NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665
April 20, 2000
Several producers in the Red River Valley do not feel that their operations represent the average when it comes to net farm income statistics based on North Dakota and Minnesota's Farm Business Management Education Program. There are many reasons why averages may not represent what producers believe to be reality, says an agricultural economist at North Dakota State University.
"I have been contacted by producers who question whether the average net farm income for 1999 in the Red River Valley was $87,000--a fourfold increase from 1998 because of extraordinary government payments," says Andrew Swenson, farm management specialist with the NDSU Extension Service. "The producers feel that those numbers do not reflect an accurate picture of how producers are faring financially. The statistics are a summary from 211 North Dakota and western Minnesota farms enrolled in the Farm Business Management Education Program--and those numbers are accurate. However, I can understand how individual producers would think the 1999 net farm income figure is not representative of their situation."
One reason is that the numbers are calculated on a per-farm basis, not a per-operator basis. Although most farms have a single owner-operator, some farms are partnerships or corporations and have two or more operators involved in the farm business. Net farm income must be shared among the number of operators. Based on Swenson's analysis of the 211 North Dakota and western Minnesota farms enrolled in the Farm Business Management Education Program, average net farm income--per operator--totaled $73,000 for 1999, or $14,000 less than the average whole-farm net income.
Another reason why average net farm income may not seem representative of the typical farm is because of the wide variance of incomes among the Red River Valley farms whose individual performances make up the average, Swenson says.
When preparing economic analyses to gauge typical farm performance, Swenson often looks at either the median (the mid-point of all values) or an average of the middle 60 percent of the farms because a few large, high-profit farms skew the average. For 1999, the average net farm income--on a per-operator basis--for the middle 60 percent of the 211 farms totaled $63,000.
"I myself sometimes question whether the public understands what net farm income is and how it can best be compared to the wages or salary income that non-farmers earn," Swenson says.
Farming requires significant investment in machinery, land and other assets. The return to a farmer's investment in the business (return to equity) is included in net farm income, Swenson says. In contrast, a non-farm wage earner's return to personal investments (stocks, bonds etc.) is not considered part of his or her annual wage or salary.
In 1999, the average farm equity of the middle 60 percent of farm operators enrolled in Farm Business Management Education Program was $377,000. A conservative estimate of an operator's 1999 return on equity ($377,000 times 6 percent) is $22,600. Net farm income is the return to labor, management and equity, Swenson explains. The net return for the "typical" farm operator for labor and management, then, would be $40,400 ($63,000 minus $22,600).
"Now, that $40,400 figure is getting close to an apples-to-apples comparison to the non-farm wage or salary," Swenson says, "but with a couple of big caveats: Employers pay one-half of self-employment taxes, and many provide retirement or medical benefits. Like all self-employed, farmers must pay for those items out of their net farm income. In addition, farming has greater risk or variability of income."
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Source: Andrew Swenson (701) 231-7379
Editor: Dean Hulse (701) 231-6136