farmgate: If Your Farm Account Is Insufficient, How Do You Pay For A New Purchase?
When the neighboring 80 acres comes up for sale this winter, will you bid on it with fund originating from your farming operation; or will you use non-farm investments and income? Even though exploding crop prices may be sufficient to allow higher land costs to cash flow, the basis for your expansion may not be pure growth from the farm.
Whether it is land, or building a new building or buying a new combine, your investment in agricultural assets may be dependent upon the depth of your off-farm resources. That could be some stock dividends or it could be salary earned by your spouse. The theory belongs to agricultural economists Valentina Hartarska and Chi Mai at Auburn University, who say, “This suggests that perhaps farm households use off-farm income to support farming.”
Other farm economists have already determined that off-farm income is used to manage financial risk, and farm family income is higher than non-farm families, even with less consumption for farm families compared to non-farm. The Auburn economists believe that farmers use off-farm income for agricultural investments, and it alleviates financial constraints for smaller farms constrained by credit. They also researched whether the trend is more or less pronounced above and below $250,000 in sales.
Their research, which focused on Alabama farms, is consistent with USDA research that the non-farm rural economy has grown in importance as more farmers are increasingly dependent on non-farm revenue. They contend that for most farms, non-farm income is more important than the financial well-being of the farm, and increases in off-farm income were more than sufficient to compensate for declines in farm income. “Size remains an important factor in access to credit for family farms and smaller farms use off-farm income to remain in farming.”
Studying more than 1,000 farms, the economists say farm income is significant for the farms in question, but farm households used a larger percentage of their non-farm cash to invest in the farm business. “The finding shows that the more income a farm household earns from off-farm source the more likely it is to invest in the farm business.”
Summary:
While the final decision belongs to the farm operator, assets used on the farm may be more likely purchased with money from non-farm sources than for money that originated on the farm. This is in contrast with other businesses. Also, farm investment in small, more financially constrained farms is more sensitive to the availability of internal finance.
Posted by Stu Ellis on January 10, 2008 12:38 AM to farmgate