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 Knowledge for the CommonWealth

Farm Family Living Cost Update

Farm Business Management Update, August 1999

By David M. Kohl of the Department of Agricultural and Applied Economics, Virginia Tech

One of the largest items in a farm family's cash flow is the withdrawal taken for family living. For most sole proprietorships, it is the amount left over after all farm expenses and debt payments are made. Some partnerships and corporations specifically take withdrawals in the form of wages. Most agricultural lenders and farm management professionals will tell you that living expenses are the most difficult figure to estimate and document is family living. In these financially stressed times, having accurate data when presenting a cash flow plan is imperative.

The Nebraska Farm and Ranch Records provide some of the most accurate and in-depth breakdown concerning family living costs over a period of time. Food, medical care, and insurance represent nearly 30 percent of the budget (Table 1). Nearly one-third of all producers lack health care benefits, or they have spouses providing some or all benefits. Such benefits provided by spouses are inaccurately missing from the budget and would significantly increase it if they were appropriately budgeted.

Families represented in these budget summaries appear to be spending more on personal items, clothing, gifts, and recreation, expenses which seem to be paralleling the families in the general economy. This budget item has increased from 19 to 24 percent of total budget from 1989 to 1999 has occurred.

The category of personal interest reflects that farm families could increasingly be using installment and credit card debt. Anecdotal evidence suggests that farm families are placing farm and household expenses on the plastic credit cards as the farm recession continues.

The education line in the summaries may not be reflective of an individual's situation. Some people are sending children to private schools and colleges or public institutions of higher learning. These costs can elevate total family expenditures to $50,000 plus for five to ten year periods. If income taxes and Social Security are added to living expenses, a total to $45,000 to $60,000 becomes the norm.

Rules of Thumb

Many people will ask if any methods or rules of thumb can be utilized when estimating family living expenses.

First, when developing a family living budget, break costs down on a monthly basis and add a 15 to 25 percent fudge factor for Murphyıs Law.

Second, family living costs generally account for between 10 and 15 percent of gross farm revenue. For example, a business generating $300,000 of revenue would have a withdrawal anywhere from $30,000 to $45,000. If a family desires a higher standard of living, then non-farm income is needed to supplement withdrawals.

A farm business exceeding a debt to asset ratio of 50 percent means that living expenses should generally be under 10 percent of revenue. This needed reduction in family living expenses is a result of the heavy debt payments taking a larger share of the revenue pie and reducing the flexibility of family withdrawals.

If you are a contract grower, have a business over $1 million in revenue, or have a young person entering the business, the firm will have to generate $40,000 more in net income to cover the living and tax requirements of the new member.

Some evidence indicates that couples over the age of 65 will require approximately 25 percent more to support their lifestyles than a couple who are 35. For the older couples, medical costs are much higher in retirement years, and they want to travel to geographically dispersed children and grandchildren, and to vacation and shop.

Are Your Costs In Line?

You can utilize the preceding factors to determine whether your costs are in line. However, a more scientific method can provide you with noteworthy insight. A study of over 25 farm record systems nationwide finds that taking 5 percent of farm revenue and adding $12,500 per operator/manager is a good estimate of living costs. For example, parents with a child operating a business that generates $500,000 in revenue could have a withdrawal of $50,000 in total or $25,000 per family. If they desire more money, their choices are to enlarge the business or seek additional non-farm revenue.

Living Costs as an Overhead Expense

Some of the most valuable assets in farm businesses are not machinery or buildings but the human assets. More record systems are now examining living costs per bushel, per hundredweight (cwt.) of milk and animal unit to determine overhead efficiency. Some preliminary results find that family living costs are ranging from 28 cents to 60 cents per bushel of corn. Dairymen have found their costs range from $1.25 per cwt. to as high as $5.50 per cwt. Apparently, if family living cost is represented as an overhead cost per unit, producers will then more accurately calculate the cost of production and benchmark how competitive they are with both domestic and global producers.

In summary, as the agricultural recession continues, and reduces margins for living, it will become imperative to have separate accounts for business and personal expenditures. A system of being able to compare projected to historical costs will show major deviations in individual items. Finally, comparisons to benchmarks and guidelines will further refine your competitive position.

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