Sweat the Small Stuff
By Danny Klinefelter, 09.30.2015

I worked in the Farm Credit System from 1982 to 1987.  Looking back, one of the things that struck me the most was that many farmers remained profitable during this significantly bad period for agriculture. Their market value net worth may have declined as land values fell by half, but their Earned Net Worth (ENW) kept increasing. So after I came back to Texas A&M, I decided to conduct a study of the factors contributing to the changes in ENW between the top 25% and the bottom 25% of producers over the six years between 1982 and 1987.  

The results that surprised me most were the differences in production (yield), prices received and cost of production; they were smaller than I expected. The top 25% of farms were only about 5% above average in these measures, while the bottom 25% were about 5% below average (the really low performers weren’t included in the study because they didn’t remain in the database throughout the period). Significant differences in financial performance were driven by only 5% differences in yield, prices and costs.

In 2013, Dave Kohl stated “the biggest surprise is the widening gap in Net Farm Income from the top 20 percent to the bottom 20 percent. In 2012, the average net farm income was $859,000 for the top 20 percent compared to -$14,000 for the bottom 20 percent. When analyzing the data since 2003, the financial extremes have become greater each year.”

This sheds light on an important point: the top producers tend to sustain their advantage over time, and these gains compound themselves in the form of accumulated equity.  The multimillionaire future Hall of Fame baseball player with the .300 lifetime batting average only gets 1 more hit every 20 times at bat than the .250 hitter. The incremental difference may seem small, but what makes him great is his ability to do it over and over again.

Consider the following scenario:

  • Average corn yield: 200 bushels / acre
  • Average price: $4.00 / bushel
  • Cost per acre: $700.00
  • Net income: $100.00 / acre

What would be the impact per-acre net income beating the averages by 5%?

Factor(s) Impact on Per-Acre Net Income
Yield only (210 bu / acre) $140.00
Price only ($4.20 / bu) $140.00
Cost only ($665 vs. $700) $135.00
Yield and Price $182.00
Yield and Cost $175.00
Price and Cost $175.00
Yield, Price and Cost $217.00

 

Conversely, the per-acre net acre impact of being 5% below average would be:

Factor(s) Impact on Per-Acre Net Income
Yield only (190 bu / acre) $60.00
Price only ($3.80/bu) $60.00
Cost only ($735 vs. $700) $65.00
Yield and Price $22.00
Yield and Cost $25.00
Price and Cost $25.00
Yield, Price and Cost -$13.00

 

Some question the ability to generate higher yields and at the same time have lower costs.  However, it occurs frequently: Producers can rent the same quality ground in the same area and pay significantly different rent. Some achieve lower rents by providing additional services to their landlords.  Others achieve lower costs through economies of scale, by sharing resources with other farmers or simply by making more efficient use of their resources.  Several TEPAP participants share equipment and even labor with producers in other parts of the country.  The examples are endless, because there are always ways to do better and it comes down to management and being willing to change.

Using technology like Granular can often increase yield and reduce costs by turning data into information and information into knowledge.  Variable rate precision planting and varying rates of inputs can yield big dividend, but by tying in cost accounting and drilling down to the individual farm and enterprise/field level, farmers can know exactly where their 5% gains can come from.

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