Title: The Importance of Off-Farm Income to Servicing Farm Debt
Abstract: (ProQuest: ... denotes formula omitted.)U.S. farm income is on the rise. Yet, farm income alone is often insufficient for many farmers to service their debt. In fact, for many farm operations, off-farm wages have become their main source of income. In 2008, 90 percent of all income for farm households came from off-farm activities.This boost in income has become vital to farm households, however, it comes with significant risk. Farm operations are now exposed to economic stresses that arise outside the farm gate. In particular, rising unemployment in the local community can elevate a farmer's risk to income loss. If farmers lose this income, their financial stress would rise to the point that many would be unable to service their debt. The risk of off-farm income loss can be heightened if the local economy relies on a shrinking industry, such as manufacturing. Moreover, the financial stress associated with exposure to local unemployment levels can be much greater for some farm operations than others, depending on their size, type of enterprise, and age of the operator.This article explores the effect of labor market stress on a farmer's ability to service debt. The first section examines the importance to farm operations of off-farm employment and income. The second section explains the relationship between off-farm income and a farmer's capacity to repay debt. The third section explores how a farmer's debt repayment capacity can vary with local unemployment rates. The analysis finds that financial stress among farmers intensifies as local unemployment rates rise-especially among small farmers, livestock producers, and young farmers who operate near manufacturing areas.I. THE GROWING IMPORTANCE OF OFF-FARM INCOMETo boost income streams, farm households have steadily increased their reliance on off-farm employment. Since 1959, the fraction of farm operators and spouses who work off the farm has tripled, reaching nearly three-quarters today (USDA). As a result, off-farm employment is the primary source of income for many farm households. The extent to which producers rely on off-farm income depends on their size, type of enterprise, and age of the operator.Farm households have increased their off-farm work primarily to boost household income (Covey and others).1 Annual real off-farm income, as measured in 2008 constant dollars, has risen sharply over the past half-century. From 1960 to 2007, real off-farm income climbed from less than $20,000 per year to roughly $75,000 (Chart 1). As a result, on average, a farm household's total real income more than doubled.While growth in off-farm income has slowed during the past decade, it still accounts for the largest portion of farm household income. In 2008, nearly all income for the average farm household came from off-farm sources (Chart 2). Working off the farm accounts for about 80 percent of off-farm income, with the remaining 20 percent coming from other off-farm sources, such as interest on bank accounts, stock dividends, and revenues from rental property.Most farms earning the bulk of their income off the farm are small operations (Chart 2). In 2008, just more than 95 percent of all U.S. farms were small (less than $1 million in farm sales). In contrast, large farms (more than $1 million in annual sales) earn just 20 percent of their total income off the farm. Large farms rely much less on off-farm income because they typically earn ten times more net farm income than smaller farms.Dependence on off-farm income also varies by agricultural enterprise type, especially when crop and livestock incomes move in opposite directions. In 2008, crop prices rose significantly, with prices for commodities such as corn, wheat, and soybeans reaching historic highs. Despite this rise, crop farmers still earned about 75 percent of their income from off-farm sources. At the same time, livestock producers suffered significant losses as surging feed costs slashed livestock profits. …
Publication Year: 2011
Publication Date: 2011-01-01
Language: en
Type: article
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Cited By Count: 16
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