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Does farm size matter in bottom line profits?

TAGS: Management

Ask many farmers or ag professionals, and probably anyone with any knowledge of crop farming, whether larger farm operations have a lower cost of production, and they would probably say YES.

However, the farm management data from Minnesota and other states does not support the assumption that average costs of production per acre get lower as crop farm sizes gets larger. Interestingly, in some cases it is just the opposite, and in most situations there is very little correlation to farm size.

The University of Illinois conducted a research-based study that compared costs of production for crop farm operations of various sizes during 2011. The study was based on 641grain farms, with similar characteristics, in central and northern Illinois that are enrolled in the Illinois Farm Business Farm Management (FBFM) program, and data was based on actual farm management records. The data from the farm operations was screened and analyzed by University of Illinois Farm Management Specialists.

The University of Illinois study found that total non-land farm operation costs on Illinois grain farms did not vary much, regardless of the operation size. The average non-land costs were $484 per acre for farms of less than 500 acres, $481 per acre for farms between 501 and 750 acres, $487 per acre for farms of 751-1,000 acres, $485 per acre for farms between 1,001 and 1,500 acres, $480 per acre for farms of 1,501-2,000 acres, $486 per acre for farms between 2,001 and 3,000 acres, $477 per acre for farms of 3,001-4,000 acres, and $525 per acre for farms over 4,000 acres.

Much of the higher non-land costs of $525 per acre for the crop farms over 4,000 acres can be explained by the higher percentage of crop acres planted to corn. The farms over 4,000 acres had an average of 76% of their crop acres planted to corn, while farm operations between 500 and 2,000 acres only had 59-63% of their crop acres planted to corn. Non-land costs associated with corn production tend to be significantly higher than similar costs for soybean production.

Land costs include the financial cost of owning land (interest and property tax) and cash rent paid, or cash-rent equivalent on share-rent acres. Just as with the total non-land costs, land costs per acre tended to increase as the farm size groups increased. Average land costs are $119 per acre for farms with less than 500 acres, $157 per acre for farms of 501-750 acres, $186 per acre for farms between 751 and 1,000 acres, $195 per acre for farms of 1,001-1,500 acres, $199 per acre for farms between 1,501 and 2,000 acres, $200 per acre for farms of 2,001-3,000 acres, $191 per acre for farms between 3,001 and 4,000 acres and $234 per acre for farms over 4,000 acres. 

The farms of under 1,000 acres had land costs of under $200 per acre, which is explained by the fact that more operated farm land is owned, much of it likely at fairy low debt levels per acre. Farms of this size tended to own 20-30% of their crop acres, while the farm group sizes above 1,000 acres only owned 12-16% of their crop acres. Average land cost per acre tends to increase as the percentage of cash rental acres increases. Average cash rental rates were $206-224 per acre for farms from 501 to 1,000 acres, compared to $236-276 per acre for the farm group sizes over 1,500 acres.

Minnesota corn and soybean production costs

How does Minnesota farm management data compare to the results from the Illinois FBFM study ? The University of Minnesota FINBIN program analysis was used to look at average costs and returns of grain farm operations from 250 acres and higher, from throughout Minnesota, that are growing corn and soybeans. Similar to the Illinois study, the data is from actual farm financial records kept through the MNSCU Farm Business Management (FBM) program, and other University FBM programs.

Following are some key findings from a five-year (2008-2012) FINBIN analysis of the over 900 crop farms in the Minnesota FBM programs.

·      The five-year average corn yields were almost 172 bushels per acre, with very little difference between the various size categories. Interestingly, the five-year average soybean yields were close to 42 bushels per acre, but were slightly higher (just over 44 bushels per acre) on farm sizes 250-500 acres, and somewhat lower than average on farms over 1,500 acres (37-39 bushels per acre).

·      Corn fertilizer costs for the five years averaged over $142 per acre on all corn acres, but averaged over $150 per acre on farms over 1,500 acres, as compared to averages ranging from $136 to $143 per acre for farms from 250 to 1,500 acres. Corn seed costs averaged slightly over $93 per acre, and chemical costs near $26 per acre, with very little difference between the various farm size categories. Seed and fertilizer costs for soybeans also showed fairly small variations between the farm size groups; however, chemical costs for soybeans averaged just over $25 per acre on all acres, but averaged near $21 per acre on farm sizes over 1,500 acres.

·      The 5-year average total direct and overhead costs per acre for all corn acres was just over $621, but averaged near $660 per acre for farm group sizes above 1,500 acres. However, the five-year average total direct and overhead costs for all soybean acres was just over $338 per acre, but the average costs for the farms over 1,500 acres was below $310 per acre. The five-year average net returns per acre for corn and soybeans were fairly similar for farms in all size categories.

·      Looking only at 2012, average cash rental rates on cash rented acres for corn production was over $194 per acre, but ranged from $227 to $255 per acre for farms in size groups over 1,500 acres. The five-year average cash rental rate for cash rented corn acres was approximately $158 per acre for all farms, and was nearly $179 per acre for the farm size groups above 1,500 acres.

While the University of Illinois farm management study and the five-year (2008-2012) FINBIN analysis of the Minnesota Farm Business Management program do not include all crop farm operations, they do provide a good comparison of the various sizes of crop farming operations. There do not appear to be any advantages to larger farm sizes over small to medium sized farms, from a standpoint of lower cost of production and higher return per acre. The final analysis is that well-managed crop farms of all sizes that control production costs and machinery expenses can be profitable. It also appears that land costs, especially cash rent paid, is a big factor in profitability of crop operations.

The analysis also shows that crop operations of any size can face financial difficulty if the farm operators do not pay attention to cost of production, machinery costs, and land expenses, as well as having a handle on their short-term and long-term farm debt. These studies did not factor in the importance of a good grain marketing plan, which can also have a significant impact on a farm’s financial well-being. In the end, a farm operator of any size that pays close attention to all aspects of farm management can have a profitable crop farming business.

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