The past two years have seen a notable uptick in economic activity tied to agriculture. The reason is higher crop prices, which have resulted in greater profit for crop producers, but also increased production costs.

“The average farm has been generating more sales and spending more in production inputs, capital purchases of machinery and equipment, and family living expenditures,” says Andy Swenson, North Dakota State University Extension Service farm management specialist.

Total cash expenditures per farm for production inputs, such as fertilizer, chemicals, seed, fuel, repairs and other expenses, increased nearly 60 percent from 2006 to 2008 for more than 500 farms enrolled in the North Dakota Farm Business Management Education program. Total cash expense was $299,000 in 2006, $373,000 in 2007 and $475,000 in 2008.

In addition to annual expenditures on production inputs, farmers also make capital investments in machinery and equipment that will be used for several years. Purchases have spiked because of higher incomes and tax incentives. The average farm spent $38,000 to purchase tractors, combines, farm trucks and other machinery and equipment in 2006. These capital investments increased to $61,000 in 2007 and to $90,000 in 2008. This is a 136 percent increase through two years. Farmers have shared the good fortune of higher crop prices with manufacturers and farm equipment dealers.

“Agricultural lenders also have benefited through a higher dollar volume of business and customers who have had an improvement in their farm balance sheets,” Swenson says. “Although profits have been strong, greater expenditures on inputs and capital investments have meant more borrowing and debt accumulation by producers.”

Borrowing has increased every year and, on average, principal payments have been less than borrowings. For example, in 2006, new loans and principal payments averaged $278,000 and $245,000, respectively. During 2008, the average farm borrowed $428,000 and made principal payments of $365,000.

“Debt has increased, but the solvency or financial risk of farms is better,” Swenson says. “There has been a notable improvement in net worth and debt-to-asset ratios the past two years as total assets have increased at a faster rate than total liabilities.”

Greater farm income has translated into more sales by businesses that provide goods and services to farm households. The annual report from the North Dakota Farm Business Management Education program indicates that farm family living expenditures increased 12 percent in 2008 to more than $57,000. The combined expenditures on housing costs, which includes repairs, maintenance and updating, as well as home furnishings and supplies, increased more than 20 percent. The amount spent to purchase vehicles for the household, but not for farm use, increased 50 percent from 2007 and was double that of 2006.

“Agricultural producers have helped fuel the North Dakota economy through a period when the national economy entered a recession,” Swenson says. “However, the recent sharp upward trend in farm income, production costs and capital purchases will end in 2009. Total production costs will be flat or down and indications are that income and purchases of machinery and equipment will be considerably lower than in 2008. For example, prices offered for new crop corn and wheat are below the cost of production.”

NDSU Agriculture Communication