Minding Ag's Business

Don't call small grain farms the dinosaurs of agriculture just yet. Based on their recent profits, they don't have a reason to go extinct any time soon.

Small grain operations with 1,000 to 2,000 acres earned an average annual production margin (before rent) of $393/acre on their corn ground between 2008-2012, about $43/acre better each year than farms with 4,000 to 25,000 acres, a new study by the financial consulting firm AgriSolutions found.

On soybeans, the profitability gaps are even more extreme. Farms with less than 1,000 acres earned an average annual profit of $323/acre versus $267/acre for the biggest farms, a difference of $56/acre every year, according to the Brighton, Ill., firm.

"Our results really show the problems with small farms aren't cost and revenue. There's not huge economic pressure squeezing small farms out," said AgriSolutions's Sam Bachman.

"Production margin before rent" is a term used to measure profitability before rent, debt or owner compensation. "It's really an indicator of what you can afford to pay your banker, your landlord and yourself (for management and administration)," Bachman explained. The firm uses Farm Financial Standards guidelines to compile the benchmarks and analyzed detailed financial records of more than 100 farms from 16 states over the five-year period.

More than finances, natural attrition through retirement, succession and land ownership issues appear to be taking a toll on smaller operations.

A recent in-depth, multi-decade USDA study of consolidation in the grain industry showed that although most cropland was operated by farmers with less than 600 crop acres in the early 1980s, today most cropland is on farms with at least 1,100 acres and many farms are five or 10 times that size. The midpoint for Midwest grain farms more than doubled since the 1980s, USDA's Economic Research Service said, but that trend appeared to have slowed since commodity prices rebounded in 2007.

Technology accounted for some of the surge in grain farm size, especially with the adoption of herbicide-resistant seeds since 1995, USDA explained. It noted that labor requirements on a 1,500-acre Midwest farm using conventional seed ran about 4,421 man hours per year, while someone with herbicide-tolerant seed introduced since 1995 would need only 3,160 hours to produce the same crop. That freed up 1,261 hours for expansion, off-farm jobs or recreation. With growing resistance to Roundup technologies, however, that pattern may slow in the future.

USDA contends that larger farms realize better financial performance, such as higher average rates of return on equity, but its cutoff for the largest farms was 2,000 acres or more. In contrast, the very largest farms in the AgriSolutions study ranged from 4,000 to 25,000 acres and did not appear to be better financial performers during this unusual era of peak commodity prices than farms under 2,000 acres.

Surprisingly, the biggest farms didn't capture the kinds of sizable input discounts or better crop marketing that conventional wisdom assumed, Bachman said. On average, larger corn farms in the AgriSolutions study also spent considerably more on fertilizer since 2008, but corn yields for all-size farms slid in this period, so they weren't necessarily receiving the expected return on their investment. Trends in hedging accounts and marketing returns likewise showed no major differences among farm operators by size, Bachman said.

"Perhaps larger is more difficult to manage. Perhaps larger is not large enough to achieve the anticipated economies of scale in the procurement of all inputs," Bachman said. "We do see some advantages to size in seed procurement and net equipment cost. But the smaller guys seem to manage tighter. The biggest issue for producers of all sizes is to manage the health of their balance sheet. That requires focus."

It's clear the AgriSolutions study found there's no real economy of scale in farm size, Bachman said. In every size category, however, there were individuals who excelled at profitability and those who stumbled far below the average of their peers.

"There's room for people in any category to do better and some can top the charts," Bachman said.

Find USDA's Economic Research Service study, "Farm Size and the Organization of U.S. Crop Farming" at http://www.ers.usda.gov/…

Follow Marcia Taylor on Twitter@MarciaZTaylor.

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