Maybe the biggest surprise is that the numbers aren’t all that surprising. Researchers at the University of Illinois have found the average amount of family living expendables skyrocketed from about $53,000 per farm in 2004 to $81,000 in 2013.
After starting at $84 per acre, living costs jumped in that one decade to $121 per acre in 2013.
Nor is it a surprise that the increase followed corn prices. Researchers Brad Zwilling, Brandy Krapf and Dwight Raab looked at the financial data from the 1,300 members of the Illinois State Farm Business Management Association whose families have three to five members families.
On average, non-capital family living expenses on those farms (mainly grain farms) in 2013 were 5.3 per cent higher than the year before. When they added in capital expenditures, like the portion of the vehicles not used for the farm, family living expenses increased to $89,130 for 2013, a $4,118 increase per family from the previous year.
Other numbers in other states are similar. For instance, David Kohl, professor emeritus at Virginia Tech, reports the average farm family living cost in Nebraska for 2011 was $85,733, up from $79,250 a year before, based on annual family living cost summaries provided by the professionals of the Nebraska Land Farm and Ranch Management Education Program.
Then Kohl, who is also president of AgriVisions and part owner of Homestead Creamery, drilled down further to find how much these living costs were eating into corn profits that year.
For a farm of 1,000 acres with 150-bushel corn yields, about 80¢ a bushel went toward living expense and taxes.
Kohl is concerned that the nine-year super cycle occurring in the grain and row crop sector is being built into the family living budgets of many producers, and it’s going to be difficult to cut back.
Nor is this spending pattern restricted to farm families south of the border.
From 2010 to 2013, when total farm cash receipts for Canada increased by more than $10 billion, rural spending followed suit. According to Statistics Canada, average rural household expenditures (i.e. for Canadians living outside of population centres of 1,000 or more) went from $72,040 in 2015 from $61,735 in 2010, increasing a whopping 14 per cent.
Of course, the picture is complex. Farmers make up only about 10 per cent of the six million folks considered as rural population in Canada. Plus, at least half of census farms had one or both spouses with non-farm occupations, and their household expenditure patterns are likely similar to any other rural household.
That small population sample means numbers can jump significantly from year to year, says Ray Bollman, research affiliate with the Rural Development Institute at Brandon University and adjunct professor at the University of Saskatchewan.
Tax management can be a big factor too. When the Illinois researchers looked at what those family dollars were actually spent on, they found that income and social security tax payments rose to 31 per cent in 2013 from 12 per cent in 2004.
In Nebraska social security and income tax for 2011 was over $40,000. Once incomes rise to a certain level, prudent tax planning can make a huge difference. Nonfarm expenses devoted to income and Social Security taxes rose from 12 per cent in 2004 to 31 per cent in 2013.
Also, Kohl noted that the largest individual cost was medical expenses, including health insurance premiums. They were over $12,000 in 2011, nearly tripling in a decade.
How do you compare?
Manitoba-based farm family coach and succession planner, Elaine Froese says one of the starting points for succession planning is nailing down how much families need to live on. (She asks her clients how they plan to be fair to non-farming family members, and where they are going going to live.)
It’s a sum that can vary a lot from farm to farm, Froese says.
Jonathan Small agrees. Over his years as farm management consultant with MNP, he has seen a wide range of expenditures, anywhere from $30,000 to $200,000 a year.
Yet when Froese and Small ask families what they live on, very few farmers seem to know. “About 70 to 75 per cent of my older generation clients just don’t know what they need,” Small says.
Many older parents have never lived on a written budget and are transitioning into a new spending phase of their lives. Some older generation farmers will set unrealistically high budgets, so high the kids don’t have a chance. Others are extremely frugal. This generation somehow made it through some very lean times and are used to big fluctuations in farm income. “There are farm families that have spent 40 years living on fresh air,” says Small. “They can’t change from this Prairie mentality.”
One of the facts of life for farm and ranch families is income irregularity, either in amount or timing, and many farms have built a resilience into their DNA that helps them deal with downturns.
“These farms have set a big gap between personal needs and profits. They want to be able to handle a disaster of biblical proportions,” says Small. “They can weather the storm.”
By contrast, more younger generation farmers have worked off farm and they are more likely to understand personal budgeting. Of course, they also have a very different commodity-price business experience in the last few years, and they have different expectations on the income side of the budget.
Culture is a huge part of setting living expenses, says Froese. For example, all Hutterite members take a vow of poverty, renounce private property and hold all their possessions in common. They devote all of their time, labour and energy to the community.
In Froese’s perspective, it’s also about fundamentally understanding what makes you happy. Maybe you prefer to save for the next generation, or maybe you like to donate profits, or maybe you just want to buy a boat.
Those are personal choices, but the choices must respect your budget, and the decisions must be made in the light of how they will impact the future of your farm business.
MNP’s Small sees another cultural impact in more densely populated regions, where farmers’ friends and neighbours are living on higher, more consistent wages from jobs in the city. These farmers want to live more extravagantly too, and with big fluxes in farm income, there are some years they can afford to keep up.
However, Small has also seen how difficult it can be to pull back in the lean years, because this higher standard of living becomes part of the farmer’s culture.
“Living expenses are inelastic,” says Small. “This can be a blessing and a curse.”
Small has witnessed spending increases reach a certain level, then plateau. The farmers are comfortable and busy and don’t have that much time to spend the money. This point of inflection is different for everyone, but is affected by culture, time and discipline, says Small.
Once farmers reach that point of spending, any additional money left in the farm rapidly increases their ability to buy land and invest.
The other side of the coin is that some farmers don’t give themselves raises. They’d prefer to cut their lifestyles or find off-farm work to expand. This has helped people get through sustained downturns and generate wealth in the business while staying relatively small. Small talks about one client who has two sons interested in farming. They crop only 2,000 acres but over many years have accumulated nearly $2 million in cash.
How much do you spend?
Three approaches can help you understand your personal living expenses, says Small. If you have time, you can simply write down what you spend as you go. Alternatively, you can go back through your records and piece together how much the family used from previous years’ statements. Make sure you include all the expenses, including the ones put through the farm books as business expenses, and use an average from several years.
The third way is to test what you can afford by paying a set salary and seeing if you can live on that amount. However, the problem of shining a spotlight on income is that people tend to adjust expenditures to stay within the salary, says Small. If the goal is to find out what you need, you don’t want it to be artificially set.
By writing your living expense budget on a monthly basis and adding 25 per cent for unexpected expenses, you’ll get a better idea of personal cash flow. This is really important because of the seasonality of the business.
It can also help improve your perspective if you have a separate account for household expenses, and then you compare it to business expenses. Having only one chequing account makes it more difficult to control family living expenses. The business expenses are just relatively so much bigger.
Read a helpful fact sheet on how to manage farm family living expenses, called Taking Control by Kathleen Prochaska-Cue and Sandra Preston.
Competing for equity
Farm family needs compete with the business enterprise for cash. Both must be healthy. A key objective in farming is to generate net worth, says Small. That’s how the farm builds wealth.
Profits that are left in the business are how we accumulate net worth. By contrast, draws for living expenses and extras go into someone else’s business. They do not build farm assets.
“Taking a $10,000 vacation is basically piling that money and setting it on fire. It’s gone,” says Small. “It might be fun, and a break might be needed but it’s still not available for further expanding the business.”
In England, Small saw clients’ personal expenses outstripping the farm’s ability to earn. To compensate for this, the farmers would slowly sell off high valued assets. Eating up assets enabled them to keep operating, yet these farms were dying piece by piece.
Watch these ratios
On corporate statements, payment for effort is reflected in retained earnings on the balance sheet. If it’s too low relative to the size of the farm or the productivity, there could be a problem. Basically this means that the farm isn’t able to accumulate equity, except in the appreciating value of the land or quota.
Cost of production calculations should include fair market value for labour. If they aren’t, they can be really misleading, says Small. “Your effort should impact the bottom line instead of ownership.”
A couple of key financial ratios can send warning signs that your living expenses are dipping into your farm business too much. For example, if you are seeing a gradual trend of decreasing current ratio, you might want to look to see if your living expenses are using up too much of your available equity.
Another red flag to look at is any change in your farm’s debt structure ratio. If the short-term debt (for example, operating lines or credit cards) divided by long-term debts is getting gradually bigger, you could be headed toward problems. When Froese helped with farm debt mediation, she said one big red flag was using credit cards to farm.
Although the numbers indicate a potential problem, it’s important to look at the whole picture and communicate with everyone involved.