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  Management Articles
Reverse COP - How much do you need?
By John Molenhuis - Business Analysis and Cost of Production Program Lead

What net income does your farm need to reach to cover your family's living expenses this year?

According to Statistics Canada, rural Canadian households spent on average $58,580 on living expenses in 2006. This included the basics like food, shelter, transportation and taxes as well as all the other stuff of life like putting your kids in hockey and keeping up with the Jones' on electronic gadgets.

Take a minute (or two) and think about what you need to live on. Is it in the $58,000 range or do you need more or less? The range reported by Statistics Canada was a low group at $23,778 and a high group at $137,815. This will be influenced by things like where you live and how many members are in your family. Table 1 presents the results for Canada, Ontario and Rural Canada. The Canada and Ontario columns would include rural and urban households. Use the Your Family column to work out an estimate for your household.

For farm families there are opportunities to deduct some of these living expenses from your business income. So if the average salary-based rural family need a net income of $58,580 to cover living expenses, the average farm family may need less.

Whatever your cost of living is, you need to find out how you will get the income you need. Let's say for the sake of argument you need $45,000 a year to live on. Will you get this entirely from farm income or will there be off farm income?

If you will be relying solely on farm income, this $45,000 will now be a financial goal for your farm. To set some targets to achieve this goal you will need to know your profit margin ratio and production levels.

Your profit margin ratio is:

Gross Farm Sales – Total Farm Expenses x 100

Gross Farm Sales

If you are able to achieve a 15 percent profit margin, you will need gross sales of $300,000 to get $45,000 in net farm income ($45,000 divided by 15%). At 10 percent you would need $450,000 in gross sales and $225,000 with a 20 percent margin.

How many bushels of corn or market hogs or lambs or whatever product you produce do you need to get $300,000 in gross sales? At corn prices of $6.00 per bushel you need 50,000 bushels. With an average yield of 140 bushels per acre you need 357 acres of corn to achieve $300,000 in sales. If corn drops to $4.00 you will need 75,000 bushels or 536 acres.

There is no getting away from it, knowing your profit margin still comes down to that dreaded phrase ‘knowing your cost of production (COP)'. It is an essential piece to help determine if you will generate the income you need to cover your living expenses.

In essence this is reverse COP. Figure out what you need at the end of the day and work backwards to find out what you need to do achieve it. Where does your cost of production have to be to have enough left over to pay your living expenses? Use OMAFRA's Ontario Enterprise Budgets as a template to calculate the COP's for your different enterprises at www.ontario.ca/agbusiness, select Cost of Production Budgets.

You will need to eat regardless of what happens with your farm business this year. It is important to know what you need to live on and set some goals on how to get it.

The results of Statistics Canada's spending survey are available in their Spending Patterns in Canada publication at http://www.statcan.ca/bsolc/english/bsolc?catno=62-202-XWE.

 
 

 
 


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