A review of North Dakota Agriculture in 2008
By Andrew Swenson
Most farms enrolled in
North Dakota
’s Farm Business Management Education program achieved back to back
outstanding years in 2007 and 2008. Median
net farm income in 2008 was $114,520, a 12 percent decline from 2007.
Net farm income in these two years of prosperity averaged about three
times more than the five years which preceding them.
The reason for the high income years have been historic high crop prices,
and overall, strong yields, which have more than offset spiraling costs.
Unfortunately, livestock farms have not participated in the strong profit
because they have had higher costs, but not higher prices for their production.
In 2008, the median net farm income of operations categorized as mixed
enterprise crop-beef farms was $53,000, beef farms was less than $15,000 and
dairy farms fared worse than beef farms. Net
farm income plus depreciation and off-farm income is the amount available to
farm families for family living expenses, self employment and income taxes,
principal payments and growth.
In 2007 and 2008 farm size increased only slightly in terms of acreage,
but gross revenue and expenses were much larger compared to previous years.
The increase in accrual gross revenue (cash revenue plus adjustments for
inventory changes) has been dramatic. It
was $381,000 in 2006, $578,000 in 2007, and $672,000 in 2008.
Although, gross revenues were much higher in 2008, so were costs. Crop
prices are probably the best leading indicator of crop costs of production.
Why? Although farmers provide
substantial inputs to the production process such as labor and management and
the equity in the capital investments of their business there are other
necessary inputs such as seed, fertilizer, chemicals and land.
The suppliers of those items wish to share in the rewards from helping to
grow crops which are generating greater income and producers are more willing
and able to accept the higher prices that suppliers set.
As predicted, costs soared at an historic rate in 2008.
Total costs per acre increased by over one-fourth for soybeans, over one-third
for wheat, barley and corn and nearly one-half for durum.
These increases were from 2007 cost levels, which at the time were the
highest on record.
Fortunately, as mentioned earlier, the combination of strong crop prices
and yields have provided gross revenues that have exceeded cost increases.
In
North Dakota
, historically, for every one dollar of gross farm revenue there is typically 80
to 85 cents of expenses, including depreciation and interest.
This leaves 15 to 20 cents of net farm income.
In 2007 this relationship improved to 33 cents of net farm income for
every dollar of gross. In 2008 it declined to 27 cents, but was still well above
the long term average.
The good news, looking forward, is that the streak of ever increasing
costs of production for raising small grains will be broken in 2009 because of
lower seed, fuel and crop insurance costs. However, total costs of canola,
soybeans, corn and sunflowers production will see little change because higher
seed costs will tend to offset cost items which declined.
The bad news is why costs have settled down.
Crop prices dropped during the last few months of 2008.
Balance sheets have had notable improvements in net worth and solvency the
past two years. However, borrowings
have increased every year and, on average, principal payments have been less
than borrowings. For example, in
2006 total new borrowings and principal payments averaged $278,339 and $244,927,
respectively. During 2008, the
average farm borrowed $428,000 and made principal payments of $365,000.
In simple terms, farms have increased debt every year.
This has not been a concern because total assets have increased at a
greater rate than total debt and debt-to-asset ratio has improved.
However, a future scenario of rising interest rates and lower crop prices
would make servicing the higher debt levels more difficult.
The challenge to producers is to manage what essentially has become a
larger farm the last two years. Gross
revenue and costs have become much higher and debt load has increased.
Therefore, management decisions have a larger impact in determining
the sums of dollars both going out as expenses and coming in as revenue.
Farmers are well aware of the risks associated with commodity
markets, weather, pests and interested rates, but risk management takes on
heightened importance when more dollars are involved.
The state farm
business management summary is available on the Web at http://www.ndfarmmanagement.com.
Regional summaries for western, north-central and south-central
North Dakota
, and the Red River Valley of Minnesota and
North Dakota
also are available. In addition to whole-farm financial information, these
books detail costs and returns of livestock and crop enterprises.
