Minding Ag's Business
Marcia Zarley Taylor DTN Executive Editor

Wednesday 11/14/12

Profit Pacesetters Rarely Stumble

MILWAUKEE (DTN) -- Benchmarking your financials can show how you stack up against your peers. But, for economists, it can also expose some startling observations about farming's best and worst money managers.

Bottom-tier farmers in the Iowa Farm Business Association returned a profit only two years since 1959, but high profit farms have accelerated their advantages over the last decade.

For Iowa State University economist Mike Duffy, one revelation has been how poorly a large subset of agricultural producers has performed, no matter the commodity cycle, interest rate or inflation scenario over more than 50 years. At the same time, top performers rarely stumble and are setting the pace for cash rents and farm consolidations across the Midwest.

With rare exceptions since 1959, the bottom third of Iowa producers enrolled in the state's farm business record-keeping systems have lost money farming, Duffy told the audience at last week's National Agricultural Bankers conference. For example, these poor performers only showed positive returns twice in 52 years -- in 1973 and again in 2011. Both were the high water marks for U.S. grain prices of their generations. The records reflect real farm profitability, not books kept for tax reasons, he added.

In contrast, those in the top third of their class have consistently earned a profit since 1959. Only in 1981--on the heels of the Russian Grain Embargo and at the height of the Federal Reserve's painful credit rationing policy--did top performers dip into the red.

More recently, the contrast between these operator groups has widened. Since 2003, the top third of Iowans in this study have amassed a string of highly profitable years, culminating with record profits above $450,000 per farm in 2011. The poorest performers made money as well that year, but about $400,000 less per farm on average.

Robert Craven, director of the Center for Farm Financial Management at the University of Minnesota, notices the same phenomenon studying farm records in his database.

"The top group of producers has really taken off compared to the average in the last few years," Craven said. The top 20% of operators in his database average $1.9 million in gross farm income in 2011, owned assets of $4.4 million and netted $842,000 apiece that year.

Why does it matter? It's these top-notch operators who are spearheading much of the consolidation in agriculture by driving competition for cash rents and land sales, Duffy added.

High-profit farms have managed to acquire more assets while keeping their debt to asset ratios in a safe zone. In his opinion, much of the 300% appreciation in Corn Belt farmland values since 2000 isn't irrational exuberance, it's grounded in the cash generated from high-profit farms.

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

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Marcia Zarley Taylor can be reached at marcia.taylor@telventdtn.com

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Posted at 12:04PM CST 11/14/12 by Marcia Zarley Taylor
Comments (6)
Interesting data and trying to grasp how meaningful. Question is: Are the "bottom-tier" farmers theoretically that same individuals/farms over the period and always "bottom-tier"? If so, what is the reason why they are "bottom-tier" losing money year after year and how do they stay in business? Similarly what is "top-tier" doing right? I am guessing that the data of those at the top and bottom are simply that, the top and bottom. And a farm could in theory bounce in and out of the bottom and/or the top from year to year.
Posted by M Swanson at 12:29PM CST 11/14/12
In this case you are correct that individuals bounce around. What's meaningful is that at ANY given time, 1/3 farmers are losing money, year in and year out, even in the most profitable era of US agriculture. Most important, it shows that its the pacesetter group that is setting land markets with cash profits. But it also shows that the disparity between haves and have nots in ag is getting bigger.
Posted by Marcia Taylor at 2:51PM CST 11/14/12
Marcia - so what do high profit farmers do to generate the high profits? My guess is that they sell their grain in the top third of the market (or maybe the top 15%), they have yields that consistently beat the averages, and they hold down expenses - especially inputs. Machinery costs are also a big deal. I think most operators have about 50% more machinery than they really need. That would include size as well. I know that filed operations have to be timely, but the exact right time is not known until the combine goes through the field. Comments? - John B.
Posted by Marcia Taylor at 1:55PM CST 11/15/12
John, We've been trying to slice and dice benchmark financial data once a week for months. You can read each of the columns which are reposted on the archived Minding Ag's Business blog online). Since March, we've examined all of the issues you mention. What we're finding is surprising me. A handful of extraordinary producers in the AgriSolutions database were able to combine high yield and above average marketing in 2011 for $1,200+ per acre corn sales. However, only 1 in 20 was able beat the median marketed price by even 10% or more, proving how hard it is to beat the herd. It's yield that seems to account for the big variable in profitability, and farms above 4,000-8,000 acres didn't achieve the highest yields nor were they the most profitable on a per acre basis. Some superstars do "double crop" by doing a better job marketing, but it's hard to beat the averages year in and out. Machinery cost is one of those $100 per acre differences, and a major advantage of "right sized" farms. We didn't notice that big famrers were necessarily getting better buys on input costs though. If someone wanted to concentrate on just one thing to be a high profit farmer for all seasons, I'd say strive to be low cost first (watch your average rents, your fertilizer buys, your machinery cost/acre, etc.). Having low overhead covers up a lot of sins in other areas of your business and helps you stay in the black when markets collapse. The gaps can be pretty significant: The 20% of farmers in the highest cost segment of producers in the Southern Minnesota Farm Business Association averaged breakevens of $5.31/bu. corn in 2011, versus $3.22 for the 20% who were lowest cost. Guess who would have come out ok if corn had hit $4 this year. Low cost operators averaged 180 bu. yields vs. 154 bu. for the low profit group. They spent about $65/acre less on fertilizer and $45/acre less on rent. Differences on seed and chemicals were miniscule in comparison. If they were also just a bit better than average on marketing, they'd have a winning combination. Anything I missed?
Posted by Marcia Taylor at 1:58PM CST 11/15/12
In your article on DTN is there a way to determine if the bottom third of producers really lost money or did they just do a good job spending it to make it look like they lost money and avoided taxes?--Mark Lane
Posted by Marcia Taylor at 8:15PM CST 11/27/12
Mark, That's a good question, since as you know, farmers have practically more flexibility to use cash accounting than any other business sector--and that can easily distort your profit picture. But Mike Duffy of Iowa State confirms these were �real� records, adjusted for accrual, not cash records used for tax purposes. "They represent the accrual based return after all costs including unpaid family labor and a return to owners equity," Duffy said. "The management return is pure profit." I guess the bottom line is still that the norm for crop producers is than a third are losing money in any given year. If you're progressing year after year, you're beating the herd.
Posted by Marcia Taylor at 8:21PM CST 11/27/12
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