Keep an eye on farm family living costs

The most recent edition of Buckeye Dairy News was put on the Web last week. When I went to the Ohio Dairy Industry Web site (http://dairy.osu.edu) to download it, I stopped to look at the financial management information posted there.
A recent addition to the data available there is a 10-year financial summary of Minnesota dairy farms produced by the Center for Farm Financial Management, University of Minnesota (the FINPACK folks). The summary includes 2005 financial analysis information from 2,381 Minnesota farms.
The 10-year summary compared several measures of financial health including profitability, liquidity, solvency and some non-farm information (family living expenses). Net farm income (both constant and real dollars), rate of return on equity, term debt coverage ratio and farm net worth all reached a 10-year high in 2005.
Financially sound. Average net farm income in 2005 for these 2,381 farms was $87,491 from an average farmsize of 763 acres. Minnesota farm managers know they must have growth in revenue and increased profits in order to remain financially sound and they are doing what it takes to achieve that.
If we had reliable data for large numbers of farms in Ohio, I’m pretty sure we’d see the same thing going on here. Unfortunately we do not have enough farms submitting records for analysis to obtain these numbers for Ohio farms. But you can obtain financial analysis information for farms of similar size and management style from the FINPACK data to compare your farm to.
Go to www.finbin.umn.edu and choose the size and type of farm you want to generate reports for. The system will prepare a benchmarking report for you to compare to your farm.
Comparable. It would be most meaningful if you had a FINPACK annual profitability analysis (FINAN) on your own farm to compare to the FINBIN benchmarking summary. Then the numbers are directly comparable to the ones for your farm. Contact your County Extension Educator for assistance in getting a farm financial analysis done.
I predict that profitability and return to equity figures will be down drastically from 2005 figures this year, due to dramatically higher fuel, fertilizer and other input prices. It will be even more important to do some financial analysis on your farm for 2006 than it was in 2005 because profit margins will be slimmer.
There is another measure that you should be keeping track of for your farm each year – family living expenses. Most farm families do not directly keep track of family living expenses, but when I calculate profitability, the real cost of family living comes to light.
It is basically gross farm income plus off-farm income minus farm expenses, new investments and debt retirement. Family living expenses for the average sole proprietor farm in the Minnesota summary topped $40,000 per family for the first time in 2005.
Cost of living. Your family doesn’t spend that much, right? Bet you’d be surprised if you sat down and figured it out. Just like fuel and fertilizer prices are major factors in farm profitability, family living costs are directly linked to the economy and fuel prices.
Your wallet is getting sliced from both sides. When the credit card balances start to climb, you and your family may be forced to make some changes in order to make ends meet.
A careful analysis of family living costs could result in some decisions about how you buy household items, how much you eat out, travel and spend for recreation. Just like business expenses, you can’t control them unless you know what they are.
Need confidential help with business analysis, profitability or controlling family living expenses? I or one of my extension colleagues would be happy to assist you.
(The author is an agricultural extension educator in Columbiana County. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)