OFI 948: Farming As One Stream Of Revenue In Your Overall Portfolio – A Healthy Perspective

Article Referenced In Podcast

https://www.forbes.com/sites/lauratenenbaum/2020/01/29/digging-in-the-dirt-really-does-make-people-happier/?sh=6266d29031e1

Show Notes

On today’s show I wanted to revisit the idea of farm ownership and lifestyle.  That is what this show is all about, and I wanted to take some time to discuss this subject with all of you some more.

There may not be a more challenging enterprise to try and get into or maintain in the United States than farming.  So many of us long for and have a vision of this lifestyle that we pursue it anyway.  If this is something you are pursuing, trying to maintain or are dreaming about doing one day, I think a shift in perspective might be useful to help assuage the frustration that is inevitably going to come.  

Let me start by giving you some statistics.  Median total household income among all farm households in the U.S. is $83,111, and that is better than the average U.S. household income by about $15,000.  However, median household income of farms increase with the size of farms, and this number is calculated using all of the off-farm income that is being produced in addition to farm revenue.  So, that $15,000 difference in household income is not necessarily reflective of being more efficient or of making more money per hour.  It is likely reflective of more work, larger scale, more debt, more hours and possibly more off-farm jobs.  

About half of all farms in the United States are classified as “very small”.  This means that annual farm sales are less than $10,000.  Obviously, $10,000 in sales minus expenses is not going to be enough to run a household.  So, 100% of farms in this category are going to require off-farm income.  

The next step up in classification is “small farm”, which is going to mean a farm with sales over $10,000 but not reaching the level of a large farm.  My farm falls into this category, and these sales are still not enough to support our household.  This is especially true if you have a payment to make on your farm/home. 

I say that frustration is going to be inevitable for a reason, and the reason is these numbers.  Unless you are willing to relocate, which I advocate for if you want to farm full-time, purchasing your farm is going to be a significant financial obstacle.  And if farming full-time is what you want to do, this obstacle will always stand in front of you until you pay that farm off.  And even then, you will still have taxes and insurance to pay.  

So, it may take you until retirement before you can “farm full-time”.  And of course, even in retirement you still have off-farm income.  The only thing that changes is that your off-farm income is now completely passive because it is coming from investments, savings, a pension or an annuity.  

If this is the case for you, and you are banging your head against the wall trying to farm full-time but the math is not working out for you, I suggest changing your perspective.  I suggest looking at your farm as one stream of revenue.  You can be working towards being profitable on your farm, and every year that you make more profit and grow the size of this stream of revenue you can celebrate as a victory.  

If your ultimate goal is to find a way for your farm to support you full-time, even if you increase your profits from year to year, you might still feel the frustration of not reaching that goal very fast or at all.  But, if your farm is a stream of revenue you can celebrate those increases from year to year as your overall income increases and you move closer to this goal.

Look at his journey in graduated steps.  For example, as your farm stream of revenue grows maybe it doesn’t allow you to farm full-time, but it does allow you to reduce your hours at your full time job.  Or, maybe it allows you to move full-time into your small business.  

You might wonder why I talk about this as though there is no option to go out and start farming full-time on a large scale.  I don’t mean to make it sound that way.  I am big advocate for relocating, establishing yourself in a community where you can make it work and going through a farm succession plan with a retiring farmer.  

However, there are a large group of people, me included, that did not have that as an option.  In my case, my wife was not on board with the relocation.  She has her career where we live, and all of her family is here.  And to be quite honest, I did not push as hard as I could have to make the case that we should have done that.  At the time we bought our farm, I don’t think my vision was big enough.  I was not an entrepreneur yet, and I was trying to maintain my career as a police officer.  

You also might wonder why I am not suggesting leasing ground.  I am not against this at all, and if you can find ground to lease I say go for it.  Again, my view of this is a bit jaded.  Where I live, I am seeing farmers being pushed out of business because they have been leasing.  Leased ground is becoming so valuable due to urban sprawl that a lot of the ground they have been leasing is being sold out from under them to developers.  

I suspect that many of you, who are looking at transition to a farming lifestyle, are in areas experiencing the same growth.  Therefore, you might even be able to obtain a piece of ground to lease.  Everything might literally be occupied already.  

And for those of you who would like to be commodity based farmers, it is even harder.  By the way, I am with you again.  I would love to run a cow/calf operation and sell all my calves every fall based on current rates.  However, I would have to grow a lot larger to make that pay with the thinner margins I would encounter.  So for now, I have a niche business.  

I have been following a thread on Twitter in which somebody asked how many acres it takes to support a family in a commodity based farm of corn, soybeans and wheat.  I think the consensus is that it takes about 1200 acres, and of course this number will vary from region to region.  

According to the USDA the average cost of cropland in the U.S. is $4,100 per acre.  At that cost, you would need just under $5 million to purchase this 1200 acres.  Of course, leasing is an option but there is that competition we have been talking about.  And, as we talked about last week that competition is going to continue to grow as more and more farmers are displaced.  

That $5 million number does not take into account a house, outbuildings, equipment and inputs.  That is just obtaining the ground.  I am averse to debt, and that is a limitation that I place on myself.  So, that $5 Million number eliminates me from being a full-time farmer in the commodity arena on row crops.  

The USDA says that the average cost of pasture land in the U.S. is $1,400 per acre.  So, for that 1200 acres you would need $1,680,000.  That is more manageable but still an unbelievable commitment.  

These numbers are why I admire commodity based farmers and ranchers so much.  They have the courage and commitment to this lifestyle to put it all on the line.  For those of us working a 40 hour per week job, putting together a $1.7 million net worth would be a nice accomplishment with a life’s work.  Imagine selling your home and cashing in your 401K to purchase and operate a ranch or farm with an operating loan every year?  I’m not sure that I have the stomach for that.  

So, this is why I encourage you to frame your perspective about your farm as being one stream of revenue in your overall portfolio.  I don’t think it always has to be this way, and I don’t think you necessarily have to wait until retirement to farm full-time.  However, it will take time to build to the point that you are farming full-time, and that will likely be with some form of niche marketing, agri-tourism or a side-hustle.  Many people call that full-time farming, but it is really still using a form of off-farm income or value adding in addition to the job of being a farmer that would allow us to be on the farm full-time under those circumstances.  

If you are building towards this life, you don’t want to get derailed by frustration about the pace at which you make progress.  So, at least in the beginning, look at your farm as another stream of revenue in your developing empire.  This will allow you to celebrate your progress, even if you are moving towards your ultimate goal at a slower than anticipated pace.    

Where Off-Farm Income And Matt Brechwald Can Be Heard:

Member Of The National Association Of Farm Broadcasters