Is There Room Enough For All of

Us?

Michael DuffyJanuary 16, 2009 Photos by USDA NRCS

Outline• Current situation• Questions to consider• Using financial information to help

withthe decisions

• Questions and discussion

Current Situation

Return to ManagementIowa Farm Business Association

-$80,000

-$30,000

$20,000

$70,000

$120,000

$170,000

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

High Third Low Third Average

Corn Total Economic Cost Per Bushel, 2007Iowa Farm Business Association

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

< 100 100 - 400 401 - 800 801 - 1200 1201-1500 > 1500

Number of Row Crop Acres

Dol

lars

Per

Bus

hel

Total Economic Cost per Bushel by Cost Group, 2007 Iowa Farm Business Association

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

High Third Middle Third Low Third Total Group

Net Farm Income per Dollar of Expense

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

Percent of Iowa Farms with Swine

0%

10%

20%

30%

40%

50%

60%

Percent of Iowa Farms with Cattle

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1964 1969 1974 1978 1982 1987 1992 1997 1998 1999 2000

Estimated Total Cost per Bushel

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

1999 2000 2001 2002 2003* 2004* 2005** 2006*** 2007*** 2008 2009$-

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Corn after Corn Corn after Beans Soybeans

Iowa Average Land Values

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

Iowa Cash Rent per Acre Based on ISU Survey

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Where we are• Management is the key; not size• Technology has increased production

but it has come with a cost• Most Iowa farms are small and do not

have livestock• Land values and costs are high but

they have always been high• Working with our heads and

managing risks will be the keys in the future

Questions to Consider

Is There Room Enough for All of Us?

• Remember there is no right way to help a young person get started farming. Wages, partnerships, sharing capital and labor, profit sharing and so forth are all examples of different approaches

• Do what works best for you and your situation• Multiple family farms are more common than

most people realize

Percent of Iowa Farms with More than One Operator by Sales Category, 2002

0%

10%

20%

30%

40%

50%

60%

All farms <$50,000 $50-$100,000 $100-$249,999

$250-$499,999

$500-$999,999

>$1M

Is There Enough Room For All of Us?

Question has at least three parts• Is there adequate income for all the families

involved?• Are there too many bosses?• Is there enough recognition and

communication with the non-farm members of the family?

Is There Room Enough for All of Us?

Too Many Bosses?

• Who is responsible for making decisions• The severity of this problem depends a lot

upon the secession route chosen• Communicate, avoid unspoken expectations• Have a plan

Is There Room Enough for All of Us? Family Members

• Be sure that everyone knows the plan• Don’t assume• Communicate together; don’t just talk• Remember that equal is not always fair

Farmers Responses to Best Plan for an Estate Plan

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Sell Put it inTrust/

Corporation

Dividebetween all

heirs equally

Give/Sell toSuccessor

No Plans Give to 1Heir

Misc/ Keepland in 1

piece

Dividebetween all

heirs w/farming

heirs gettingland or more

than rest

Give tosomeoneother than

familymember

Is There Room Enough for All of Us?

Adequate Income• This is the most important aspect; many single

family farms don’t have an income adequate for the level of family living draws and this is even more of an issue for multiple family farms

• Remember most technologies are designed to substitute capital for labor, they are not necessarily designed for multiple family farms

• The key is to select the most appropriate technology and enterprises for the situation

• Simply increasing volume is not the answer

Strategies

Increasing Net Income• How much additional income is

necessary?• Remember; family living, taxes,

retirement income or full living expenses for older generation

• Include off-farm or income that isn’t from the current farming operation

Using Ratios

• Use ratios from current farm as a starting point; remember that as changes are made these ratios can change

• Ratios vary considerably by size, profit level and type of operation

Asset Turnover Ratio

Asset Turnover Ratio =Value of Farm Production/

Total Assets Used

2007 Average for farms in IFBA was 42%

Net Farm Income Ratio

Net Farm Income Ratio =Net farm income/

Gross farm income

2007 average for farms in the IFBA was 35%

$___________ = $___________ x = $___________ x

$___________ = $___________ x = $___________ x

$___________ = $___________ x = $___________ x

Income to Achieve Your Goals

Net Farm Income

Gross Income

Total Assets

Net Farm Income Ratio

Asset Turnover Ratio

121,951 41% 248,880

135,135 37% 314,268

208,333 24% 612,745

49%

43%

34%

50,000

50,000

50,000

Net Farm Income and Asset Turnover Ratio by Profit Group, Iowa Farm Business Association, 2007

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

NFI ratio Asset turnover ratio

Low Middle High

Gross Income to Needed to Increase Net Farm Income Using NFI Ratios from

Iowa Farm Business Association Profit Groups, 2007

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$30,000 $40,000 $50,000 $60,000

Added Net Income

Gro

ss In

com

e

Low Profit Middle Profit High Profit

Increase in Value of Assets Needed to Generate Additional Net Farm Income by Profit Group, 2007

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$30,000 $40,000 $50,000 $60,000

Net Income Category

Low Profit Middle Profit High Profit

Using Your Ratios• How do you know your ratios? use your own

financial documents• How can you change the ratios? Examples

- Increasing management for cost control

- Increasing management to increase value of output

- Increasing intensity of use for existingassets (rented land)

- Acquiring more assets

Increasing Income from the Existing Farm

• Increase the assets used • Increase the efficiency with which

theexisting assets are used

• Increase the amount of gross revenue

converted into net income

Possibilities• Look for ways to more intensively use

the current assets (additional enterprises, alternative production techniques, etc)

• Look for ways to improve the net income ratio (organic production, non-commodities ie, special attributes, improved marketing and production, etc)

• Look for ways to improve both ratios (new enterprises, etc)

Possibilities• Supplemental income from off-farm

sources; could be another farm or farm related activities- 2004 Rural Life Poll reported 95% of farmers felt spouse would need off-farm job and 92% said beginning farmer would need off- farm job

• Delay process until capital can be acquired or situations change

Is There Room Enough for All of Us?

• Agriculture is a high-risk industry but it can have great rewards; there is a future for farmers, different from the past but opportunities none the less

• When examining the question of adequate income, remember you can:

Live with the tight margins but ensure an adequate volume for the incomeLook for ways to widen the marginsLook for additional sources of income

Is There Room Enough for All of Us?Final thoughts

• Be sure there is an adequate income• Take the necessary steps to help minimize the

income instability, especially in the beginning• Develop, evaluate and revise your plan as

needed• Communicate and respect differences• Remember the view should be for a farm

family; not a family farm

Discussion

Beginning Farmer Centerwww.extension.iastate.edu/bfc/

877.BFC.1999