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Net farm or net cash income? Aren't you glad you asked.

One of life's great mysteries involves two phrases with similar words and — you would think — similar meanings. But those who ought to know say while net cash income and net farm income may sound alike, they aren't.

I didn't cover the 1978 “tractorcades” that tied up traffic in Washington, D.C., for days. But farmers who did have said they spent much of their meetings with the Carter administration listening to USDA officials trying to explain the difference.

Thus, I was intrigued by a recent article by Roy Ferguson in The Ferguson AgReport on “Understanding USDA's Net Cash Income and Net Farm Income.” Ferguson, a farm management consultant, has long advocated the use of standard accounting principles for farmers that would help provide more realistic assessments of their operations.

Net cash income and net farm income are two valid measures of profit which are widely used in USDA economic reports. But the terms, which Ferguson believes few farmers understand, can also lead to confusion.

In 2005, net cash income was $82.8 billion while net farm income was $72.6 billion. The previous year net cash income totaled $85.5 billion vs. net farm income at $82.5 billion. In other years, net farm income has been much higher than net cash income. Why so much variation?

“USDA's net cash income is primarily a financial measurement that conforms rather closely to standard cash reporting procedures,” he says. “While past peculiarities such as treating net CCC loans as sales along with not recognizing family living withdrawals as operating expense remain subject to criticism by accounting purists, USDA does identify the extent of each category carefully.”

USDA calculates net cash income by adding crop receipts to livestock receipts to show total receipts from farming. The value of government payments and other cash income is then added to total receipts to establish gross cash income. Total dollars of gross cash expense, including interest expense, are subtracted from gross cash income to determine net cash income.

Net farm income begins with the same data used to determine gross cash income. An “accrual” oriented adjustment is made to reflect net inventory changes. “Hypothetical values for imputed non-money income follow next,” he says.

“Then depreciation charges and perquisites for hired labor plus other expenses are added to gross cash expense to yield total farm expense. Finally, subtracting total farm expense from total farm income provides net farm income.”

Ferguson said some of the confusion may come from farmers not realizing that net cash income and net farm income are quite different measurements. “NCI is primarily a financial indicator,” he says, “while NFI is more useful for macro-economic evaluation.”

He also concedes the two measurements have led to problems, including rumors USDA falsifies the numbers as part of a conspiracy to eradicate family farmers. “Reality is that nothing could be further from the truth,” he says. “USDA's economists and statisticians strive diligently to achieve maximum accuracy irrespective of the final results.”

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