Say the farm’s account holds $150,000 and the farm spends $30,000 in an average month. The usual sum gives five months of cash, and it counts too many. Part of the balance belongs to the household, the household keeps drawing money after the milk check stops, and the account runs dry in the costliest month, not the average one. On the dairy in this article the same account lasts 1.8 months, and a farmer who planned on five would be $60,000 short by the end of the fifth. To answer a feed dealer who wants payment in thirty days, divide the farm’s own money by the costliest month’s spending plus the household’s draw beyond its off-farm income.
How much of the bank balance is the farm’s?
Only the reserve: cash that belongs to the farm alone, already received, that you can reach this week. A balance shared with the household is not that, and on most farms the account is shared. University of Nebraska Extension notes that a single checking account makes family spending harder to control.
Three things look like reserve and are not:
- Money a buyer still owes you, including the milk check for a month already shipped, which you follow on a list of who still owes you and since when.
- Heifers, a machine or a field you would have to sell.
- The household’s savings or pension kept in the same account.
To find the farm’s part, mark twelve closed months of the statement line by line, farm or household, after writing down how you will treat the lines that serve both. The feed bill is the farm’s and the pharmacy is the household’s. The pickup and the electric bill serve both, so decide before marking which side each goes on, or what share, and next year’s marking can be compared with this one. In its handbook on farm cost statistics, the FAO asks for the same split: where a cost also serves the household, the household part is estimated and subtracted so farm costs are not inflated.
Give a third mark to any line the rule still cannot settle, and count those lines. Five out of three hundred means the farm’s money is nearly its own; sixty means the reserve you write down is partly a guess. If the count is high, open an account and a card that only the farm uses, and the next statement arrives already sorted.
The example dairy has 95 cows, the herd size Wisconsin extension used for an average herd in 2009. Its account holds $150,000, and $30,000 of that is the household’s savings and pension.
Does the household’s spending count?
Yes. When the milk check stops, groceries and school fees are still paid, and on a farm with one account they are paid from the reserve. Mississippi State University Extension counts that draw too when it works out how much debt a farm can repay, adding off-farm income and subtracting family living withdrawals.
So the page carries the net household draw: what the household takes out of the farm account each month, minus the off-farm income paid into it, such as a salary or a pension. On the example dairy the household takes out $10,000 a month and a job off the farm pays $4,000 into the account, so the net draw is $6,000.
Off-farm income can be large. Across all US family farms, not dairies alone, 86 percent of households earned more than half their income off the farm, the USDA Economic Research Service reports. If off-farm income exceeds the household’s draw, the household is supporting the farm: write the difference as money coming in, and subtract it from the spending you divide by.
Why does the average month give too many months?
The average spreads a year of bills evenly, and the account runs dry in the worst month, not the average one. Open your twelve statements and write the costliest month beside the average. On the example dairy the average month is $30,000 and the costliest is $60,000, the month when the feed order and the corn seed for silage both fall due.
Dairy income seldom stops outright; it falls below the bills. In the first half of 2009 the milk price sat under cash costs in Wisconsin. Ed Jesse, an extension dairy marketing specialist at the University of Wisconsin-Madison, took a herd of 95 cows. Each gave 20,000 pounds of milk a year, and he worked out a cash flow deficit of $47 per cow per month, a monthly loss of about $4,500 per herd.
That case is a different division. The drain is the $4,500 plus the $6,000 net draw, $10,500 a month, and $120,000 divided by $10,500 is 11.4 months. A full stop of the milk check, the case on this page, is the harder test.
The costliest month comes from last year, and in a bad year the next one can cost more while income falls. How far price and yield can drop is a separate calculation of how bad a year your farm can take.
How far does the number drop on the example dairy?
On the 95-cow dairy, the same money lasts five months by the usual sum and under two by the sum on the page.
| What is divided | Calculation | Months of cash |
|---|---|---|
| Whole bank balance over the farm’s average month | $150,000 ÷ $30,000 | 5.0 |
| Farm reserve over the farm’s average month, household left out | $120,000 ÷ $30,000 | 4.0 |
| Farm reserve over the average month plus the net draw | $120,000 ÷ $36,000 | 3.3 |
| Farm reserve over the costliest month plus the net draw | $120,000 ÷ $66,000 | 1.8 |
The second line looks careful, and by it the money lasts more than twice as long as by the last. The household’s own $30,000 is not farm reserve, even though it sits in the account; what leaves the reserve is the draw the household keeps making in the months ahead. The last line is the worst case, how many months the money would last if every month cost as much as the costliest. With a month-by-month cash flow, add up each month’s spending until the next sale and check that the reserve covers it, a more exact figure. The last two lines go on the page.
No rule sets how many months to hold. The Federal Reserve Bank of Minneapolis studied crop farms in Minnesota and nearby states. Working capital, a wider measure than the cash reserve, counts grain in the bin and subtracts what is owed within a year. From 2015 to 2019 the most profitable 20 percent of those farms held 70 to 80 percent of a year’s cash operating expenses as working capital. The least profitable 20 percent fell below 5 percent in 2019. The 70 to 80 percent is roughly 8.4 to 9.6 months of average spending, and the 5 percent about 18 days. These are crop farms in one region, not a target for a dairy.
Two corrections run in opposite directions. If the lender pays an operating loan already arranged straight to a supplier, that money never leaves the farm account. Take the spending it covers out of the costliest month, and the months of cash go up. Every loan payment made from the farm account counts in the spending of the month it falls due. Whether the farm’s whole debt fits what it earns is a separate question, answered with the three ratios used to judge farm debt.
Where to start
One afternoon with twelve months of statements and a calculator ends with one page and two numbers of months, each figure with its date and source.
With the page done before the feed dealer asks, you weigh the request against a number of months instead of a balance, with the household’s spending already counted. Working that out from your own records is part of managing the farm as a business; other articles on farm money are in the finance section of the library.