NEWS for North Dakotans
Agriculture Communication, North Dakota
State University
7 Morrill Hall, Fargo, ND 58105-5665
July 30, 1998
[Editors: Please include byline when using this story.]
by Dwight Aakre, Farm Management Specialist
North Dakota State University Extension Service
The current financial situation on many farms in North Dakota and surrounding states is very serious. Farm debt and debttoasset ratio have increased each of the past four years, a culmination of production losses over several years.
Unfortunately, the region's farmers are facing a precarious financial situation even with normal production. They are operating on extremely thin margins. Even if a solution were found to help them through the current situation, a short crop in the future—together with currently projected longterm prices—would likely lead to the same situation again.
On a typical central North Dakota crop farm, spring wheat, barley and oil sunflower constitute nearly all of the production. A historical crop mix would be 50 percent wheat and 25 percent each for barley and sunflower. Given that mix, the average return to labor and management would be $7.54 per acre—but this assumes the farmer receives the longterm average yield and long-term projected prices. And he isn't receiving either at the moment. Current wheat and barley prices are more than 20 percent less than the long-term projections.
This average farmer is also receiving about $10 per acre additional income in the form of transition payments under the current farm program.
The most recent North Dakota Farm Business Management records show that the average farm family spends about $35,000 for family living and taxes, which means the family must farm 1,995 crop acres for their returns to labor and management, plus transition payments, to supply that amount of income for living.
Many farms are considerably smaller than this. The intense pressure to increase the size of a farm to where it will cash-flow works against the producer by holding rental rates high. Most farm families are using offfarm income and depreciation to meet family living expenses, but eating depreciation has dire consequences—and working off the farm takes labor and management away from the farm business, making it more difficult to obtain optimum productivity.
The average farm is in a very tenuous financial position:
n A 10 percent reduction in yield or in price would mean that the average
farm family would need to farm 5,500 acres to provide family living costs.
n When market transition payments end in 2002, the average farm family
will need to farm 4,642 acres to generate family living—assuming normal
yields and prices.
Clearly, it is unrealistic to expect that a farm family can provide all the labor and management needed to farm the huge amount of acreage required to make a living. And using hired labor will, of course, reduce net returns.
Federal crop insurance is of little assistance. If yields for our average farm were reduced to 65 percent of normal (the most common coverage), return to labor and management, plus the transition payment, would be a negative $24.82 per acre. On a 2,000-acre farm this would result in a $49,640 loss and a reduction in net worth of about $80,000, assuming no off-farm income.
However you look at it, the future for North Dakota agriculture is bleak. At the end of the current Farm Bill legislation, farmers are expected to survive without any transition payment. Without the $10 per acre transition payment, it will be necessary for the typical farmer of our example to farm more than 4,600 acres to provide for family living costs—assuming family living costs will be the same as now, and assuming that operating costs will not change.
But of course family living costs will keep rising.
And so will operating costs.
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Source: Dwight Aakre (701) 231-7378
Editor: Barry Brissman (701) 231-7866