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The paradox of off-farm income

We all knew off-farm income is reshaping Canada’s farms. But who knew large farms are affected most?

Agriculture and Agri-Food Canada has released its farm income forecast for 2013 and 2014. Not surprisingly, in view of our record grains production in 2013 and rising livestock prices, its 2013 farm income estimates remain at historically high levels. AAFC pegs average total farm family income in 2013 at $128,517. This is 19 per cent higher than the average total farm household income over the previous five years. And it is expected to keep growing. At the time of the forecast, the department projected farm family income to rise to $132,579 for 2014 despite declining grain prices.

Such figures are even more eye opening when you learn that Statistics Canada put median income for all Canadian households in 2012 at $74,540.

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man in farmyard with haybales

However, there is a wide variability in individual total farm household incomes depending on the size of farm, location of farm and commodities produced. For example, according to Statistics Canada, the net market income for farm families (this is the average farm family income derived from actual commodity sales less any program payments and before adjusting for depreciation or CCA for all farms reporting over $10,000 in sales) ranged from a low of $6,290 per farm family in British Columbia to a high of $22,464 in Quebec in 2011. Prairie farm families averaged roughly $20,000 in market income.

Canadian farm families involved in dairy production received the highest portion of their household income from the market, taking home an average $79,508 in 2011. They were followed by egg producers who received $51,737 from the market, grain and oilseed producers at $32,262, hog producers at $25,081 and beef producers earning only $1,756 from the market in 2011.

income graph

Size matters when it comes to income levels. In 2012, David Sparling of Ivey Business Schools wrote Six Years that Changed the Future for Agriculture: Impact on Farm Income in Canada 2005-2010.

By using Statistics Canada data, Sparling categorized farms by sales volume. The 66,000 farmers who had between $10,000 and $100,000 in sales revenue actually had a negative net income of $-0.3 billion in 2011 (a loss of over $5,000 per farm). At the other end of the scale, the 2,425 farmers with over $2,500,000 in sales earned $1.2 billion in net income (almost $50,000 per farm).

Sparling is quick to point out: “the 10,000 farms in Canada with more than $1,000,000 in annual sales now account for over 50 per cent of sales.”

However, a closer examination of the variability of net farm income reveals that even the biggest farmers, those farmers producing the highest-value commodity, and farmers living in the provinces with the highest net farm income never even came close to the average farm family household income that Statistics Canada has reported for 2011 and what is predicted for 2013-14.

Off-farm income

A fundamental shift is taking place, says David Freshwater, ag economist at University of Kentucky who writes, “Off-farm income has become a major determinant of farm operators’ and farm families’ economic well-being. For a majority of farm families and operators in OECD countries, off-farm or non-farm occupations have become a significant source of income and a major determinant of their well-being.”

Freshwater collaborated on the 2011 research paper “Farm Income Variability and Off-Farm Diversification in Canadian Agriculture.” Data presented in the paper shows off-farm income grew from 55 per cent of Canadian farmers’ income in 2002 to 62 per cent by 2006.

Even more interesting, since 2006 and in spite of much higher commodity prices, the percentage of farm household income that comes from off-farm sources continues to go up.

Many other researchers have also reported the importance of off-farm income. In planning the 2008 U.S. Farm Bill, the USDA study of farm family income found that in 2004 off-farm income accounted for 24 per cent of the household income for the largest eight per cent of U.S. farms (those with sales of over $250,000). The study also stated: “Almost 90 per cent of farm household income comes from off-farm sources.”

The March 2009 issue of Statistics Canada’s Rural and Small Town Canada Analysis Bulletin reveals a corresponding trend. “In 2006,” it says, “the share of operators of small census farms reporting off-farm (income) has remained stable while that of operators of larger census farms has further increased.”

income graph

The September 2013 information bulletin of the USDA Economic Research Service entitled “The Off-Farm Occupations of U.S. Farm Operators and Their Spouses” found 91 per cent of farm households had at least one family member working at an off-farm job. The paper states: “… even households operating larger farms often have substantial non-farm income: in 2011, median off-farm income was $29,250 for households with family farms with $250,000 or more in annual sales.”

Freshwater believes farmers consider and rely on off-farm employment as a risk management strategy. “Agriculture is risky. Most farm families deal with this risk with off-farm income. It is a form of diversification. Farmers used to produce a number of commodities to deal with risk. Today they don’t have to produce 10 different things to deal with risk.

Instead they specialize, which reduces the labour needs of a farm. As well, technology and capitalization have resulted in more labour than a farm needs except for short periods of time so farmers are able to diversify by working off farm.”

While many farmers complain at having to work off farm and some look down on neighbours who work off farm, Freshwater does not see off-farm labour as bad. Instead, he sees it as a valuable management strategy to deal with risk and to enable a farm to expand. It also allows farmers to live better.

Where it becomes a problem is when off-farm income is used to run up land values and rental rates.

Sparling agrees that risk management is a reason some farm families supplement their farm operation through off- farm employment. However, he feels most farms are simply too small to be economically viable, and the owner/ operator must work off the farm. Small landholders, he says, farm as a lifestyle choice.

However, this does not explain why a significant amount of the household income of even the largest farms comes from off-farm employment. Sparling points out it could be a lack of understanding of what constitutes off-farm income. We do not know if value adding of the commodities a farm produces is included in the farm income or if the increased returns as a result of a farmer value adding are recorded as off-farm income.

Nor do we know if income that a farm receives when the farm business adds a trucking service and hauls grain commercially is being reported as farm income or as off-farm employment.

Could there be other reasons why so many farmers with economically viable farm operations also work off farm? Could it be they are sought after for management or technical skills that are lacking in their community?

Could it be that the farmers have developed business skills to the degree they recognize off-farm opportunities and are increasingly pursuing those opportunities while at the same time managing a viable farm business?

Or could it be farmers simply like the challenge of another job?

We really need more information about what constitutes off-farm income.

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Gerald Pilger

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