Global economics is causing farms and ranches to evolve toward either large commercial enterprises or small family operations. This phenomenon prompted a lender in the Farm Credit University Commercial Ag Lender online class to ask me, “Will mid-size farms exist in 10-20 years?” There is no doubt that technology, the transition of family farms, and the marketplace are compelling forces behind the structure and size of U.S. farms.
Of the approximately 2.2 million U.S. farms today, 270,000 produce 80% of the revenue and carry 60% of the total farm debt. On the other end of the spectrum, 1.35 million farms, which account for 60% of all farms, generate just 6% of the revenue and carry 20% of the debt. Many of these smaller operations depend on off-farm income to cash flow the business and maximize rural lifestyle. The traditional farms, or “tweener” businesses, consist of approximately 580,000 farms, which contribute 14% of the revenue, and approximately 20% of the debt of all American farms. Usually these operations generate less than $250,000 in revenue, which is supplemented with some off-farm income or other business income.
What does the mid-sized “tweener” farm structure segment require to be sustainable?
· First, they must not financially leverage the business to the limits. A prudent financial metric is to maintain the debt to asset ratio level below 50%.
· Second, these businesses will focus on efficiency as a strategy, i.e. get efficient before they get bigger because “better is better before bigger is better.”
· Next, they are frugal on family living costs, usually keeping them below $50,000/year. Yes, these operations will generally supplement the business with W-2 off-farm income or other business income.
· In my travels, I see many midsized or “tweener” farms and ranches that are too big to be small and too small to be big, but they tend to diversify their revenue sources and production enterprises.
· Finally, these farms and ranches will often balance business with lifestyle as a primary goal, and many are multi-generational family businesses.
Are traditional farms and ranches in danger of extinction? Yes, if they are not operated as a sustainable business. Also, if there is no transition plan, these entities are often sold to larger, growing farms or ranches, developed if in a suburban area, or scaled down to become a part-time business.
Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at firstname.lastname@example.org.