Business of Farming

Managing Expenses for the Farm and the Family

BY ADAM N. RABINOWITZ, PH.D

Commodity prices for row crops have been on a wild ride in recent years. From the decade lows of 2019 to the spike in prices that is reminiscent of record highs in 2011-2013 (see Figure 1). As higher prices have been maintained throughout the first half of 2021, it can be easy to start thinking about the current market situation as a new norm. It’s only natural to want to remember the highs and forget the lows. Thus, I want to take this opportunity to discuss a few important topics in managing expenses for the farm and the family.

Figure 1: Average Annual Nearby Futures Market Prices for Corn and Soybeans

The Counter to High Prices

While prices are high and are projected to remain strong, there is another side of the equation that may limit farm income from following this upward trajectory. Input costs during 2021 have also been increasing. Fertilizer prices have sharply increased to their highest point since 2013. The same is true for some chemical prices and other inputs. A combination of factors is contributing to the rise in input prices, but one persistent reason is the cycle of increasing crop prices leading to higher input costs. The demand pressure for crop inputs increases their price.

Table 1: Major Farm Income and Expense Categories

Major Farm Income Categories

• Revenue from Product Sold.

• Payments from Government Programs.

• Crop Insurance Proceeds.

• Revenue from Custom Work.

• Other Income.

Major Farm Expense Categories

• Seed or plants.

• Fertilizer and pesticide treatments.

• Hired labor.

• Machinery operating expenses.

• Land rent or ownership.

• Vehicle expenses.

• Drying, hauling and marketing.

• Utilities.

• Taxes.

It’s important to also keep a close eye on land rental rates during times of increasing prices. Landowners may view increased crop prices as an opportunity to increase rents since production on the land yields a higher revenue. Producers need to be careful about locking in long-term contracts at higher rates. There is no guarantee that prices will remain at current levels over the next three years, or longer. Once again, history tells us that we should expect prices to fall. Being locked into high land rents can lead to critical issues in the farm’s finances.

Fundamentally, this means that producers need to remember that farm income is not just about the revenue but the expenses, too. A focus on margins can be more informative to the financial situation of the farm rather than a focus on just price, yield and the resulting revenue. This starts by having good documentation on an individual farm’s cost of production. Table 1 details some of the important elements to include for good record keeping. Not only does that help for measuring farm finances today but it also allows for appropriate budgeting when planning for the next crop year.

Family Living Expenses

Another topic that is often thought to be separate from the farm is family living expenses. These are sometimes also called personal withdrawals. When prices are high it’s easy to start thinking about all the family wants and needs. While vacations and luxury items can be tempting, spending on the more essential items should first be examined. This includes kids’ day care and school activities, groceries, insurance, mortgage, cell phones, utilities, internet and retirement savings. For the vast majority of farmers, the farm and the family are one and the same. Balancing family living expenses when prices are high can help establish a safety net when prices begin to fall.

Planning as a Key to Success

Setting goals, estimating expenses, and remembering the good financial times and the bad can help keep the farm’s finances on track for long-term success. The Alabama Cooperative Extension System (ACES) has the resources available to help educate farmers based on scientific research and best practices. Reach out to your local Extension agent or specialist for assistance.