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Donald J. Breece, Farm Management Specialist, OSU Extension Center at Lima

The size of a farm required to make a desired living income is one of those economic questions most easily answered by "that depends." It depends upon such things as the desired family living standard, amount of debt or investment to be paid by enterprise profits, production efficiency, market prices received and per unit cost of production. However, it may be best to look at some general economic principles, as it pertains to all family farm businesses producing commodities for sale.

The 2005 Ohio Business Summary of farms, utilizing the FINPACK computer program for financial analysis, showed the average farm family had $262,172 of farm production, net farm income of $44,552 and non-farm income of $15,600. Economists have indicated that it takes about $50,000 living costs for an average farm family. The average family living and taxes from the 2005 Ohio Summary was $44,104 per farm. So how many dollars of gross farm sales would it generally take to earn nearly $50,000 to take care of a family?

Typically, at least $300,000 of gross revenue is needed to generate $50,000 family living income. Assume it takes 75 percent of revenue to cover operating costs. This leaves 25 percent for debt service, capital replacement, growth and family living costs. Gross revenue of $300,000 would net $75,000. After $50,000 for family living, this would only leave $25,000 for debt payments and investment.

Certainly, as a minimum, farm families should plan for family living costs to exceed the U.S. Department of Health and Human Services poverty guidelines for 2006. A family of four with income below 130 percent of the poverty guideline or $26,000 may qualify for the USDA Food Stamp Program. The risk of such a large investment, as in farming, deserves a more reasonable return to family labor.

Family living expense requirements are driving the size requirements of commodity agriculture. Commodity production assumes smaller profit margins. To meet future family living demands, farms will continue to grow in size and scale. David Kohl of the Virginia Cooperative Extension lists some rules of thumb for family living costs: Family living costs generally account for between 10 and 15 percent of gross farm revenue. Also, a farm business exceeding a debt to asset ratio of 50 percent means that living expenses should generally be under 10 percent of revenue. He indicates that there may be some evidence for couples over the age of 65 requiring approximately 25 percent more to support their lifestyles than a couple who are 35. For older couples, medical costs are much higher and travel plans add to the living expenses. What does this mean for retirement planning and its affect on the businesses future? With increasing life expectancies, it will be more common to have two generations of retired farm families possibly drawing on the resources of an operating business. Retirement planning is, therefore, essential to any transition plan.