceived that the scheme could be feasible, help farmers to avoid over-capitalising
during years of good cash flow, and provide liquidity in "lean" times. Most of them would support
recommendations that the Land Bank drought relief scheme for livestock farmers be replaced with
an IED scheme that all farmers could access. They also felt that the capital expenditure and
accumulated depreciation allowance provisions available to farmers should remain in place. In the
consultants' view, farmers with higher annual net farm incomes (>R300 000), lower debt/asset ratios
<15%), more variable net farm incomes, and less off-farm income would more likely use an lED
scheme. In terms of ranking, ceteris paribus, high risk maize farmers, intermediate risk maize
farmers and high risk livestock farmers are more likely to use an IED than are low risk maize
farmers, low and intermediate risk livestock farmers, and diversified farmers. Since maize farmers
have been the main beneficiaries of past government drought aid, this could mean reduced demands
on government drought relief funds in future if an IED scheme is introduced.
Description
Thesis (M.Sc.Agric.)-University of Natal, Pietermaritzburg, 2001.
Keywords
Farmers--South Africa--Economic conditions., Agriculture and state--South Africa., Agriculture--Economic aspects--South Africa., Agricultural assistance--South Africa., Theses--Agricultural economics.