Building Farm Equity
Building net worth in your farm business happens by retaining earnings in the business, contributing equity from off-farm income, or by inflation from the value of the farm assets. The retained earnings will generate additional income in future years for retirement or to help the next generation run the farm business.
Kelvin Leibold is an Extension farm and ag business management specialist with Iowa State University. He says how you allocate net farm income has a direct effect on increasing equity.
"You can use net income to pay taxes, you can use net income to pay family living expenses or retirement investments, those kinds of things. Or, you can go back to your business with the money," he says. "And so, if you’re going to grow your business, you’re going to have to have profits, you’re going to have to bring those profits back to the business, and those profits can be used to either reduce debt or to buy more assets."
Leibold is working on a study to see what it takes to get into that “elite producer” status. He says top producers don’t do things that lose money.
"They get what I call incremental advantages. They pick up that little bit of savings on rent, they pick up that little bit of savings on seed, they get that extra 10 cents on marketing, they shave that $25 out of their machinery costs through repairs and fuels, and maybe they get 2,3,4 more bushel’s yield," says Leibold. "They’re not hitting home runs, they’re doing a series of little things that add up to a significant advantage."
It’s easy to get in the habit of spending the money you make. Controlling living expenses is often neglected as a way of increasing wealth.