A common perception in agriculture is that the biggest producers are the most profitable. Is this true, or do they just have “bigness on the brain?” Is the land-grabbing producer from out of the area who negotiates a higher price on cash rents the most profitable? Let's go to the FINBIN database and examine 2009 results that Bob Craven, director of the Center for Farm Financial Management at the University of Minnesota, presented at a recent ag lender conference.
Farm businesses, regardless of enterprise, were broken into size classifications based upon gross farm income. Rate of return on farm assets (ROA) was the metric used to establish profitability comparisons.
As expected, businesses with less than $100,000 in gross farm income annually generated negative ROA of approximately -3.4%. These are often lifestyle farms with dependence on nonfarm income or producers who are either entering or transitioning out of the business.
Farm businesses from $100,000 to $500,000 of gross farm income generated an average 2.5% ROA. While this may be above current inflation rates, it is below the cost of borrowed capital.
The highest return group was $500,000 to $1 million in income with a rate of 4.1% ROA. While not stellar, it is higher than the large producers above $1 million in income, who had an average of 2.9% ROA.
Drilling deeper, the variation in profits from the bottom to the elite profit managers was noticeably different for farms above $500,000 in gross income. From $500,000 to $1 million in gross income, the range was, on average, over $325,000 in profits. This was small compared to the producers over $1 million in sales; they had over $875,000 variation in average profits from the top one third elite to the bottom third of profit managers.
A message to lenders reading this column is that when large operations spiral out of control because of a negative cycle or poor management, losses can compound rapidly, placing your agricultural portfolio in jeopardy very quickly.
The future of agriculture with many larger businesses is going to require careful management and monitoring and a chief financial officer (CFO) mentality.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected]