AN-ECONOMIC-ANALYSIS-OF-THE-TOPDRESSING-INDUSTRY.pdf
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1、 1 AN ECONOMIC ANALYSIS OF THE TOPDRESSING INDUSTRY Miles Grafton(1) , I Yule (1) and James Lockhart (2) (1) New Zealand Centre for Precision Agriculture, Massey University. (2) College of Business, Massey University Abstract. Over recent months, there have been some well publicised reports which ra
2、ise doubts about the financial viability of the topdressing industry within New Zealand. There seems little evidence of a systematic analysis of the business model and suitability of the charging structures in place. This paper considers three aspects of topdressing costs in order to estimate the ac
3、tual costs of spreading fertiliser and lime. The questions posed are; what are the actual costs of operating the two main models of aircraft flown in New Zealand? What size of aircraft fleet is required to fulfil the spreading requirements? What are the on-farm infrastructure costs that also need to
4、 be considered in order to calculate the true costs of servicing the application of fertiliser to our hill country sector? Topdressing services mainly the sheep and beef sectors which contribute 22.5% of New Zealands agricultural output. Farm income in this sector is nearly $4 billion. Application o
5、f fertiliser is important to sector productivity and the possible collapse of the topdressing industry would have far reaching consequences for these farming sectors and New Zealands export earnings. The model finds that there is no financial return on capital invested in the industry. Therefore, th
6、e best returns are found by applying fertiliser from old aircraft with aged support vehicles all with little capital value. This is clearly unsustainable as even old aircraft require large injections of capital periodically to maintain airworthiness. As fertiliser prices have increased, application
7、rates have fallen which increases application cost per tonne applied. The agreed fixed price charging model is traditionally based on an application charge per tonne. It is likely that farmers perceive increased application charges per tonne as a price increase, whereas it is only compensating the a
8、pplicator for the additional time of sowing at a lower rate. Introduction The spike in fertiliser prices experienced over the last two years, (see Figure 1) has reduced demand for both the products and aerial application services. The agricultural aviation industry has been thrown into crisis, putti
9、ng further pressure on application pricing. Downward pressure on pricing further compromises the fixed pricing model assumptions as applicators marginally price to cover their operating variable costs, leaving their margins and fixed costs to chance. 2 There has been recent publicity and industry co
10、mment which leaves little doubt that the New Zealand fixed wing aerial application industry is in difficulty (Van Den Bergh, 2009). This probably stems from the New Zealand Agricultural Aviation Association (NZAAA) Conference of 2009, which was themed “Industry in Crisis”. The keynote presentation a
11、nd report to the Association was an industry structural analysis (structure, conduct, performance) conducted by Lockhart (Lockhart, 2009). Figure 1: Moroccan Phosphate rock prices US$ per tonne. FoB, World Bank Commodity Price Data, sourced; www.M, on 29/01/10. The report concluded that the industry
12、 is failing to achieve an adequate margin that allows for replacement of existing equipment and is, therefore, consuming the capital invested in existing plant and machinery. In short, the industry was identified as failing to meet the cost of capital. Evidence of this being included low replacement
13、 rates of aircraft (only two replacement aircraft have been introduced into New Zealand within the past three years), and price competition in the absence of technological change (Lockhart, 2009). Aircraft operator issues To raise load capacity and, therefore, reduce marginal costs the industry has
14、been re- powering existing aircraft, constructed between 1968 and 1984, with turbine engines instead of purchasing new aircraft (CAA, 2008; Lockhart, 2009). In some cases the repowering has exceeded the original airframes design envelope. Furthermore, the difficulty of achieving reasonable returns a
15、ppears to eventually lead to operator failures. Pilot safety is being, unwittingly, compromised and puts at risk an 3 essential service to the hill country farming sector of an agriculture dependent nation. The two major fertiliser manufacturing cooperatives identified the financial risk to their hi
16、ll country shareholders and have vertically integrated their businesses by purchasing agricultural aviation companies. Services to their farmer shareholders are then assured in the short-term, providing that the cooperative members support the cross subsidisation of this service. One of the main pro
17、blems is the inconsistency in demand for fixed wing aerial application services. Between 1994 and 2006 inclusive the total hours flown has fluctuated between a low of 15,000 hours and a high of 52,500 hours (see Figure 2). Figure 2: Annual Fixed Wing Aircraft hours by type; source CAA Agricultural A
18、ircraft Review December 2008, source www.CAA.govt.nz sourced Dec. 2008 The inconsistency of demand is symptomatic of the sheep and beef farming sector which is generally located on the poorest easy to steep hill country land and is also the sector making the lowest returns on capital invested. There
19、fore, it is the sector most influenced by the law of marginal returns; and by the nature of the topography is the main user of fixed wing 4 agricultural aircraft. When either, sheep and beef prices are low, or fertiliser prices are high, sheep and beef farmers reduce application of fertiliser. The o
20、perating costs of two typical aircraft types under New Zealand conditions has been described in detail by Grafton (2010). Table 1 summarises those costs and calculates a cost per tonne spread. The costs are based on spreading superphosphate and urea and are based on an assumed annual workload of 600
21、 hours. The Cresco applies 20 tonnes and the Fletcher applies 12 tonnes of superphosphate per hour respectively. Table 1. Operating cost per tonne applied of Cresco and Fletcher aircraft. Aircraft Type Expense Item Cresco Fletcher Engine operating 4.15 5.91 Airframe maintenance 5.30 9.74 Insurance 8
22、.66 2.78 Fuel 15.12 16.50 Salaries and support vehicles 13.28 21.58 Overhead 1.30 2.32 Ownership (including depreciation) 14.99 1.08 Return on capital at 15% 22.50 4.38 Total operating and fixed cost per tonne 85.40 64.29 Assumes a Cresco 08-600 powered by a Pratt and Whitney PT6-34 Ag; a Fletcher F
23、U 24 powered by a Lycoming IO 720 engine, with little capital value approaching overhaul. The current application charges are less than the total operating cost, there is no return on capital and in many circumstances the cost of ownership is not being fully recovered. Thus the capital in the plant
24、is being eroded as identified by Lockhart (2009). On farm infrastructure issues On-farm infrastructure also appears to be both dated; heavily depreciated; an additional source of safety problems and cost to the industry; and, therefore, in need of considerable investment. Grafton (2009) identified m
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