Is 2023 the Year of Growth?
January 30, 2023
| AgFocus-Ag Focus
Happy New Year from all of us at Security Bank! We are excited to see what 2023 will bring for all our customers and local businesses. As you plan for 2023, hopefully this month’s article will provide food for thought, as some of the ideas build on ideas shared in a past article!
How Much Income is Enough for Growth?
By Lee Potts, Vice President/Senior Credit Officer
In September 2022, we shared an article published by the UNL Center for Agriculture Profitability, written by Dr. Larry Van Tassel of the UNL Ag Econ Department. The article outlined various considerations for the expense of bringing a family member or other employee into the operation. You may recall that in the article, some math was outlined to determine the amount of additional gross income needed to cover the new expense while maintaining a similar level of net income. In that example, the expense of adding a family member as an employee was about $76,000 per year to where about $470,000 of additional gross income was needed to achieve the same level of net income (about a 6:1 relationship). Thinking more about that article led to the question in the bank: Why not use that same approach to make other decisions in the operation? Not to say that in every single case, every single year, the decision must pass this test because we know that things change throughout the year and no two years are the same either when it comes to farming. However, it can at least be a quick litmus test to determine how realistic an added expense, payment, or other cost may be.
Using Nebraska Farm Business, Inc. (NFBI) data from 2021, for example, the average farm operation in northeast Nebraska had a gross income of $1,230,048 and a net cash income of $220,133. In other words, it took $5.59 of gross income to generate $1.00 of net income that particular year on average based on the costs for that year (a 5.59:1 relationship).
Applying the concept outlined by Dr. Van Tassel, let’s say that operation is wanting to add a $30,000 annual expense, loan payment, or other similar change to the operation. That would mean that an additional $167,700 of gross income would be needed to maintain a similar amount of net income ($30,000 x $5.59). Or put another way, an increase in gross income of about 14%. Is this realistic and achievable?
Going back to the 2021 NFBI data, the average northeast Nebraska farm, in their sample, farms 1,063 crop acres. The additional gross income figure from above equates to an additional $157.76 per acre. What does that equate to per bushel or per head? Do those metrics seem to be realistic and achievable?
Remember that the investment may very well add return to the operation in some way in and of itself. Otherwise, why would anyone move forward with such an investment? One can’t assume that such a change is nothing more than a financial drain on the operation. If it were a drain, the question of whether to invest in that change would already be answered. Similar to what Dr. Van Tassel generally asks in his article: What does X bring to the operation?
The underlying point is that sometimes assuming there is enough net income to afford some sort of investment in the operation may not tell the whole story. Ideally, additional earnings should enter the equation whether that be through a combination of added yield, added price per bushel/head, or reduced expense and gained efficiency. These examples, of course, are rather simplified since there are many moving parts to any farm operation. Net income is finite, no matter how much a business may generate. When considering various investments into the operation, a gain being realized elsewhere in the operation as various investments are implemented helps bolster or enhance net income.
Larry Van Tassel
Professor & Director/ Center for Agriculture Profiability