How Farms in the "Red Zone" Are Staying in Business

How Farms in the "Red Zone" Are Staying in Business

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

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Spell Check

Kerr Lee
Scottsboro, AL
7/13/2015 10:20 PM

  So if I sell the farm and the equipment and lease it back, I can get out of the red zone. I can get an infinite RRA. It seems that this model rewards not only leverage but just plain old indebtedness. Greece will have a better RRA than Germany if we evaluate using this logic. Surely there's more to it than that.

Common Sense
Bristol, SD
7/13/2015 10:10 AM

  This data conflicts with data collected by Robert Craven who created FINPACK as a University of Minnesota Ag Econ Prof. His data that he presented at a conference a few years ago showed the most productive farms are in the 1100 to 1500 acre range. Below that the economies of scale shrink and above that, additional labor expense and less involvement by large operators at the micro scale show efficiency dropping off consistently. I would believe Bob Cravens numbers anyday before the USDA manipulators.

Lagrange, OH
7/13/2015 10:14 PM

  Amen cornstar! I was taught years ago that the trick in life is learning to be "content ",NOT being big. Big toys mean Bigger headaches. Needs not wants. A 600-1000 acre farm is the most productive in my area from what I've seen with even the smaller (me) holding its own where as the 1500-3000 acre farm changes colors and there name as often as they change their pants. Yep, it would be nice to sit in newer equipment but when it comes to making the payment I will take the older and have money in hand at the end of the year. Now this is just MHO and after this years weather woes in my area I'm sure I wouldnt want that BIGGER is BETTER payment hanging over my head.


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