Net Farm Income, a tool for transition

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There are many facets to the farm transition discussion. How do you bring a new person into the farm business? Will the farm need to milk more cows? How many more cows? Where will they come from? Where will the cows be housed? What about heifers? Calves? Feed? Manure? Equipment?

A quick way to start putting the real world into these discussions is to look at what it will take interms of net farm income (NFI) generated per cow, says Dianne Shoemaker, dairy extension specialist at The Ohio State University. If the farm’s five-year average NFI is $500 per cow, and the potential new addition to the farm business needs a family income package of $60,000 per year, that $60,000 is equivalent to the NFI generated by 120 cows if the new person will not replace at least some labor and management currently provided by and being paid to another employee.

If the NFI dollars generated by the existing cows are not already being used to pay principal, or taxes, or being reinvested in your business, they might be available to help pay for the new person being added to the business. If the dollars are already “used up,” then there are four choices: increase NFI per cow, add cows, develop a new source of income, or don’t add another person to the business.

If the farm already generates an average net farm income of $1,000 or more per cow per year, it is already in the top 10 percent of U.S. herds. In years such as 2009, top herds were happy to achieve positive NFI, although in most cases it was less than $200 per cow.

If the farm continues the discussion of adding more cows, this same NFI/cow process can be used to ballpark the additional cows needed to service additional debt needed to purchase cows, herd replacements, equipment and build and additional facilities and storage structures for an expanded herd.



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