One of the major discussion points at ag lending and banking schools is the trend in family living costs and withdrawals from farm and ranch businesses. Some lenders say that their customers are living on $40,000/year, while others state that the living withdrawals have increased dramatically, particularly in the last five years with strong grain and commodity prices.
I recently received an update of the annual summary of farm family living costs from the good people at Nebraska Farm Business, Inc. who have gathered data since 1976 on this particular subject. The following provides credence to the idea that there is wide variation in family living withdrawals, as discussed by the ag lenders.
For 2012, the average farm and ranch family living cost was about $100,000. However, more striking was that the low one-third of families reported family living cost slightly above $72,000. At the other end of the spectrum, the high one-third was slightly above $136,000. This is very comparable to other farm family living databases that found approximately one-fifth of farmers reported above $200,000 of living withdrawals, with one reporting over $1 million in living withdrawals.
What were the largest differences between the top third and the low third concerning individual expense items? The largest was life insurance, which is now is three times higher for the top third. This could be justifiable given high farmland values and business transition issues in agriculture being a prime time issue. Life insurance is a tool used for transition and risk management, and apparently the top third of producers may be using it for these purposes.
Cash donations, recreation, household repairs and educational expense were two to four times higher for the top third producers versus the low one third. Again, this can be expected as one enjoys the fruits of their labor, management and risk taking agriculture represents.
The expense item that was most concerning was miscellaneous expense at nearly 14% of total family living cost for the top third. As a rule of thumb, when the miscellaneous category exceeds 8%, be cautioned. For the average family, miscellaneous expense represented 9.4% of total expenses, and miscellaneous expense for the low one third was 5.3% of total living cost. The miscellaneous category is a “catch-all” category that should be divided out into specific expense items to see a clearer picture of living expenses.
Next time I will expand on the topic of family living cost, and how farm profits, taxes and even killer toys have an impact. Stay tuned!
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at email@example.com.