Why have farm family living expenses been identified as a problem?
Family living expenses is a common term for non-business Owner Withdrawals from the farm business, but they are not the same. Personal taxes, purchases of personal assets, and other non-business expenditures are not included in family living expenses. As you read this article, consider your use of the term. When you think of family living expenses are you including all non-business expenditures?
A tension exists in farm businesses between minimizing or eliminating federal income tax obligations and maximizing after tax equity growth. Purchases made to take advantage of expense method depreciation have resulted in debt that must be serviced through after tax profits. When profits are slim or losses are incurred, Owner Withdrawals compete for their share of the profits against the principal portion of debt service and add to the need to consume working capital or trigger a need to refinance. 2015 reports from Farm Business Management Associations showed an inability of average farming operations to cover family living expenses.
When it comes to shelter, there is a range of farm family living arrangements from a relatively new home to an older farm house. Like other homeowners, the purchase of a home tends to be an infrequently made decision with a long-term commitment. Unlike other homeowners, the farm family’s home may be on an active farmstead. As a result, the sale of the home and purchase of a different home could be disruptive to farm business activities.
Farm families are quite similar to non-farm families when it comes to luxury consumption. Second homes, recreational vehicles, and international vacations are easy to identify as being unnecessary to the sustenance of life. A more difficult area of distinction between wants and needs, or luxury and normal consumption, is a set of smart phones requiring data plans for the entire family, satellite TV, and consumption of food away from home.
Even without debt to service, the level of profit from the farm or off-farm income required for family living can be a challenge. Families may struggle to get their family living costs under control. With accurate measurement and benchmarks for comparison, farm families can determine whether their costs are already well managed or they have room for improvement.
Are farm families the same or different from non-farm families?
Farm families are like non-farm families when it comes to the basics of food and shelter. A perception of farmers being closer to the sources of food means that some farm family living budgets include “home raised” meats, vegetables, and fruits. Fewer operations raise chicken, pigs, sheep, dairy, and/or beef cattle, so access to farm- raised meat is not universal. Likewise, large vegetable gardens and orchards are established and maintained based on personal preference more than subsistence needs. Expenditures for food eaten at home may not differ between farm and non-farm families.
Health care is an area of expense that continues to grow. Health insurance expenses increase over time and health care expenses increase with age. Off-farm employment provides farm families with cash income. After cash income, a deciding benefit is often access to lower cost group health insurance. The cash and non-cash costs off off-farm employment are the focus of a future article in this newsletter. Some operations couldn’t exist without the off-farm income of one or more members of the family while others have no off-farm income.
Family living cost data from the Bureau of Labor Statistics can be found to establish a benchmark. The average annual expenditures for a Midwest Consumer according to Table 1800 is $53,425. The Farm Business Associations of many neighboring states have members who record their family living expenses. When looking at these sources, be sure to compare the Owner Withdrawals numbers to include purchases of personal assets, and other non-business expenditures. Note that the Bureau of Labor Statistics does not include personal taxes in their expenditures.
Differences between farm and non-farm families lie in the investment required and risks managed to create farm income. Cash grain operations sell the crops produced, and the likelihood of those sales being in even intervals and at the same levels is quite low.
From year to year and crop to crop, production levels vary. The marketing year average prices for 2014, 15, and so far in 2016 have been below economic costs of production. Differences in costs of production occur with the remaining profit being irregular. Some livestock enterprises result in a more steady income stream while others, like cattle feeding, can quickly swing from large profits to large losses.
How do you measure family living expenses, to see whether they are under control or not?
If a recordkeeping system isn’t in place, the first step could be to calculate Owner Withdrawals and allocate those expenditures to the simple categories of family living expenses, personal taxes, purchase of personal assets, and other non-business items. Choosing categories for family living expenditures and assigning cash spent to those categories could be difficult without a recordkeeping system. Moving forward, a simple recordkeeping system like the 2017 Money Management Calendar provides a paper based way to record family living expenditures. There are many personal finance software solutions. Like any recordkeeping activity, the real work comes in the data entry and use of the results.
Iowa Farm Business Association
Iowa State University Extension and Outreach reported summarized Iowa Farm Business Association data on Family Living Expenses prior to 2009 in AgDM File C1-10, Farm Costs and Returns. In 2009, "Table 4. Summary of Cash Income and Expenses by Size of Farm" changed to Table 3 adding many categories and removing a few. One of the categories removed was family living expenses.
Illinois Farm Business Management Association (IFBMA)
The IFBMA uses the Owner Withdrawal approach. FarmDocDaily’s How Will Family Living Affect My 2017 Budgets included a summary separating family living expendables, capital purchases for family living, and income and social security tax payments. The 2015 averages were $78,538 for expendables, $6,241 for capital items “such as the personal share of the family automobile, furniture, and household equipment,” and $32,438 for income and social security taxes. The totals are useful, but the single category of Expendables does not provide categories of spending.
Farm and Family Living Income and Expenditures, 2012 through 2015 reports high and low third costs of living for a family of 3-5 on the final page. Expendables is expanded to four categories. The categories are Contributions, Medical, Insurance (life and disability), and Expendables. Summing the noncapital and capital living expenses, the low third had a total cost of living of $58,150 and the high third was more than twice as much at $135,650 before income and social security taxes. In this report, three categories are added. The same categories are used in the full report. Twenty-four percent of the 5,668 IFBMA members provide the information necessary to report Owner Withdrawals with the additional detail.
Kansas Farm Management Association (KFMA)
The KFMA provides An Analysis of Family Living Expense Categories. Thirty-four percent of the 1,159 KFMA members reported family living expenditures in 17 categories. Figure 1 gives the family living expense categories from that report and provides a visual realization of the changes in expenditure for the nine largest categories. A farm family looking at the graph may be able to think about changes in their own expenditures, and areas where costs could be cut. Home repairs, contributions, recreation, and household all increased dramatically beginning in 2006. Of those four categories, only household has continued upward through 2014 and 2015.
In An Analysis of Family Living of Kansas Farm Families the correlation between net farm income and family living expenses is explored. Greg Ibbendahl writes, “Family living is correlated to net farm income (correlation 0.62) but it appears to have a lag as the jump in family living expenses happened after the jump in net farm income. In publication GI-2016.7, we hypothesized family living was based on a four-year average of net farm income. Also, while net farm income in 2015 declined to near zero, family living is only starting to show a decline. Although total family living expenses declined slightly... some expense categories showed steeper declines...home repairs, contributions, medical, gifts and auto all showed declines in 2015.”
Southwest Minnesota Farm Business Association, Missouri Farm Business Management Association, and Nebraska Farm Business Incorporated
The Minnesota, Missouri, and Nebraska associations use the same family living expense categories. Page 18 of the Southwestern Minnesota Farm Business Management Association Annual Report and page 15 of the Missouri Farm Business Management Analysis Record Summary show the allocation of Owner Withdrawals. Ten percent of the 132 Missouri FBMA members reported family living expenditures in detail. Thirty-one percent of the Southwest 103 Minnesota FBMA members and 36 percent of the 118 Nebraska FBI members reported family living expenditures in detail. The Nebraska Farm Business, Inc. report is available for purchase.
The 28 categories used by the Minnesota, Missouri, and Nebraska associations may be a sweet spot between the 17 categories used by the Kansas Farm Management Association, and the 103 categories used by the Bureau of Labor Statistics. If the Kansas Farm Management Association categories are used, be sure to add personal taxes, purchases of personal assets, and other non-business expenditures to get to the total Owner Withdrawals.
What can be done?
A distinctive difference between farm and non-farm families is the expectation of a decrease in family living expenses when profits are small or non-existent. That may or may not be possible. Calculation of the Owner Withdrawal would be the first step. How much of the accumulated earnings have been used by the owner? Identification of luxury consumption could help to find easy expenditures to stop. The next step would be examining existing family living records to see how past expenses compare to Bureau of Labor Statistics or Farm Business Management Association benchmarks.
If you feel that your family living costs are not under control, the Farm & Family Connections: Taking Control of Farm-Family Living Expenses document from Purdue includes simple worksheets for estimating family living costs. You could compare the estimates you generate to your Owner Withdrawals. Then you could use the 2017 Money Management Calendars or a personal finance software package to record and monitor family living expenditures against the budgets you’ve set.
If family living expenses are not a problem, the farm business may have problems that need to be addressed through AgDM File C3-53, Financial Troubleshooting. A thorough review of the efficiency, scale, and debt of the farm business may show that family living expenses were not the problem, but something that points to the problem.