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Off-farm jobs critical to ag economy ... Part 3

Income detailed by farm type

Of average family-farm household income, 82 percent came from off-farm sources in 2019 – see Exhibit 22. Off-farm income includes earned pay from wages and self-employment along with unearned income from Social Security, pensions, interest and other sources. Earned wage or self-employment is the largest share of household income for all family farms.

Off-farm income was particularly important in 2019. Small-sales farms – less than $150,000 in income – operated by someone who considers farming their primary occupation, account for one in three family farms in 2019 yet they still relied on half their income from off-farm employment. Off-farm earned income offers more reliable, and often more profitable, pay to small family farms.

The stabilizing nature of off-farm income is evident from the analysis of larger operations – family farms with more than $350,000 in gross cash farm income – from 1996 to 2013, conducted by the USDA Economic Research Service. The study found those larger-farm households faced substantially more income volatility than smaller farms, a counterintuitive finding when compared to nonfarm households that generally see income volatility decline as income increases. A farm household with more than $3 million in farm assets had a 34 percent chance of having negative household income at least once every two years, but farm households with less than $750,000 in farm assets had a 17 percent chance.

Half farm households have negative income

Farm-operator household income is often reported by averages, so that income from different sources can be added to more easily understand the shares of income by different types – as shown in Exhibit 22. An alternative measure, the median, describes the level where half of all farm households have smaller incomes and half have bigger incomes. It’s useful in understanding the financial situation of a typical household.

USDA data tabulations of median income – see Exhibit 23 – show that, in most years, households have negative farm incomes in regions across the United States. From 2011 to 2019 the median household income from farming was only positive in one year – 2019. The Midwest region did show modestly-positive median farm incomes in most years, but off-farm earned income was much greater.

Off-farm income reduces debt-risk exposure

Negative farm income is the reality for farmers and ranchers because most have small operations. Earned off-farm wages reduces household-income volatility for agricultural producers who depend on off-farm income to meet household spending needs. It’s precisely because farm income is so volatile that larger operators, who depend on their agricultural output for income rather than an off-farm job, and younger farmers, who need to borrow to finance land and equipment purchases, often face greater debt-default risks. While tax-management strategies may reduce volatility in the short term, income losses through multiple years is not uncommon.

A 2011 Kansas City Federal Reserve study analyzed the importance of off-farm income to servicing farm debt, and how dependent farmers were on the regional economy. The study, and others cited, found that most farmers would have great difficulties repaying debt without off-farm income. The author noted that off-farm income was even more important for young operators under age 35 in reducing debt-repayment risks. The study also suggested that agricultural producers in rural counties with weak labor markets – indicated by bigger unemployment rates – had greater debt-repayment risks because of the loss of off-farm job opportunities.

The household farm’s debt-to-asset ratio compares outstanding debt in relation to total farm assets; it’s one way to understand risk exposure by farm type. It’s a key measure that indicates agricultural-producers ability to repay farm financial debt by selling farm assets. A smaller ratio suggests the producer is in better financial shape to weather adverse farm events.

USDA data from 2011 to 2019 indicate that the average debt-to-asset ratio for all farm households was about 9.1 percent. Put another way, lenders had a claim on 9.1 percent of a farmer’s assets to cover debt repayment. For off-farm-occupation farms, the debt-to-asset ratio averaged 6.3 percent whereas midsized-to-larger farms averaged more than 13 percent during the same period. Younger farmers, under age 35, had average debt-to-asset ratios of 21 percent.

Exhibits 24-26 illustrate the debt-to-asset ratios in comparison to average shares of off-farm income. The grey line and bar represent the average level of off-farm income or debt-to-asset ratio, respectively, for all farm households. Green chart lines indicate that the farm type has either greater off-farm income and-or a smaller debt-to-asset ratio than the national average. Orange chart lines show that the farm type had smaller off-farm income and-or larger debt-to-asset ratios than the U.S. average.

It’s clear that larger farms that must rely on farm income to finance large debts, and younger operators who work more off-farm but have relatively big financing needs, face greater risk exposure than households that have larger off-farm income shares.

Strength linked with Cooperative System health

The analysis presented up to this point suggests a symbiotic relationship among and between farmers and agriculture’s allied industries. Farmers, even in farm-dependent counties, rely on off-farm income to not only supplement and stabilize their incomes, but also for health and retirement benefits. The evidence suggests that off-farm income is vital in financing agriculture – from inputs to farm equipment to land mortgages – and that without off-farm income, debt repayment risk is greater.

Taken together, the financial health of farmers and, by extension, the communities from which they access off-farm income, is vital to ensuring reliable supply-chain dynamics and transactions in farmers’ up- and down-stream relationships with cooperatives and agribusinesses. That is, the relationship between producers, their agricultural cooperatives – such as marketing, energy, input-supply and processing – and the Farm Credit System – the cooperative lending system obligated to finance them all – is of utmost importance. Financing agricultural production and producers includes operational or short-term financing and longer-term financing. Many producers utilize the Farm Credit System of lenders for one or both. Likewise agricultural cooperatives that purchase and market farmer outputs and provide inputs to them rely on Farm Credit System financing. In that way the system is financing production but also the inputs to it and the marketing of products into the downstream supply chains.

Agricultural cooperatives provide short-term financing of member inputs including seed, feed, nutrients and energy; they often serve as a secondary source of capitalization for producers. In doing so they take on additional price and default risk at the co-op level to benefit members and ensure timeliness of production. Investigating the relationship between financially stable farms and rural communities, and how that impacts producer-owned cooperatives, could be a future area of research.

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CoBank is a $158 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. It’s a member of the Farm Credit System. Visit for more information.

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