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Do farm profits equal farm size?

No matter what the size of the farming operations, losses can spin out of control quickly.

David Kohl, Contributing Writer, Corn+Soybean Digest

May 30, 2024

3 Min Read
Do farm profits equal farm size?
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There is no doubt that American agriculture is consolidating. A recent drive across southern Minnesota and much of Iowa finds fewer farm yard lights and farmsteads with some of the smaller towns a shell of the past. When it comes to farm size and profits, a concerning trend is starting to emerge. With more zeros and commas on the balance sheet, income statement, and cash flow statements, when macroeconomic variables align in a positive direction record profits can be earned.

Triple play

However, at the other end of the spectrum, losses can spin out of control very quickly. This is particularly true when the “triple play" of lower commodity prices, inflated costs, and higher interest rates is in effect.

The luxury of the past three years of observing financials once per year for tax reasons is in the rearview mirror, particularly amongst larger operations generating over $500,000 in annual revenue.

Examining the FINBIN database by gross revenue gradients finds some compelling data based on 2023 yearend results across all commodities. Those farms generating less than $250,000 in revenue had losses of about $32,000 for the bottom 20 percent of profitability. All farms generating less than $250,000 in revenue edged out annual profit of about $24,000. The top 20 percent of small farms reported over $96,000 of profits. With a smaller operation, off farm income and tightening the belt on family living costs could be strategies to rectify profitability issues in the short term.

Moving up the revenue spectrum finds losses compound for the bottom 20 percent of farms. Farms with $500,000 to $1 million of revenue in the low 20 percent of net farm income had losses that averaged about $80,000. The losses almost double for farms generating $1 to $2 million in revenue and then double again for farms with over $2 million in gross revenue.

The larger farms with over $2 million in revenue in the low 20 percent category reported approximately $360,000 in losses. On these larger operations, off farm revenue and reducing the personal family living budget are not effective corrective strategies.

The goalpost

What is interesting amongst larger producers is what the FINBIN team calls the “goalpost of profits.” That is larger producers can generate considerable profit if they are dialed in on management or the opposite if they are not. This is analogous to a flywheel. If everything is in sync, then things accelerate. However, if a few years are missing, the performance can deteriorate very quickly.

Growth and profits

Growth and management are the most common reasons businesses fail or succeed. The high 20 percent of profitable farm operations that generated more than $2 million in revenue reported about $920,000 in profits in 2023. The average profits generated by all farms in the sample was approximately $219,000.

However, the bottom 20 percent reported about $360,000 in losses. Both the ups and downs of economic cycles can quickly expose management weaknesses. With the negative triple play of inflated costs, lower commodity prices, and higher interest rates, the economic picture can change very quickly.

About the Author(s)

David Kohl

Contributing Writer, Corn+Soybean Digest

Dr. Dave Kohl is an academic Hall of Famer in the College of Agriculture at Virginia Tech, Blacksburg, Va. Dr. Kohl has keen insight into the agriculture industry gained through extensive travel, research, and involvement in ag businesses. He has traveled over 10 million miles; conducted more than 7,000 presentations; and published more than 2,500 articles in his career. Dr. Kohl’s wisdom and engagement with all levels of the industry provide a unique perspective into future trends.

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