Financially Savvy Farming

October 6, 2012 03:09 PM

Elite producers sweat the small stuff

The most financial-savvy producers didn’t reach that level by accident or luck. They pay close attention to detail—all details—from seeding rates to fertilizer to marketing. "There isn’t one thing you can point to, but they’re a little bit better at everything," says Dale Nordquist, University of Minnesota ag economist. "Saving a few cents here and there on costs may not seem like a lot, but when you add that over all inputs, it makes a huge difference," adds Michael Langemeier, an ag economist at Purdue.

"We’ve pored over the data and conclude that it all comes down to management," Nordquist says. Management includes everything from buying inputs to applying them at the proper rates. Every single cost item is lower for the top 20% of producers compared with the bottom 20%, according to data from the Southwest Minnesota Farm Business Management Association.

Overall production costs in 2011were $3.45 per bushel for the top 20% , but $5.36 per bushel for the bottom tier of producers. That’s nearly a whopping $2 per bushel difference in production costs. The most significant impact on cost of production is yield per acre, which ranged from 139 bu. per acre to 177 bu. per acre. At $6 corn, the top tier brought in $228 more per acre, or, for 1,000 acres, $228,000 more.

While top-tier producers grow far more corn per acre at lower costs for each input, seed costs were only slightly lower. Fertilizer, the second highest input in terms of cost, was about $150 per acre for the bottom half but was $118 per acre for the top group.

"What blows your mind is that cash rents are lower for the top group," Nordquist says. It’s not that the top group is renting inferior ground, but rather that they are better at cultivating long-term relationships and negotiating. "This, too, is part of management," he says.

Overall, direct expenses significantly varied, with the bottom end of the group spending $625 per acre and the top 20% spending $553. Total expenses varied from $745 to $611.

Returns to labor and management varied by about $450 between the top and bottom ends of the group, specifically $63 and $509 per acre.

Common Results. The range in management isn’t isolated to Minnesota farmers or corn farmers. Kansas Farm Management Association data from 2011 shows similar results, as does corn enterprise data from 2006–10. A 22% range in machinery costs is due to the fact that the top third of farms are twice as large as the bottom third, Langemeier says. "They simply have more acres to spread machinery  investments over." The top third also has lower interest costs, giving them a $5 per acre  advantage.

When it comes to marketing, the difference was a 24¢ advantage for corn sold by the top Kansas farmers. For 2011, the top 20% had a 46¢ advantage on marketing, according to Minnesota data. Profitable operations are more likely to monitor prices carefully and truck grain longer distances to take advantage of higher prices, Langemeier says.

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