Previously, we discussed how family living expense has declined by 17 percent since 2012, the peak of the agricultural supercycle. The tide has turned in living cost, especially in areas such as personal care, cash donations, and household supplies.
Now, let’s take a closer look and compare family living cost by three net farm income levels: low, median and high. Of course, one of the first questions one asks is whether living costs vary according to income level, and by how much. According to data from Nebraska Farm Business, Inc. the average family living cost for their participating farms was $83,210 in 2016; and there was considerable variation around the mean.
The FINBIN data at University of Minnesota supports Nebraska’s findings.The Center for Farm Financial Management separated the FINBIN data according to farm net income levels. As perhaps expected, those generating a higher level of income, or those in the top one-third of profitability, averaged the highest living cost at $94,710. This follows the old adage of “the more you make, the more you spend.” Interestingly, farms in the lower one-third of profitability averaged just below $88,700 for family living. And most surprisingly, the lowest level of family living came from the median group of farms at $67,546. It is also important to note the farms with the highest income averaged 4.6 family members, those in the middle averaged 2.9 family members, and the farms in the lower one-third of profitability averaged 3.4 family members.
Dissecting the costs, it was interesting to see the variations in individual expenses among the groups. The miscellaneous category or the “catch-all” was approximately $5,000 lower, along with food and meal expense for the two ends of the spectrum. As expected, cash donations were significantly lower for the group with the least income. Overall, the difference in family living costs between the high and low groups of profitability was approximately $25,000 to $30,000 annually of after-tax, free cash flow. Of course, this money could be used to service debt or grow the business; it is all a matter of choices.
Next, income taxes and Social Security categories were $47,759 for the higher income group, as opposed to $12,566 for the lower group. For the highest income earners, this accounts for nearly 25 percent of living and non-farm expenses, but only 10 percent for the lower end of the spectrum. Additionally, a disturbing trend for the median group with the lowest family living cost was their withdrawals from cash and savings. On average, this group withdrew approximately $20,000, or in other words $-20,000. Not only is this group frugal but possibly drawing from their savings to meet short-term expenses and debt service obligations.
In short, as the economic reset trolls on, some producers and farm businesses are aggressively cutting costs in many areas, while others are not; some of which seems to depend on income level. According to the data, expense control is the best way and in some cases, the only way to boost profitability in today’s economic environment, as long as one is careful not to jeopardize long-term sustainability.
P.S. Many producers indicate their health care expense is the single item busting their budget. One shared his premiums had increased six-fold this year alone.