Farm, barn, silo, wheat field

On-farm income alone is likely not enough to satisfy all family living and debt obligations. Content Exchange

A reader recently asked if it was possible to look more closely at the demographic data covered in our early post about off-farm income. That was a good question because the largest category, “commercial farms,” were those with more than $350,000 in gross cash farm income. This week’s post digs deeper into the U.S. Department of Agriculture’s typography segments for a close look at demographics of farm household income and debt.

On-farm compared to off-farm income

Table 1 shows the farm household-income data across the expanded segments. With that the on-farm vs. off-farm income division is much easier to see. Consider the off-farm occupation and poor-sales segments, which were previously in different categories – off-farm in the residence category and poor sales being intermediate. Both groups reported negative off-farm income in 2018. In fact negative farm income is very common as the poor-sales segment posted a positive value only once between 2011 and 2018 -- and was never positive for the off-farm-occupation segment. Those two groups are heavily dependent on off-farm income to meet all their household obligations, including family living expenses and servicing farm debt.

Consider the moderate-sales and midsize farms. Both segments have a balance between on-farm and off-farm income. On average off-farm income accounts for 40 percent to 60 percent of total household income.

The large and very-large segments are considerably different. While average off-farm income doesn’t go to zero, they are the least across all segments. Additionally on-farm income is much more significant for those segments. As a result off-farm income accounts for a much-smaller share of total household income – on-farm plus off-farm. To be clear we’re not saying off-farm income is unimportant but pointing out that on-farm income alone is likely not enough to satisfy all family living and debt obligations.

Think about debt consolidation

Table 1 also highlights the debt-consolidation situation and how a few segments account for significant debt. Consider the column that reports average debt per farm by segment in Table 1. There are significant differences. The off-farm occupation and poor-sales farms have an average debt level between $35,000 and $40,000. Also included is the median debt level, which points to many of those farms having very little or zero debt.

On the other end of the spectrum are the large and very-large segments, which have an average farm debt of more than $1 million. While that might seem intuitive, the magnitude of financial stress varies across segments. If a very-large farm faces financial stress – and perhaps bankruptcy – the volume at stake is considerably more. In fact it could take about 100 “average” off-farm occupation or poor-sales farms to reach the same level of debt held by an “average” very-large farm.

We frequently see headlines pointing to an uptick in farm bankruptcies or farm-loan delinquencies. But Table 1 highlights the importance of considering the volume or magnitude of financial stress. We’ve written about the volume of delinquent farm loans in the past, and will provide an updated look in a future post.

Wrapping it Up

While the broad conclusions are the same as the earlier post, these additional segments highlight the demographic contrasts even more. When thinking about farm-loan performance it’s important to recognize a majority of farms, on average, rely heavily on off-farm income to meet all obligations. Overall those segments are likely less susceptible to swings in the farm economy, but more vulnerable by macroeconomic headwinds and inflated unemployment.

On the other end of the spectrum, the large and very-large categories are much more reliant on farm-level conditions to meet all obligation. Furthermore those farms are much more susceptible to downturns in the farm economy.

In 2020 it’s both ends of the spectrum that are concerning.

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David Widmar is an agricultural economist with Agricultural Economic Insights.

This article originally ran on Content Exchange