Power Hour: Dispelling Myths about Farm Size Advantages

December 28, 2012 08:30 AM
Power Hour: Dispelling Myths about Farm Size Advantages

True or false: As farm size increases, per acre costs go down? The answer may surprise you. It’s false.

Illinois farms with over 4,000 acres had per acre fertilizer costs of $124 per acre in 2011, the highest of any size group, with total non-land costs of $525, once again the highest of any size group. The highest size group also had the highest land costs of $234 and paid the highest cash rent of any group of $276 per acre.

The data is from pure grain farms in northern and central Illinois enrolled in Illinois farm business farm management, 2011.

What gives, and why is the assumption false that large scale producers have the lowest per acre costs? "The data do not support the notion that larger farms have cost advantages over smaller farms," says Gary Schnitkey, University of Illinois ag economist who did the study. There are still good reasons for getting bigger, however, he says. "There are advantages to increase 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 cash rent more of their farmland at higher cash rent prices, Schnitkey says.

For example, the largest sized farms cash rent 77% of their acres, own 15% share rent 8%. This compares with 55% cash rent/41% owned and 4% shared rent for the smallest size group and 70% cash rent/16% owned and 14% share rent for operations between 1,001 to 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.

Non-land costs ratchet up with size, too, ranging from $484 per acre (total non-land costs) 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, however, and chemical costs are lowest for the highest acre production group: $30, with the highest chemical costs of $49/acre going to the next lower group, those between 3,001 and 4,000 acres.

One key reason why larger farms have higher costs, Schnitkey says, is that they have a higher percentage of their acres in corn, whose production costs are higher than other crops. For example, farms with over 4,000 acres are 76% corn/22% soybeans; farms with fewer than 500 acres are 56% corn/42% soybeans, while farms with 1,001 to 2,000 acres are 63% corn/35% soybeans.

"Costs associated with corn acres tend to be higher than those for soybean acres, thereby accounting for the higher costs for farmers with over 4,000 acres," Schnitkey states.


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Spell Check

12/29/2012 07:49 AM

  The article fails to mention how many operators grew. All to often they rented acreage out from under a smaller operator, thus paid a higher rent. They may also have bid too high for the sake of having the property in their grasp. Once full time help is needed to accomplish day to day operations, a higher level of expense is reached which does not mean higher profit.

12/31/2012 05:26 AM

  Well put Rascal. There are also other disparities of scale to consider. There is less good used equipment available in the mammoth size class forcing the purchase of new. The equipment needed to operate 4,000 acre plus operations often can't access or efficiently operate on small parcels. A great example article found here is Stamp Farms (just 60 miles away from me). Albeit he is out of business and his 73 employees are looking for work he made top producer 2012. Let's not forget the small farmers already out of business precipitant of his greed.


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