Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Thursday 09/27/12

Big Range in Corn's Take-Home Pay

Some corn growers retained more than 50% of every dollar earned as profit between 2007 and 2011, giving them an edge when recapitlizing or expanding their operations. On average, profit margins as a pecent of sales price run about 25%.



Capturing top dollar for your crops is only half the equation for profitability. How much take-home pay you keep is what counts. On this score, corn growers vary all over the map.

"It's like students in math class: There are some smart kids, a few troubled kids and no such thing as average," says Sam Bachman, an analyst at the financial consulting firm AgriSolutions.

Bachman's study of 2007-2011 crop returns for more than 300 clients found corn growers retained about 25 cents on every dollar of sales generated over that five-year period. (He also found that the roughly 25% retention rate was the case for both corn and soybeans.) "However, some of those operators kept 50% or more of their sale price and others less than zero," he said. It's worth knowing where you stand on that scale.

Widening your margin is one factor of competitiveness, because it reflects the money available for reinvestment in the business. If your returns are consistently thin compared to your peers, it may also be a warning sign that you're paying yourself too much in salary draws, your labor costs are too high or your hedging strategy backfired. Anecdotally, Bachman notes that some of the highest profit operators performed custom work, so they could keep their equipment costs in line.

"Of course, margins don't measure quality of life. Farming is price times volume, so smaller operators need to retain more of each dollar in order to have a meaningful pool of dollars for reinvestment and replacement," Bachman said.

In retrospect, the last five years may turn out to be one of agriculture's rare golden eras. As profit margins return to more normal levels in the future, growers take home pays could shrink even further. To be top of class, it's worth tweaking your operations now.

Read and comment on all DTN Ag Business Benchmarks on the Minding Ag's Business column.

Follow Marcia Taylor on Twitter@MarciaZTaylor.

Posted at 10:50AM CDT 09/27/12 by Marcia Zarley Taylor
Comments (2)
Marcia, Could agri solutions expand on the margins that you quote. ie we pay land rent to an llc owned by ourselves to reduce FICA exposure. so if you add back that $300 of land rent that we pay ourselves, that alone would add more than 25% to our margin compared to the farmer who owned his land but did not pay himself rent. I am sorry to write and bother you, but they really do need to clarify or further break down these accounts/customers. If one guy farms 5000 acres and rents it all, and another guy owns and farms 1000 acres, the farmer that owns his land is going to add at a minimum 25% to his operating margin if he does not have his land in an outside entity. Or a person who has a 50% debt load on his land will have a lot lower margin due to interest payments than the person who owns land free and clear. By paying rent to ourselves via land held in an entity, we avoid the 15% FICA tax. I prefer to write one check and pay myself an extra 15%! So my margin may not be as high via Agri Solutions, but I also save tax dollars.--Dave S
Posted by Marcia Taylor at 10:58AM CDT 09/27/12
Dave, Great question, sorry we haven't made clear how AgriSolutions accounts for growers who own some land and those with multiple entities in all of the features we've done in this series. If I understand your question it sounds like you have more than one entity. Besides the FICA issue, this is a very common practice for estate planning purposes and also because of multiple ownership arrangements with siblings or parents. I believe that AgriSolutions has accounted for that. What we are essentially measuring here is the operating entity's costs and profits. Farmers who own their land in the AgriSolutions database impute a cash rent based on market prices in their area. Renters include the actual rent they paid. That means all of the farmers whether they rent or own in this example use the same yardstick on production costs. That keeps comparisons fair. However combining entities is really important for balance sheet comparison purposes but can be time consuming for operators. Since not all of AgriSolutions customers use the software that allows them to do that, net worth, etc calculations are harder to make when making peer-to-peer comparisons and may include more distortions. We have not reported those balance sheet benchmarks but are working on it. Hope this helps give you a better idea of the yardsticks we're using. Keep the questions coming.
Posted by Marcia Taylor at 11:09AM CDT 09/27/12
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