The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Net Revenue per Acre Is Better than Yield per Acre
Jun 01, 2010
I was watching "AgDay" yesterday and noted in the business section that Mark Gold of Top Third Ag Marketing was the guest and had a discussion on how gross revenue per acre is more important than yield per acre. His insight was that it can be more important to budget for getting top marketing dollars for your crop than to worry about the greatest yield per acre. With the improvements in technology, farmers can get great yields on their crops; however, if they end up with the bottom third for their price, they will end up net losers for the crop year.
I believe that you need to take this concept one step further and key in on net revenue per acre, not gross revenue. My definition of net revenue per acre is to take your gross revenues from crop sales and government payments and then subtract all direct input costs related to this crop. For example, let's take two farms. One farmer is able to achieve 175 bu. of corn per acre and sells it for $3.75. The farmer spends $300 per acre on direct inputs (fertilizer, oil and gas, labor, etc.). The other farmer gets only 160 bu. per acre; however, he sells it for $4.00 per bushel and spends only $250 per acre on direct input costs. Which farmer makes the most money?
The answer is the second farmer. Farmer No. 1 has gross revenue of $656.25 per acre and net revenue per acre of $356.25. Farmer No. 2 has gross revenue of only $640.00 per acre; however, his net revenue is $390.00 per acre, which is about $34 higher than farmer No. 1.
As you can see, a farmer needs to key in on maximizing net revenue per acre, not just the yield per acre.