The Road From Good To Great
As a CPA, I review a lot of financial statements. As part of this review, I try to determine the ratios that separate the business from other businesses in the same industry. Sometimes these ratios are positive and sometimes they are negative. For comparing ratios for farmers, a great site is the Farm Financial Database. This site has income and expense data for almost all types of farms in about 10 states around the country. You can compare the net income for corn farmers in 1993 to 2008 sorting by the bottom 20%, the next 20% and so on.
I took the data for 2008 for Minnesota, Nebraska and Missouri and did this exact analysis. From this, we can determine what is the difference between so-so farmers and great farmers. The highlights are as follows:
• Great farmers yield about 20 bushels per acre more than so-so farmers. They also sell this crop for about 60 cents per bushel more than the bottom farmers. This results in extra gross revenue of about $180 per acre.
• Great farmers spend a lot less on chemicals and fertilizer than so-so farmers. For 2008, they spent about $123 per acre versus $160 per acre for the so-so farmers. They do this while still producing 20 bushels per acre of more corn. Remember, these are per acre costs, not per bushel costs. Have you reviewed your chemicals and fertilizer costs to see how it compares to these great farmers.
• Great farmers minimize their repair costs. They spend on average about 50% less on repairs than s0-so farmers. Are you doing every thing you can to minimize these costs. Is your equipment updated and maintained in the off season. Do you higher out everything when something goes wrong. I remember growing up on the farm that my dad was able to fix almost anything that went wrong with the farm equipment.
• So-so farmers spend about twice as much on custom hire as great farmers. It is only about an extra $6 per acre, but it adds up.
• Most of you would think that great farmers spend more on cash rent since they probably have better land. The reality is that all farmers spend almost that same amount on cash rent per acre. It ranged from $132 for the so-so farmers to $123 for mid-range farmers. This indicates to me that great farmers farm the same land as anybody else or spend their time picking the best land to rent.
• So-so farmers spend the most on operating interest at about $15 per acre compared to about $10 per acre for great farmers. This makes sense since they are spending more money on operating costs than the great farmers are.
• So-so farmers spend twice a much on hired labor per acre than great farmers. This costs them about an extra $5 per acre. They also incur an extra $10 of machinery and building depreciation. These two ratios indicate to me that they are not getting their maximum return from labor and machinery. How does your stack up.
• Finally, great farmers actually allocate more cost to their land for their time and effort. This costs them about an extra $5-10 compared to so-so farmers, but it certainly appears that they are well worth it.
After you add up all of these differences, the bottom line per acre income for so-so farmers is about $62 in the hole for 2008. Great farmers earned about $265 per acre. This ends up being a $327 difference per acre. On a 1,000 acre farm, this is about $327,000.
It is well worth your time to compare your farm operation to the great farmers and see how you can get great.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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