outlook

Little things make a difference

The more profitable farms are making more and spending less, but not just in one or two categories.

Over the years, I have found that some seminar participants expect to find that one magical silver bullet that will make their businesses successful. Well, especially in today’s economic environment, there is no magic elixir for profit; and in fact, it is the little things that really deliver.  

Recently, I was in “study mode” examining fresh FINBIN data from University of Minnesota’s Center for Farm Financial Management.   The data summaries included various categories of expenses, revenues, as well as fixed and variable costs.  Zeroing in on the information from 1600 corn farms, it became abundantly clear just how much of a difference the little things can make. 

When examining revenue summaries, yields per acre were 30 to 50 bushels higher for the top 20 percent of profitable farms as compared to the lowest 20 percent.  Additionally, the marketed price per bushel of corn was $0.20 more for the top group.  This calculates to a gross revenue difference of approximately $150 per acre between the two segments.   

Switching to the expense side, those farms in the top 20 percent of profitability paid $40 per acre less for fertilizer than the lower 20 percent. Another cost category, and one that has gained ample attention over the past few years, is land rent. On average, the most profitable group spent $40 less per acre than the bottom level group. Of course, a large expense for any corn farm is seed, and according to the FINBIN data, the top group of profitability paid approximately $10 less than the bottom group.  The principles of economics say marginal revenue must exceed marginal cost to yield a profit; clearly, this is playing out for these farm segments. 

As I continued through the data summaries, I was surprised to find that the hired labor category of expense was highest for the most profitable group.  However, that figure does make sense considering that higher compensation is usually required for those with a strong skill set that includes technology and innovation. 

In summary, the more profitable farms are making more and spending less, but not just in one or two categories. The differences in profitability come from smaller differences in several areas.  Whether owned or leased, corn ground was approximately $100 cheaper per acre for farms in the top 20 percent of profitability. When one combines the $150 difference in gross revenue, and the reduction of $100 in costs, the difference between the top and the bottom segments is approximately $250 per acre. For a 500-acre corn farm that results in a $125,000 difference; and of course, nearly $250,000 for a 1000-acre farm. As the numbers show, little things do make the difference. Of course, in order for the little adjustments to yield a bigger impact, one must plan, focus on execution, and follow through with monitoring. 

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