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Why are some producers more profitable than others?

Why are some producers more profitable than others?

Data shows a farm making a profit is not due to one factor but several.

Why are some producers more profitable than others? This question was addressed at the ABA National Agricultural Bankers Conference by Bob Craven and his team at the Center for Farm Financial Management at the University of Minnesota. Let's investigate strategies that lead to bottom line profits on the income statement.

According to the FINBIN data, there was not one single factor that resulted in profitability; however, it was combination of factors. First, production management is critical. The most profitable segment of producers produced about nine more bushels per acre that peer producers, while still maintaining cost efficiencies. Often the combination of technology and sound agronomic practices on a timely basis were the difference makers.

Next, the more profitable producers are better marketers. How much better? They receive a ten to twenty cent higher price per bushel for their crops. Knowing the cost of production and then executing a marketing plan were strategies for profitability.

Of course, cost control is a major factor. Specifically, the more profitable producers focus on fixed cost management, although variable or input costs are also important. As Bob Craven mentioned, tax strategies intended to minimize costs often drive up fixed costs. This was very true during the go-go years from 2007 to 2012.

Capital management efficiency was another variable that led to an increase in profitability. Capital management can be analyzed by dividing revenue into total assets, which results in the capital turnover ratio. When one multiplies net margin by capital turnover ratio, the result is return on assets. To improve return on assets, one can apply two strategies: either improve margin, or improve capital turnover.

One of the leading strategic thinkers and educators in this field was in attendance at this session. Dr. Danny Klinefelter of Texas A&M University was the founder of the Executive Program for Agricultural Producers (TEPAP).  He has stated numerous times that the really profitable producers are just a little bit better in many areas of the business. He calls this the 5 percent rule. That is, these profitable producers are just 5 percent better in several individual areas of the business, and the FINBIN data proves his rule correct.

The opinions of the author are not necessarily those of Corn+Soybean Digest or Farm Progress.

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