Minding Ag's Business

No Substitute for Staying Low Cost

Star performers in the top 25% of corn growers in the AgriSolutions database averaged net returns of $268/acre in 2012. That was almost 10 times the profit margin of the bottom 25%.

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/bu., down 35% from the $6.89 peak in 2012-13.

The bottom 25% of corn growers in the AgriSolutions accounting database averaged an annual profit of roughly $27/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, including salary draws, 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% earned an average of $268/acre net margin annually during this same five-year period. The most profitable operators generated about $800/acre gross revenues--virtually identical to the lowest-profit operators-- but their expenses ran just above $500/acre. In contrast, operators in the bottom 25% erased virtually all of their profits by spending about $225/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 the same edge, observed Gregg Ibendahl, a Kansas State University economist. He studied 15 years of records of 626 farms enrolled in the Kansas Farm Business Association record system from 1997-2011 and found similarities with the AgriSolutions study.

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

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

Rather than pure luck, Ibendahl believes skill plays a large role in farm profitability. By his count, roughly 33% to 50% 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."

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Pedro Sanchez
2/21/2014 | 9:45 AM CST
With expenses just above $500/A, my question is what are they using/paying for cash rent? Are the ones on or near the bottom paying more for certain inputs or is it all cash rent/debt payments/family living?
Bonnie Dukowitz
2/20/2014 | 5:56 AM CST
Poor Operators? Top 10%. Maybe the ancesters of the bottom 25% landed on the wrong quarter section to start with. If one buys some land in good growing year when lush crops surround, the long term operating is much more challenging. The bottom could well be better managers and operators than the top, just sat at the wrong table and dealt a poor hand to start with. Once a foundation is poured, it is not affordable to move it. Compare $27 to minimum wage, it brings home bacon in a smaller grocery bag.
Marcia Taylor
2/19/2014 | 1:38 PM CST
Doug, the bottom 25% spent $225/acre MORE than the most profitable farms, for total expenses around $775/acre (see chart). Everyone was measured on accrual basis and used the same accounting program, so the lower group was not smart like foxes. If their land is paid for free and clear they have an extra cash cushion not shown here, but if they are renting most of their ground, they have will need real cost adjustments to stay afloat.
2/18/2014 | 7:30 PM CST
Doug has a good point. Maybe some of the lower group smart like foxes!
doug taylor
2/18/2014 | 7:10 PM CST
How much of the bottom 25% operators $225/acre imputs; being hidden as income - "capital expense"? Does cash and accrual accounting have different advantages for farm operation?
Raymond Simpkins
2/18/2014 | 4:03 PM CST
Thats a new thought!!! That farm incomes vary with farm management. Marcia, as long as there is crop insurance there will be guys growing corn for 27 dollars an acre.What I have been saying, is goverment will keep the poor performers going.Like your guys who are not worried about $4.00 corn.