In recent columns, I have discussed why I am enthusiastic about the future of agriculture. This request came from an agricultural broadcaster in the Northwest, placing a positive slant on the future of agriculture. In previous columns I have discussed the five dimensions, the convergence of technology and one size does not fit all. Now let's move to number seven, profitability.
No. 7: Profitability
If one examines the farm record systems over the past two decades, it can be quickly observed that the top 20% of agricultural producers had a return on assets of above 10% for over 90% of the time. The return on assets was calculated on a cost basis rather than using market value of assets. Granted, producers on these record systems are not average because many producers do not keep good records or use their financial records in decision making. If one aspires to have average performance in profitability, their business life is usually five years or less, unless they have the equity base or the non-farm income to support operations.
If you think about it, the top 20% of producers with those returns, sometimes reaching 15%, have outperformed most investments, including the red-hot gold market in recent years.
Yes, agriculture can be a profitable industry if the operation is well-managed utilizing best management practices. Many of the most profitable producers have been found not to be the biggest, but those who operate in a very focused way, utilizing capital and human assets efficiently and effectively in a sustainable manner.
Return on assets, utilizing cost basis assets, should exceed the rate of inflation, which has historically averaged 4%. Signs that your business is not exceeding this metric are refinancing requests on operating money, using equity or cash from other operations, not replacing capital assets, and running up high accounts payable to supplement your business.