Large operations have higher per-acre costs
True or false: As farm size increases, per acre costs go down. The answer might surprise you. It’s false.
Illinois farms with more than 4,000 acres had per-acre fertilizer costs of $124 per acre in 2011, the highest of any size group, with total nonland costs of $525, again the highest of any size group. This group also had the highest land costs at $234 per acre and paid the highest cash rent of any group at $276 per acre. The data is compiled from grain farms in northern and central Illinois that were enrolled in the Illinois Farm Business Farm Management Association in 2011.
"The data do not support the notion that larger farms have cost advantages over smaller farms."
What gives? Why is the assumption that large-scale producers have the lowest per-acre costs false? "The data do not support the notion that larger farms have cost advantages to smaller farms," says Gary Schnitkey, a University of Illinois ag economist, who conducted the study. However, he says, there are still good reasons for getting bigger.
"There are advantages to increasing farm size, as incomes will rise with large farm sizes as long as costs can be controlled. Therefore, larger farms will have higher net farm incomes than smaller farms"—again, assuming costs can be managed.
Schnitkey notes that land costs tend to increase on a per-acre basis as farm size increases. This is because larger farms tend to cashrent more of their farmland at higher prices, Schnitkey says. For example, the largest sized farms cash-rent 77% of their acres, own 15% and share-rent 8%. This compares with 55% cash-rent, 41% owned and 4% share-rent for the smallest size group, and 70% cashrent, 16% owned and 14% sharerent for operations between 1,001 and 2,000 acres.
Overall, costs increase as farm size increases. Looking at land costs, they are $119 per acre for farms with fewer than 500 tillable acres; $157 for farms with 501 to 750 acres; $186 for farms with 751 to 1,000 acres; $195 per acre for 1,001 to 1,500 acres; $199 per acre for 1,501 to 2,000 acres; $200 per acre for 2,001 to 3,000 acres; slightly less, $191 per acre, for 3,001 to 4,000 acres; and, the highest of all, $234 per acre for farms with more than 4,000 acres.
Nonland costs ratchet up with size, too, ranging from $484 per acre (total nonland cost) for farmers with fewer than 500 acres to $525 per acre for farmers with more than 4,000 acres, thus less of a swing than with land and some other key inputs. Seed costs vary little by size group, whereas chemical costs are lowest for the highest acre production group: $30 per acre for farms with more than 4,000 acres and $49 per acre for farms between 3,001 and 4,000 acres.
Corn Is Key Reason. Larger farmers have higher costs because they have a higher percentage of their acreage in corn, which costs more to produce than other crops. For example, farms with more than 4,000 acres are 76% corn/22% soybeans; farms with 1,001 to 2,000 acres are 63% corn/35% soybeans; and farms with fewer than 500 acres are 56% corn/42% soybeans.
"Costs associated with corn tends to be higher than those for soybean acres, thereby accounting for the higher costs for farmers with more than 4,000 acres," Schnitkey states.
Data from Minnesota is somewhat different. Total direct and overhead expenses for 2011 were $810 for the largest group measured, farms between 2,001 and 5,000 acres, according to Farm Business Farm Management Association data for the southern part of the state. Second highest was 1,001- to 1,500-acre farms, with total costs of $765 per acre, and third highest was the 1,501- to 2,000-acre group, with direct and overhead expenses of $761 per acre. Those who farm between 101 and 250 acres had just $691 in total costs.
Dale Nordquist, a University of Minnesota ag economist, says smaller operations’ lower costs are probably due to the fact that they also are livestock operations and use the manure on the crop side of the business, which keeps fertilizer costs low.