No substitute for low cost farm management

Feb 21, 2014
by DTN

The five-year stretch from 2008-2012 represented the most profitable crops in 40 years of U.S. corn production. Sadly, most of the spoils accrued to just the top half of producers, a recent study by the consulting firm of AgriSolutions Inc. found. Ag’s golden era largely bypassed the bottom half of corn growers in their analysis.

“In the best bull market in history, many operators barely made money,” said AgriSolutions Financial Consultant Sam Bachman. “Missing that rare opportunity will make it doubly hard for these low profit corn farms to keep pace with their peers as the margins in farming narrow to more normal levels,” he added. USDA has already dropped its estimate of the 2013-14 season-average corn price to $4.50 per bushel, down 35 percent from the $6.89 peak in 2012-13.

The bottom 25 percent of corn growers in the AgriSolutions accounting database averaged an annual profit of roughly $27 per acre on the 2008-2012 crops. Without sizable insurance claims on 2012’s drought-ravaged yields, returns would have been even worse.

The firm’s database includes more than 200 real growers in more than a dozen states from the Dakotas to Ohio. The analysis covered all costs before taxes: salary; equipment depreciation; and land rental costs.

Operators with owned land charged themselves fair market rent, in accordance with Farm Financial Standard guidelines. AgriSolutions also adjusts for accrual records, so results reflect the crop cycle not calendar year tax returns.

In contrast, star performers in the top 25 percent earned an average of $268 per acre net margin annually during this same fiveyear period. The most profitable operators generated about $800 per acre gross revenues—virtually identical to the lowest profit operators—but their expenses ran just above $500 per acre. In contrast, operators in the bottom 25 percent erased virtually all of their profits by spending about $225 per acre more on inputs and capital expenses than their most competitive peers.

NASCAR drivers with the superior equipment hold an advantage over competitors, and farmers with larger farms, better soils or moisture may possess a similar edge, observed Gregg Ibendahl, a Kansas State University economist. He, who studied 15 years of records of 626 farms enrolled in the Kansas Farm Business Association record system from 1997-2011.

In every year of Ibendahl’s analysis, 10 percent of the farms lost money and another 10 percent barely broke even or showed zero profits. It didn’t really matter whether corn was $2 per bushel or $6 per bushel, the same percentage of poor performers existed each year.

However, Ibendahl points out that the same farms aren’t always losing money. Only 1 percent of the farms in his study lost money every year for the 15-year period and another 2-3 percent consistently broke even.

Rather than pure luck, Ibendahl believes skill plays a large role in farm profitability. By his count, roughly 33-50 percent of the variation in farm incomes could be due to farm management.

Bachman agreed. “What’s insightful is that winners and losers emerge in every market situation,” he said. “If you are the type of person who thinks improved commodity prices will fix your problems, here is proof that the fix is more likely to be found in your operational decisions and your strategy for deploying capital.” — Marcia Zarley Taylor, DTN