The Dairy Excel 15 Measures of Dairy Farm Competitiveness bulletin was published by Ohio State University Extension to provide dairy farmers the ability to evaluate business competitiveness using financial and production information.
We’re going to talk about measure 13, “Maintain family’s standard of living,” in this article.
Families usually wish to maintain or increase their standard of living over time. Because of inflation, farm income must increase or the standard of living falls. Above-average dairy farmers who have improved management, adopted technology and increased production per cow have only maintained or slightly increased income per dairy cow over time.
Farm families should estimate what their desired standard of living is for each year and then develop a plan to make sure farm revenue increases at a rate to meet these goals. What is included in family living expenses?
There are several categories to include when you determine family living expenses for your family: food, housing, taxes, insurance, utilities, repairs and maintenance, automobiles, personal loans, education, medical care, furnishings and appliances, personal care, savings, clothing, childcare, gifts and recreation.
Determining how much family income is needed. Farm families often underestimate 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. 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. Assume it takes 70% of revenue to cover out-of-pocket costs. This leaves 30% for debt service, capital replacement, growth, income taxes and family living costs.
The $750,000 gross revenue example would net $225,000. If $75,000 is used for family living, $150,000 would remain for debt payment, taxes and investment/reinvestment.
Also, note that farm businesses will need to grow each year by at least the rate of inflation just to maintain that level of income.
Considerations
Family living costs vary based on several factors, including number of operators, amount of any off-farm income, family size, health, etc. It is critical that the farm management team determine the present family living costs and project future family living expenses.
It is better to budget on the high side for family living expenses. Farm families planning to be in business well into the future must make realistic plans and projections.
Two key areas to focus on are cost control and improving operational efficiencies. A growing dairy herd requires cash to feed additional animals, control land, purchase veterinary supplies and medicine and fuel. Farm families who have neither the desire nor the resources to expand their herds have several alternatives.
Alternatives
First, family members should conduct a benchmark analysis on their farm’s financial records to determine if there are ways to increase efficiencies when compared to established benchmarks.
Ohio farms can find dairy benchmarks from the Ohio Farm Business Analysis program at https://farmprofitability.osu.edu. Increasing efficiency can increase revenue. The family can diversify the operation to include more than dairy cattle or look at ways of direct marketing to consumers through value-added products.
The family may also retire existing debt and/or invest in financial assets, such as stocks, bonds and mutual funds. Retiring debt will reduce the principal and interest expenses of the farm in the future. Investments in financial assets will provide returns, which can provide money for family living in future years.
Another alternative is to seek off-farm employment. Cash flow projections will indicate whether these options will provide enough funds for family living.
