The USDA Economic Research Service (ERS) measures profitability on the farm by “rate of return on assets” (RRA). It assigns farms as being in the “green zone” if the RRA exceeds 5%, in the “yellow zone” if the RRA is between 1% and 5%, and the “red zone” if the RRA is less than 1%.
For the purpose of reporting, ERS sorts farms by revenue, from “low sales farms” (below $150,000), “midsize family farms” ($350,000 to $999,999), and on up to “large” and “very large” family farms ($1 million to $5 million).
The findings? Profitability, as measured by RAA, is strongly associated with farm size. According to the latest ERS data, 86.6% of very large family farms are staying out of the red zone. Meantime, between 79% and 86% of retirement, off-farm occupation and low-sales farms are in the red zone.
“Larger farms can often use their resources more productively than smaller farms, generating more dollars of sales per unit of capital,” according to the latest ERS report.
And how are smaller farms in the red zone coping? According to the ERS, there are several scenarios at play.
Smaller farms are using income earned off the farm to cover on-farm expenses.
Some smaller farms earn “substantial” off-farm income and do not rely on farm income to make a living.
Many smaller operators undervalue their labor, “effectively ignoring the value of the unpaid labor they provide.”
Total net farm income in 2015 is forecast to be $73.6 billion, which is down about 32% from $108 billion in 2014. This year’s forecast is the lowest since 2009, and down about 43% from 2013’s record high of $129 billion.
For more information ERS provides on farm structure and organization, visit http://www.ers.usda.gov/topics/farm-economy/farm-structure-and-organization.aspx.