The Kansas State University Department of Agricultural Economics periodically produces a recap of the high 1/3, mid 1/3 and low 1/3 of various farms in their state.  They just released the latest analysis for corn, sorghum, wheat, soybeans and alfalfa for the three years 2006-2008.  The total number of crop farms reporting for all three years during this analysis was 629 farms.  There are several pages of producer returns, but I thought I would try to recap the major trends that I spotted.  These trends are based upon the differences between the top 1/3 and the bottom 1/3.

CORN

• The yield per acre difference was about 16 bushels for non-irrigated corn or about 18% while the price difference was only 13 cents or 3.6%.  The total average revenue difference was $61 per acre.
• Major costs variances were in fertilizer and machinery with these costs being about $49 lower for the top 1/3.
• The overall net return to management in the top third was $150 more than the bottom third.

SOYBEANS

• Yields for good producers was about 6 bushels higher or about 20%.  The net selling price was about 55 cents higher or about 7%.
• Total revenue was $72 higher or about 31%
• Again, machinery costs were materially lower for good producers at about $30 per acre lower.
• Good producers returned $130 more per acre than the low producers.

WHEAT

• Yield was about 6 bushels higher or about 19% better for the top 1/3.
• Prices were only about 4% higher than the bottom third or 23 cents overall.
• Again, machinery and fertilizer costs were about $46 lower for the better producers.
• Overall, the best producers gained $120 per acre over the bottom producers.

Other trends are:

• In all cases, the lower 1/3 of farms reporting had negative net income for this three year period, with wheat and corn growers being the worst off compared to the other crops.
• For non-irrigated crops, soybeans appeared to be the best return per acre compared to the other crops, however, the difference between returns for each 1/3 was only about $25 plus or minus per acre.
• As we have discussed in other posts, it appears that the best way to increase your return per acre is to minimize your equipment cost per acre.  This is by far the most consistent cost that is almost always higher for the lower third than the top third.

How does your operation stack up.

As a CPA, I get asked many times by small business owners what their business is worth.  As part of calculating that value we usually work up what the net bottom line earnings of the business is.  To detemine that, we take the profit and loss of the company and make certain adjustments.  Normally, we add back interest paid, depreciation and amortization and other one-time items.

From this number, we then make various deductions, of which, usually the major one is the deduction for compensating the owner for their time and effort in running the business.  In some cases, we actually need to add back an amount since the owner has taken out to much compensation, but in most cases, we need to deduct owner’s compensation.

In many cases, after deducting a fair amount for the value of the services provided by the owner to the business, we can end up with negative income.  When this happens, we usually tell the client that they do not have a valuable business, but rather a job.  It may be a well paying job, but for business valuation purposes, it is just a job.

For farmers, in arriving at the bottom line profit of the business, many do not deduct a fair value for their services provided to the farm.  You need to do this in order to detemine if the farm is profitable and by how much.  Many farm decisions are made based upon erroneous data and this mistake can be huge.

For example, the Center for Farm Financial Management provides an excellent database of what various farm operations are earning per year since 1993.  In all cases, these farm returns include an allocation for labor and management charge for the owners.  For corn production, this charge was in the $30 to $40 range per acre and for soybeans, it was about $10 per acre lower.  If you do not make this allocation, then you will think your farm was more profitable than it actually was.

For either very large or very small farms, this allocation could be distorted.  If the farm is very large, but managed very efficiently, then the charge per acre may be smaller.  If the farm is only 500 acres and the farmer is working it full time, then this charge could easily be $100 per acre or greater. 

You need to review this closely to see how profitable you really are.

The Department of Agriculture released many crop reports today. As a result, corn, soybeans and wheat prices were sharply lower on the cash and futures markets. In many cases, the drop was 10% or more. 

Prices has steadily risen over the last few weeks and there were many chances to lock in a profit on the new crop. Many times, farmers want to wait for the high of the market to lock in prices and what usually happens is that they get a much lower price than if they simply sell 1/12 of their crop each month.

Every farmer should have a marketing plan (in conjunction with the appropriate help from marketing consultants, if needed). When you can lock in an adequate profit for the crop year, do it! 

Usually you will be much better off than trying to go for the highest price. 

Every farmer should have a marketing plan (in conjunction with the appropriate help from marketing consultants, if needed). When you can lock in an adequate profit for the crop year, do it! 

Usually you will be much better off than trying to go for the highest price.