STEINBACH, Man. – If an American farmer can’t average a net income of $40,000-$70,000 US, or a gross revenue of $300,000, his operation probably isn’t making enough money to survive as a stand-alone farm.
Virginia Technical Institute economist David Kohl told local farmers and business people here that 15 years ago viable farmers needed a net income of only $25,000 or a gross revenue of $150,000.
Due to inflation, farms have to increase their revenue and net income by about five percent a year or be left behind.
“How much does your net income grow annually?” Kohl asked. “You need to know that.”
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Kohl, a consultant to the Royal Bank of Canada, addressed the Steinbach Chamber of Commerce as part of an agricultural speaking tour of the Prairies organized by the bank.
Kohl said the first thing all farmers need to know is their cost of production. That means their cash costs, their total cost of production, and what they consider a reasonable profit.
If producers don’t know those things, Kohl considers them “pure plant production managers” who are probably good at producing commodities, but won’t likely survive as farmers.
“You can survive being a pure plant production manager, but you’d better not carry a whole lot of debt,” said Kohl.
“You’d better not expect a lot of profits.”
Producers must understand that agricultural commodity prices are set globally, but some costs of production like land and labour are set locally. The successful producer must use whatever natural resources his farm has to produce something that can be profitably sold at world prices, Kohl said.
Producers need to be able to analyze whether hard times are temporary or permanent problems.
“You have to decide if it’s a bad year, or a bad trend,” said Kohl. “You have to be able to tell the difference.”
A bad year is one in which it is hard to make cash payments and a farmer starts eating into equity. A bad trend is a string of years in which the farm has to be continually refinanced and working capital is being drained, he said.
Some farmers support their operations with off-farm income. But any farmer who needs his farm to supply a family income needs to gross at least $300,000. The commodity itself is not important.
Kohl said a beef cattle operation now needs at least 300 breeding cows to produce that amount of money. A hog or poultry producer in the United States needs about four barns to reach that level.
Kohl said U.S farms now fall into several recognizable business models.One is the “super commodity group,” which includes farmers who focus on bulk production and bring in more than $3 million in gross revenue.
Another is the vertically integrated, contract producer tied to a production chain.
He defined a farm with $150,000-$600,000 in gross revenue as the traditional family farm, which will face enormous pressures “not only by the economy, but by the (services offered by the) rural community. The younger generation will not come back if they do not have the right kind of community.”
To avoid becoming lifestyle farmers who live on acreages and work off-farm, or “agri-entertainers” who use their farms as a base to offer tourist attractions, family farmers need to generate enough revenue and net income to support a family and have a plan to increase revenues by five percent each year.
Farmers who want to survive and thrive will need to accept these challenges, and not play the blame game, looking for excuses for why things aren’t working out.
“It’s the banker’s fault. It’s the supplier’s fault. It’s the hired labour’s fault. It’s the spouse’s fault,” Kohl said some producers say.
That’s not how successful farmers think.
“A lot of successful management is looking in the mirror…. They figure out how they fit in. Then they take their resources and form an effective business plan with it.”
