An analysis of factors contributing to the use of an income equalisation deposit scheme by commercial farmers in South Africa

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 determining what types of farmers would be likely to use the scheme. During 2000, a postal survey of 24 consultants was conducted mainly in KwaZulu-Natal, and in the Maize Triangle and surrounding areas. Each consultant was to review nine scenarios (eight plus a control, giving 192 observations) and 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. Discriminant analysis revealed that, ceteris paribus, 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 most likely use an IED 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 scheme than are low risk maize farmers, low and intermediate risk livestock farmers and diversified farmers. These results support the use of an IED scheme as a risk management tool as higher risk farmers are more likely to make use of the scheme.