Whether you grew up watching Little House on the Prairie or playing Harvest Moon, you’ve probably fantasized at least once about getting away from it all by buying a family farm. If you ever find yourself in a position to make that fantasy into a reality, make sure that you know what you’re getting into financially. A farm probably isn’t going to be good insurance against disasters (whether natural or man-made) or a source of passive income. But it could be a solid small business, if you’re willing to put in the work.
There’s a saying that you have to spend money to make money, and this certainly applies to farming.
Many farmers take out loans to buy seeds, livestock, equipment, etc and hope that they can pay back that loan when they harvest their crops or butcher their animals. There are two related difficulties with this approach. First, farm loans are notoriously hard to get. Second, farming is an occupation fraught with hazards. You never know when bad weather will destroy your field before you harvest or disease will spread through your herd of livestock. That’s why it’s so hard to get the loans in the first place. Banks aren’t trying to be mean, but they want a reasonable assurance that they will get their money back.
Maybe you don’t plan on getting a loan because you’ve saved up enough money to buy your farm and everything you need up front. This isn’t necessarily a better solution, though. The risks that make banks wary are still present if you finance your own farming ventures. If you aren’t careful, you could spend everything you’ve saved and end up with little or nothing to show for it.
Subsidies and Taxes
The predecessors of today’s farming subsidies were established as part of the New Deal to help the nation’s food suppliers recover from the Great Depression. However, if you’re hoping for help with your own farming ventures from Uncle Sam, you’re likely to be disappointed.
Have you ever driven through a rural area and seen nothing but fields of corn and soybeans alternating as far as the eye can see? Those endless fields are sponsored by the federal government. Subsidies cover only a very small list of crops: corn, soybeans, wheat, cotton, and rice. If you dream of going out your back door and picking a sun-warmed tomato off the vine, you’ll have to finance that dream yourself.
Furthermore, even though small farms vastly outnumber large ones, statistics show that industrial-scale megafarms take home most of the subsidies – and most of the profits.
Unless you can produce everything you need on your own farm, you probably hope to make a profit off the endeavor, in which case you’ll need to pay taxes on these profits. Most family farms will probably file Schedule F, in which case you have to follow many of the same rules as a self-employed filer. There are also many other rules governing what counts as taxable income and what counts as a deductible expense. For example, you can’t deduct the expenses of producing food for your own family. You will almost certainly need to hire an accountant to help prepare your taxes to prevent expensive mistakes and could also use the services of a financial advisor to minimize your tax burden.
Finding Your Niche
Running a farm is not an easy ticket to financial prosperity, but that doesn’t mean it isn’t worthwhile. Think of it as a small business like any other—involving market research, a business plan, and well-managed finances.
Today’s consumers are more conscious than ever about where their food comes from and how it gets from there to their table. Many people are concerned about animal welfare, fair wages for farmworkers, and industrial farming’s impact on the environment, among other things. More and more family farms are taking advantage of this market niche. If you’re good with social media, it gives you an unprecedented opportunity for transparency and building a relationship with your consumers. If you want to get into farming, find out what people in your area want out of a farm and make sure you have the ability to provide that before you tie up your life savings.
While a farm can be a fulfilling way to make a living, it definitely isn’t going to provide passive income. Even if you hire employees, which can be very expensive, there’s still the job of overseeing everyone, from your farmworkers to your bookkeepers to your social media manager. If your goal is simply to live quietly on a few acres after you retire, put most of your money into less volatile investments and spend the rest on a house with a nice porch for rocking chairs.
Professional advice for important decisions
A lot of people love the idea of living on a farm, but not everyone is well suited to the lifestyle in practice. Before you make any major financial decisions, make sure you know what you’re getting into. We can help by connecting you to a financial advisor with experience in the areas you need. Call us today to get started!