Over the years we have observed that profitability in production agriculture is not a function of size of operation, type of operation or location. We have observed 800-900-acre operations can achieve return on assets and return on equity levels as good as or even better than 8,000-9,000-acre operations.
What we have observed is the profit gap is getting wider between all types of operations. The producers who are at the top of the profitability curve leverage four major areas to improve their bottom line. They are:
Marketing their commodities in the top third of the market.
Knowing and managing machinery cost/acre.
Tracking and managing labor cost/acre.
Practicing state of the art agronomic management.
One thing I have noticed in recent years is escalating labor cost per acre due to dramatically increasing family living costs. Generally we calculate labor cost per acre by family living draw from the operation added to hired labor divided by harvested acres. Our database shows the average is about $33/acre but the range is from about $15 to $110. That can have a big impact on bottom line profitability in retained earnings.
WE HAVE SEEN a number of operations with that figure over $100,000/year.
Often, no expense for house rental or interest on mortgage payments is included because the housing investment is generally considered an integral part of the farm business.
All costs have increased, but the major ones have been health care, insurance and education.
When I started my undergraduate college work in 1967, annual tuition costs at the land grant college I attended were $330/year. Now it takes over $7,000.
Farmers, being entrepreneurs and private business owners, often cannot take part in group health care plans. Personally I face the same issue, having a $10,000 deductible health care policy just to have affordable premiums.
Fortunately, gross farm income per acre has risen in recent years to pay for increased living costs, but it will reduce the retained earnings of the industry over time. This can ultimately impact wealth creation, lending and borrowing capacity and capitalization of growth of privately owned farm businesses.
I have often commented on the tremendous opportunity for wealth creation in production agriculture, and it can exceed opportunities in other industries. Each year I take data from the late April or early May issue of Fortune magazine where the Fortune 500 companies are featured. There is generally data on return on assets by industry and by company.
In 2008, the Fortune 500 sorted out into 68 industries. The return on assets for all 500 companies was 2.2%. There were only 11 industries with return on assets above 10%. The average of our client base return on assets for the same year was 11.1%. There is tremendous opportunity in production agriculture but it will take keen cost management and expertise in managing margins in the future.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 34 states and Canada. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.