Danny Klinefelter stumbled onto an interesting discovery while working as a lender during the farm financial crisis in the 1980s.
Scouring through hundreds of income statements and balance sheets during the worst era in farming since the Great Depression, he noticed that while some farmers were filing for bankruptcy, others were very profitable.
A popular notion at the time was that farmers who failed had taken on too much debt.
Klinefelter, who was working for the U.S. Farm Credit Bank at the time, put the hypothesis to the test by analyzing financial data from farmers in 13 states during the period between 1982 and 1987, the bottom of the financial crisis in the United States.
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He separated farmers into four groups, or quartiles, ranging from the least profitable to the most profitable. He found that debt was not the distinguishing factor between the two extremes. Farmers who went broke and those who did well both had high levels of debt.
So he started to explore other possible explanations. Were the farmers in the top quartile achieving better yields? Were they generating more output per dollar invested? Were they able to obtain better prices? Were they the least-cost producers?
“When I got all done, the answer was yes to all of those,” said Klinefelter, who is now an extension economist at Texas A&M University.
But they were only slightly better in all those measures – about five percent above the norm. So if the average corn yield for the group was 100 bushels per acre, the top producers were generating 105 bu. while the bottom quartile was averaging 95 bu.
“If you drove down the road I’m not sure you could see the difference,” he said.
Money in pocket
Added together, those minute differences had a tremendous impact on the bottom line. Those in the top quartile increased their net worth at a rate of $50,000 US per year, while those at the bottom lost it at a rate of $25,000 per year.
“Over the six years, from the start to the end of it, there was about a $500,000 difference in their net worth,” said Klinefelter, who has become one of the gurus of the farming-for-profit movement.
While his data suggests farm profitability stems from a head-to-toe makeover by making a slight improvement on every aspect of faming from production to marketing, other economists contend all that is needed is a little belt tightening.
Dave Culver, chief of farm data analysis with Agriculture Canada, has studied five years worth of farm tax filer data of similar-sized operations in the same region of the country that farm the same commodity.
Like Klinefelter, he has observed that some farms consistently outperform others and there appears to be one good explanation for the difference: “The more profitable ones, they seem to control their costs a little better.”
Culver came to that conclusion whether he was looking at Quebec dairy farms, Saskatchewan grain and oilseed operations or Alberta cattle ranches.
In the data he analyzed between 1998 and 2002, the top 20 percent of farms, ranked according to net farm income, consistently had lower costs in every category except salaries and wages.
It is not an isolated finding. Minimizing input costs appears to be the key to maximizing profitability, according to a variety of experts.
A study released in February from Kansas State University divided the average per acre return of grain farms in the state between 2002-04 into three profitability groups: high, middle and low.
High profit farms earned anywhere from $79.11 US more per acre than low profit farms for soybeans to $154.61 more per acre for irrigated corn.
It was lower costs, not better yields or higher prices, that made the difference.
“Despite all the rhetoric that people throw out there about marketing, it’s never marketing that separates the successful from the unsuccessful in commodity based agriculture,” said Terry Kastens, one of the authors of the report.
Lower input costs accounted for 95 percent of the profit gap in corn to 66 percent in wheat.
The only exception to the rule was alfalfa, where nearly half of the additional profit came from earning a better revenue per acre. Marketing tends to play a bigger role when it comes to specialty crops.
For the five other crops in the study, it was all about cost savings and a closer look at the costs found that one major factor made the difference: “Machinery management is one of the areas that producers should focus their efforts to improve their relative profit positions,” the study concluded.
Machinery costs include repairs, fuel, gas, oil, depreciation, machinery-related labour and the cost of hiring custom crews to do the work. It does not include the initial capital investment in new equipment.
Kastens said if farmers focus on minimizing that one cost category, it will go a long way toward making their operations more profitable.
There is no magic formula. For some it may mean keeping old equipment running; for others it could require the intensive use of newer machinery.
For Heather Broughton it is the latter.
The producer from Donalda, Alta., recently completed a four-week farm management course that forced her to take a critical look at the grain and oilseed operation she and her husband run in conjunction with her brother- and sister-in-law.
After analyzing a number of accounting ratios, she determined the farm needed to improve its return on assets.
“What we needed to do was to make sure those assets work harder,” Broughton said.
In an effort to spread out the farm’s machinery costs over a bigger land base, the two families decided to add 800 seeded acres to their operation, bringing this year’s total to 3,000 acres.
“We ran the numbers numerous times, numerous ways and we feel confident we’re making the right decision,” she said.
