Minding Ag's Business
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.
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.
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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.
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Marcia Zarley Taylor can be reached at marcia.taylor@telventdtn.com
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