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Surviving Catastrophic Loss of Income on the Farm

Farm Business Management Update, August 2002

By Bill Whittle

Farmers can suffer a catastrophic loss of income for reasons beyond the control of even the best managers. Freeze losses in a tree fruit crop are a natural disaster that affects Valley fruit growers all too frequently. The current avian flu outbreak is causing a similar catastrophic income loss for poultry farmers. To insure financial and farm survival from an income loss, you need to carefully evaluate your situation to determine a course of action. This course of action is based on individual circumstances and must fit with your long-term plans and goals or it becomes vitally important for you to communicate with your banker and other creditors the severity of the situation. It is easier to develop a solution if you do it before the financial situation gets critical. Talk to your tax preparer and make reasonable assumptions about your potential tax liability for income and social security tax under reduced income scenarios. If you have employees you need to understand how this affects them. Unless the farm can continue to pay wages, you may lose valuable employees as they search for alternative income.

As you evaluate your farm situation you need to make realistic decisions as to the severity of the loss of income, the length of time involved, the employees who may be affected, etc. Once this evaluation is done, you have several possible courses of action. The first action is to cut expenses. You may need to cut both farm expenses and personal living expenses. If the poultry house is empty, make sure the simple things such as turning off all lights are done. Your financial survival depends not only on how much you bring in but on how much must go out during this time. The flip side is to evaluate all potential reductions to be sure the cut will not create bigger problems later.

With expenses reduced, the first option for survival is to dip into your rainy-day fund. This option assumes that you have done what financial advisors have suggested for years, i.e. accumulated enough readily available cash to provide living expenses for three-six months. If this option is available, it allows you to negotiate this period without undue stress and prepare for the time when income will start to flow again. The downside to this scenario is that it does not help employees through this rough period, and you will need to recoup this rainy day fund once income resumes.

A second option for many of you is for one or more family members to take an off-farm job while farm income is interrupted. Realistically, short-term jobs that allow you to prepare for the new flock, if available, may be low paying unless you have marketable trade skills such as a mechanic. Also, with the many layoffs in the non-farm sector, jobs are not as readily available as they were just a few months ago. Again, this alternative does not help valued employees survive the crises and guarantee their return to your farm.

An approach often used when normal farm income is lost is to try alternative enterprises. Fruit growers who lose their crop to freeze often plant pumpkins or other vegetables. This alternative has the opportunity to provide income for the farm and, maybe more importantly, provides a potential income stream to keep valued employees working. Issues that need to be resolved are the labor and management needed and the availability of resources necessary to produce the crop. The last issue is the ability to profitably market a product that you may not be accustomed to. It may be that to insure keeping valued employees just covering expenses is sufficient, but with unfamiliar products you have no guarantee of even doing just covering expenses without a lot of preparation.

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