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Ohio Ag Manager

Feb
01
2007

Farm Size Requirement to Meet Family Living Expenses

by Donald J. Breece, Farm Management Specialist, OSU Extension Center at Lima

The size of a farm required to make a desired living income is one of those economic questions most easily answered by “that depends.”  It depends upon such things as the desired family living standard, amount of debt or investment to be paid by enterprise profits, production efficiency, market prices received for the products, and per unit cost of production. The web sites listed at the end of this section provides benchmark information to help establish the profit potential of given enterprises. It should be noted that Net Farm Income or Profit will be affected greatly by assumptions made for market prices, production levels, available family labor, and input costs. However, it may be best to first step back and look at some general economic principles, as it pertains to all family farm businesses producing commodities for sale.

The 2005 Ohio Business Summary of farms, utilizing the FINPACK computer program for financial analysis, averaged $419,475 Value of Farm Production per farm with 1.6 operators, $71,283 Net Farm Income, and about $25,000 of non-farm income. On a per family basis this would be $262,172 of Farm Production, $44,552 NFI, plus about $15,600 of non-farm income. Economists have generally indicated that it takes about $50,000 living costs for an average farm family. The average family living and taxes from the 2005 Ohio Summary was $44,104 per farm. So how many dollars of gross farm sales would it generally take to earn nearly $50,000 to take care of a family?

It generally will take at least $300,000 of gross revenue to generate $50,000 family living income. Assume it takes 75% of revenue (operating expense ratio) to cover “out-of-the -pocket” costs.  This leaves 25% for debt service, capital replacement, growth and family living costs.  The $300,000 gross revenue example would net $75,000.  After $50,000 for family living, this would only leave $25,000 for debt payments and investment.

The following web sites may be used to identify benchmarks and budget information.  Also, note that farm businesses will need to grow 5-7% per year just to keep even.

Illinois Farm Business Farm Management Association: www.fbfm.org

A report of 2005 information from 1,209 farms that averaged $351,457 in farm receipts, $27,810 non-farm income, net farm income of $55,030 and non-capital family living expenses of $52,743.

The Center for Farm Financial Management, University of Minnesota, collects FINPACK data from several states, mostly in the Midwest . In 2005, 3236 farms reported an average of $376,778 farm receipts, $22,944 non-farm income, net farm income of $81,959 and family living of $40,753. “FINBIN is one of the largest and most accessible sources of farm financial and production benchmark information in the world. FINBIN places detailed reports on whole farm, crop, and livestock financials at your fingertips.” www.finbin.umn.edu

National Ag Risk Library and a Library of Budgets: www.agrisk.umn.edu

OSU Extension Budgets: www.aede.osu.edu/programs/FarmManagement

Farm families will often under estimate requirements for family living expenses. As additional operators are brought into the farm business, a realistic estimate must be considered for additional family living expenses. The following indicates some recent research in the area of family living income and expenditures.

2002-2005, the University of Kentucky Cooperative Extension Service completed a detailed study of 121 farm families. The trend is for climbing living expenses, $57,336 in 2005 for a family of 2.8 people, with 55 as the average age of the operator. The expense breakdown is Contributions $4,060, Medical $7,346, Life insurance $1,421 and Expendables of $40,936 for a non-capital total of $53,763. Capital expenses of $3,573 increased the total to $57,336. Total farm receipts averaged $375,553, net farm income was $64,594, and non-farm income amounted to $42,068. On a per acre basis, family living amounted to $83.70 in 2005, $72.05 in 2004 and $70.64 in 2003 (total living expenses divided by total operator acres). However, if non-farm income was considered in 2005, the 685 acres only needed to contribute $22.29 per acre toward family living.

The University of Illinois continues to study more than 1,200 farm families enrolled in the Illinois Farm Business Farm Management Association program. In 2005 non-capital living expenses averaged $52,743. The breakdown is as follows: Contributions $2,058, Medical $7,433, Life and Disability Insurance $2,900, and Expendables $40,352. Capital expenses added $5,542 for a total of $58,285. This was for 3.1 family members and an average age of operator to be 52 years. In addition, income taxes averaged $10,351. Total farm receipts averaged $351,457, net farm income $55,030, and non-farm income was $27,810. On a per acre basis in 2003, family living averaged $79 for each tillable acre. However, if non-farm income of $39/acre was considered, than $40 per tillable acre would need to have been generated from the farm business to meet family living.

Certainly, as a minimum, farm families should plan for family living costs to exceed the U.S. Department of Health and Human Services poverty guidelines for 2006 (Table). A family of four with income below 130% of the poverty guideline or $26,000, may qualify for the USDA Food Stamp Program. The risk of such a large investment, as in farming, deserves a more reasonable return to family labor.

2006 HHS Poverty Guidelines

Persons in
Family or Household
48 Contiguous
States and D.C.
1 $ 9,800
2 13,200
3 16,600
4 20,000
5 23,400
6 26,800
7 30,200
8 33,600
For each additional
person, add
3,400

SOURCE: Federal Register , Vol. 71, No. 15, January 24, 2006, pp. 3848-3849

Family living expense requirements are driving the size requirements of commodity agriculture. Commodity production assumes smaller profit margins. To meet future family living demands, farms will continue to grow in size and scale. David Kohl, Virginia Cooperative Extension, lists some rules of thumb for family living costs: Family living costs generally account for between 10 and 15 percent of gross farm revenue. Also, a farm business exceeding a debt to asset ratio of 50% means that living expenses should generally be under 10% of revenue. He indicates that there may be some evidence for couples over the age of 65 requiring approximately 25% more to support their lifestyles than a couple who are 35. For older couples, medical costs are much higher and travel plans add to the living expenses. What does this mean for retirement planning and its affect on the businesses future? With increasing life expectancies, it will be more common to have two generations of retired farm families possibly drawing on the resources of an operating business. Retirement planning is, therefore, essential to any transition plan.

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