VALLEY CITY, N.D. (NewsDakota.com) – What is the best way to measure the farm economy for strength or weakness? Most assume you just need to look at net farm income. When it goes up, the farm economy is strong and when it goes down, the farm economy is weak.

For me a better measure than net farm income is “operating farm margin”. Operating farm margin is defined as, the amount of net farm income generated per dollar of farm production. Here is a simple example of how to calculate operating farm margin.

A farm has $1000 in total production and net farm income of $100. That equates to a margin of 10%. Another farm may have $2000 in total production and net farm income of $100. That equates to a margin of 5%. Same net farm income for both farms but it takes twice as much in production to produce the same net farm income.

A decrease in production (lower price of grain) or an increase in operating cost will have a larger impact on the lower margin (5%) farm. As farm production increases due to larger acreage or higher value crops, net farm income becomes less of an accurate predictor of the farm economy. The long term average (1960-2018) for operating farm margin for the state of ND is 22%.

Looking closer to home, operating farm margin for region 3 ( including Barnes County) of the Farm Business Management program for the years 2007-2017 shows a range from a low of .5% to a high of 37%. The three highest margin years were, 2007 (37%), 2012 (36%) and 2010 (34%). The three lowest years were, 2015 (.5%), 2014 (11.4%) and 2017 (13%).

Using the long-term average of 22% for operating farm margin, we could define a strong farm economy as a year with a margin above 22% and weak economy as a margin below 22%. The projected operating farm margin for the ND farm economy in 2018 is 15% which by this definition is a weak farm economy.