By Stanley Moore
Sustaining the economic viability of farm operations
In this six part series, we are discovering what sustainability on Michigan Farms means, looking at examples of how farms are demonstrating that sustainability, and how MSU Extension is working with producers to become even more sustainable.
As a reminder, the definition that is used by the Sustainable Agriculture Research and Education (SARE) program for sustainable agriculture is:
“Sustainable agriculture is defined as an integrated system of plant and animal production practices having a site-specific application that will, over the long term: satisfy human food and fiber needs, enhance environmental quality and the natural resources base upon which the agricultural economy depends, make the most efficient use of non-renewable resources and on-farm resources and integrate, where appropriate, natural biological cycles and controls, sustain the economic viability of farm operations, enhance the quality of life for farmers and society as a whole.”
This fifth article’s sustainability topic is “sustaining the economic viability of farm operations”.
Often times we hear from farms that they feel many individuals that are not reliant on farming for their livelihood, forget about the aspect of economic sustainability. “If our farm is not economically sustainable (making a profit and cash flow), it won’t matter how sustainable we are in other areas”. It is true that for a farm to be truly sustainable, all six areas have to be sustainable, and a farm that is not economically sustainable will not last.
In fact, farms just like any other business need to be economically sustainable in both the short and long-term.
Michigan State University Extension works with farms to help them improve the understanding of their farms finances, strengths and weaknesses, and how they can improve their economic sustainability.
MSU Extension Educators in cooperation with the MSU Telfarm program work with Michigan farms that are enrolled to conduct an annual farm financial analysis of their businesses. Through balance sheets and an accrual adjusted income state a developed analysis shows the farms cash flow, net farm income, and net worth change for the year. The analysis also gives farms a relative strength/weakness on 21 farm financial measures/ratios. Through these farm financial analysis sessions, farms work toward improving their economic sustainability.
Financial indicators that we stress include Cash Flow, Net Farm Income – Profitability, and Net worth change.
Cash flow is the financial year (short-term) measure of a farm being economically sustainable. A positive Cash Flow means the farm business is able to pay all of its cash expenses & current principle loan payments for the time period in question. Cash expenses include items such as seed, feed, labor, services, taxes, and interest on loans. Cash flow also includes the payments of any principle loan payments as well as the farms capability to pay for any capital purchases that were made.
Net farm income is a measure of farm profitability. While cash flow is critical, in any given year a business can have a positive cash flow, but not be profitable. How is that possible? A farm can generate cash flow from things such as; selling a previous year’s inventory (supplies, livestock, crops, or feed), collecting on accounts receivables, machinery and equipment, or selling breeding livestock. These are adjusted for with Net farm income using an accrual adjusted income statement in order to get a true picture of what happened in the time period being reviewed. The net farm income will also include economic depreciation of machinery and buildings. In the short term a farm may be able to show positive cash flow by not purchasing any capital assets or not properly maintaining and or repairing machinery and buildings, but that too will catch up with the farm in the long run.
Net worth change is a long-term measure of the farm business’ economic sustainability. It takes into consideration the farm’s net farm income and how much of that income is needed for family living expenses vs. reinvestment in the business. A farm cannot be sustainable long-term if Net worth continues to decrease over a period of time.
It is true that if a farm is going to be able to address sustainability around environment, use of resources, positively contribute to society, and supply human food and fiber needs, that they have to remain economically sustainable. It’s a challenge that Michigan Farmers willingly take up every day. It’s a challenge that MSU Extension strives to help farmers successfully address.