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Minnesota Farm Households as Economic Generators

June 11, 2009 By Lee Egerstrom, Economic Development Fellow
 
If you think you've got problems managing the household budget, be thankful you don't live on a Minnesota farm. On the other hand, if you are a local merchant or service provider, be thankful you've got farmers living in your community.

Economists and other farm business experts have concluded that it took $89,147 in farm income last year to pay the average farm household and personal living costs last year on what can be described as "commercial" or "conventional" Minnesota farms.

Data were gathered by farm management educators with the University of Minnesota Extension Service and the Minnesota State Colleges and Universities (MnSCU) farm business management programs in southern Minnesota.

The findings are in the report, "What Does It Take to Earn a Living on the Farm?" (PDF). It was prepared by Extension educator Gary Hachfeld at Mankato and includes data from farm business programs at South Central Technical College at North Mankato and Jackson, and Riverland Community College at Austin.

The findings will tweak curiosity from Minnesotans who are one, two or three generations removed from the farm. It shows how dramatically agriculture differs from nostalgic and stereotypical assumptions about how Grandpa and Grandma lived in earlier days.

But for the here and now, the data are especially important for state policy makers, community development experts and business people who would like to build economic activity from a fairly strong agricultural base.

From this latter perspective, let's cherry-pick some of the data:

Hachfeld combines farm family living expense as food, medical care, charitable donations, supplies, furnishings, clothing, educational costs, recreation expenses, gifts, utilities, child care, house rent, and upkeep of the house, along with purchases of non-farm vehicles, investments, savings, life insurance premiums, income and social security taxes, and non-farm capital purchases.

That's an all-inclusive collection of paid-out expenses, no matter where you live. Unfortunately, it doesn't include charges for labor or farm management that may or may not be imbedded in payments to savings and investments.

Regardless, the findings show that expenditures from an "average" Minnesota farm household of 3.3 people are an economic engine that keeps cash registers churning across much of rural Minnesota. It reaches into the Twin Cities and center cities as well, both through the supply chain and through modern mobility as people travel farther distances for entertainment, continuing education, and shopping for home and business.

"Average" farms
What the data clearly shows is how capital-intensive the modern, conventional or "commercial" farm has become, said Kent Olson, an applied economist and farm management expert at the University of Minnesota in St. Paul. That does provide evidence that agriculture is still an important platform to build on in Minnesota.

At the same time, Olson said, combined data leaves a lot of unanswered questions because there is no "average" farm. Agriculture has become extremely fragmented. Other research shows agriculture is becoming something a household does in addition to other income producing activities.

The U.S. Department of Agriculture counts farms as enterprises that generate at least $1,000 in income from some agricultural activities. Small-scale "hobby" farms continue to increase in number while larger farms that are primary sources of farm household incomes continue to decline.

Olson said farms need about $500,000 in agricultural revenue before the household can show that it receives more than 50 percent of family income from farming. One young couple he knows calculates that one-third of its household income comes from farming, one-third from a related, or "aligned" income from the seed industry, and one-third comes from off-farm income.

Nearly all small farm operators, such as the truck or garden farmers in and near the Twin Cities metro area, are far too small to survive on agricultural income alone. Agriculture supplements these families' household incomes. Elsewhere, Olson said revenue of $100,000 is the most practical measuring point for classifying commercial farms no matter how diverse the sources of household income.

"Aligned" income
Going forward, state researchers and USDA statisticians will need to break out sources of non-farm income that is now built into the maintenance of farm households. This unknown data would give community development specialists and public policy makers guidance on how to build value-added activity up from the ground.

More than a decade ago, CHS Inc., the huge farm marketing, supply and petroleum cooperative in Inver Grove Heights, coined the concept of "aligned" investments for farmers who wanted to invest in value-added enterprises. The intent was to increase the value of commodities produced on CHS members' farms. This concept was largely a response to farm investment in New Generation Cooperatives (NGCs) and limited liability company (LLC) enterprises that have sprung up across the Midwest in the past two decades.

In retrospect, Olson said the "aligned" term is significant because it is an extension of the farm as opposed to a stake in a mutual fund or other impassive investment in stocks and bonds. It would signal ways to build on Minnesota's farm economy.                        
  
Evidence is mounting of the importance of aligned income to Minnesota agriculture. Olson's farm couple, cited above, is a case in point.

Further evidence is provided in a study for Minnesota 2020 in which Aparna Bishap, a recent Macalester College graduate, found farm investment in ethanol plants produced more than $1 billion in added crop income and raised corn prices by $1.22 a bushel for Minnesota farmers.

This occurred even though ethanol production wasn't generally profitable in the past two years and part of the industry is going through bankruptcy reorganization. That aligned income came in the form of higher crop revenue; the Hachfeld study doesn't break out ethanol plant investment income from other non-farm investments.

Given the changes that have already occurred in agriculture, we are going to need to understand concepts of "aligned" income just as we seek more "value-added" enterprise to build from our farm economy. The two are inseparable, and "aligned" with the future of rural Minnesota.



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