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					Investing On Farm or Off Farm
It’s a Choice
By: Bill Van Loo MS, Sr. Extension Educator,
Cornell U Cooperative Extension,
St Lawrence County

         This is not an easy choice to make and should depend on what stage the farm business is
in. In the early stage of a business, proper investing in the farm will generate more profit and
give more available income. The resulting increased income can be used for living costs, travel,
leisure activities or generally increased life style. This increased profit can also be allocated for
farm improvements, debt repayment or for off farm investments.
         Borrowing to invest is a good practice providing the returns from the investments are
greater than the cost.
         In the later stages of the farm business, the farm is built up and probably doesn’t warrant
a lot of extra investment. This is the time when choices on debt repayment, life style, and off
farm investing are generally made.
         A totally debt free farm may not be a good choice, as some debt for equipment, repairs
and improvements may be appropriate. A debt at 15% of the total farm value would indicate that
the farm is continuing to do maintenance investing.
         A farm with a huge debt load and low equity, unless at start up, is generally not a good
situation. An exception might be if a huge investment has been calculated to be very profitable.
         As profits increase, there are two major traps that farms can fall into. One is spending on
an excessive life style, and the other is investing in items on the farm that will never generate a
positive return and may be almost worthless after the investment is made or worthless when a
farm business is transferred and may never have generated a total payback.
         It takes discipline, focus, research, education and homework to make the best choices.
There are four questions that need to be asked when making investment choices.

    1.   Will I have adequate income to meet my retirement needs?
    2.   Will the investment pay for itself and increase profitability?
    3.   Will the investment increase the value of the farm business?
    4.   Will the investment make running the farm easier and allow for a longer farm career?

Below we will examine these questions and present some ideas.

    1. Retirement income needs depend somewhat on an individual’s life style choice and
        health status.
    Planning needs to be done so these needs can be met. Some farm businesses will do almost
anything to avoid paying income taxes, and as a result, the retiree may not qualify for two
important government programs: Medicare and Old Age Social Security and Disability Income
    In order to qualify for Medicare and OASDI programs you must report enough income over
forty quarters and for ten years. For 2005 the income reported must be $920 per quarter or
$3,680 for the year.
         If one spouse qualifies for Medicare, the other spouse is automatically covered. The
other spouse is also eligible to receive 50% of a spouse’s OASDI pension, or their own, which
ever is highest.
         Medicare is not free and has costs depending on the level of coverage that is chosen at the
time a person qualifies. It is however, a lot less costly than private family health insurance. It
would be prudent for a farm to report at the very least the income required to qualify for Medicare
coverage for a least a ten-year period covering forty quarters.

    OASDI can be considered a good off farm investment since returns far out weigh required
investment for the average or below average income earner.
    Based on an average reported taxable earnings of $35,051 and enough credits (ten years of
$3,680 taxable income per year) present benefits are:
    Age 62      $903 per month
    Age 67       $1,309 per month
    Age 70       $1,633 per month

    Disability benefits are at $1,197 per month. This benefit is available after meeting OASDI
contribution requirements as based on the age of the insured when the disability occurs.

    Survivor’s benefits are $933 monthly per child
    Spouse caring for a child $933 per month
    If benefits start at retirement benefits up to $1,245 per month are available for the spouse.

    There is also a special one-time death benefit available for a spouse or minor child of $255.
    The above information was accessed at Social Security on Line

     2. A farm business investment should always be penciled out and a decision made on how
the investment will pay for itself and how it will add to profit. Increased profits allow for more
re-investment, increased expenditure for an improved life style and for debt reduction payments.
     On farm investments include inputs such as those for growing crops as well as capital
purchases. These expenditures have an impact on the business.
     An input investment generally adds directly to increased profit. When analyzing input
investments, a comparison to farms that have made similar inputs and have records can be made.
This will give a good basis to see if these investments will give positive results for your farm. If
your farm results vary greatly from the norm after input investments were made, the cause must
be determined. Why were expectations exceeded or why were they not met?
     We must pay careful attention to results from inputs as the very last level of input may impact
negatively on expected returns.
     A return on capital investment should, over time, be equal to the returns averaged on Wall
Street and ideally be higher than those on Wall Street. If farm return on capital investment is less
than those of the market, the question “why” needs to be asked and acted on.
     There are a lot of resources available to help with investment decision-making and moving
farm returns to a defined target area.

     3. On farm investing should increase the value of the farm. At the very least the farm needs
to maintain its value.
     Increased farm value may be due to appreciation or because the cash flow will support a
higher debt load or be both. Farm values should at the very least keep pace with the rate of
inflation. Appreciation of values at less than the rate of inflation indicates that value is being
eroded. In a period of deflation, values should not slide more than the deflation rate. If investing
in the farm is not increasing the value of the farm or maintaining value, off farm investing should
be seriously considered.
     If deciding to invest off farm it would be advisable to use a professional. Picking a money
manager to manage investments requires serious thought. Only one out of four money managers
does better than the S&P 500 rate of return. Special attention to funds needs to be made. Funds
may not be properly balanced or diversified to manage risk and rates of return targets.
     Other off farm investing could also include real estate, other business ventures, holding
mortgages etc. These avenues should not be ignored.
     Off farm investing should be made in areas the investor has a comfort level and a good level
of understanding. Remember it’s your money.
     The risk tolerance level acceptable to the investor as well as to a level of acceptable risk that
will ensure retirement income objectives with a required level of confidence also needs careful
     The higher the risk - the greater the probability of high returns or losses. Over time high-
risk investments will give the greatest rates of return. As the time horizon shortens risk-taking
levels must be reduced since the time to recoup losses may not be available.
     4. Not all investments are or should necessarily be made based solely based on value and
profit measures. Some are made to make farming more enjoyable or to enable an operator to
continue farming or to farm longer. These are value judgments and are entirely dependant on
what the operator wants to do and how he can justify them. There is no right or wrong answer
here. The decision must however be given serious thought and justified before the decision made
is implemented. It would also be valuable to ask for input from trusted peers.

    Decisions regarding on or off farm investing need serious consideration and need to be based
on priorities for the present and for the future.
    Farm managers need to realize that a dollar can only be spent once. Decisions on how, what
were and why to spend are important. The decisions made will impact the business, life style and
future retirement. A conscious deliberate effort must be made to arrive at the best decisions at all

   If you would like more information on this or other topics, please call your local Cornell
Cooperative Extension office.

“Thriving Dairy Farms”, the Cornerstone of a Strong Dairy Value Chain is a project of the North Country Dairy
Viability Initiative. For more information about the contents of this article or on the Dairy Viability Project, please call
Peggy Murray, Project Manager at 315 - 376-5270 or email her at

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