Tracking profitability of farmers and ranchers has been Steve Metzger’s work for more than 30 years. As a farm business management (FBM) instructor based at the Carrington (North Dakota) Research Extension Center, Metzger helps FBM participants categorize costs and income, showing them how to ferret out problems in the process.
While the high crop prices of the recent past made profitability a relatively easy mark, the tides have turned, of course. Since crop prices have dropped while the cost of inputs has remained high, farm profitability is a hard target to hit.
“Up until the last couple of years, farm profitability was good for a seven- or eight-year period,” says Metzger. “We now have 20% to 30% of farms running into negative farm profits. We really need to get back to looking at costs and efficient management of inputs.”
Participants enrolled in the FBM program submit records that are analyzed on an enterprise and whole-farm basis. Annual FBM reports compile data from individual operations and present the financial information in a comparative analysis.
Last year’s FBM participants in Metzger’s southeast region of the state numbered 136. Most are cash-crop producers, while 25% to 30% also run livestock.
The comparative data provided by FBM reflects financial performance of the 20% of participants who are high-profit producers, the 20% who are low profit, and the 40% to 60% who are in the middle. The overall average is comprised of all 136 farms.
“Last year, we saw extremes in regional profitability, ranging from a high of $90 an acre in net farm profit to a minus of $39 per acre for the lowest-profit producers,” he says. “The average net profit was $46 an acre.”
Last year’s records revealed a surprising twist in local profitability trends, showing that some of the larger farms had the lowest per-acre profit.
“Not all large farms lost money, of course; it was a very mixed bag,” says Metzger.
The midsection of local producers, whose farms average 2,232 acres, earned a per-acre net profit of $26 an acre, realizing a net whole-farm profit of just under $59,000.
The 20% in the local low-profit category farmed 4,487 acres and lost $43 an acre in net farm profit.
“On average, low-profit producers lost $192,000 in net profit on a whole-farm basis,” says Metzger. “We normally don’t see larger farms falling back into that low-profit category.”
With the turning of the tide in farm profitability, cost containment has become critical.
“In order to regain profitability, you have to get to that point where your costs are average or below average,” he says. “You need to look at the overall makeup of your operation to identify the level of costs you’re incurring and whether or not these costs are warranted.”
Over the years of working with producers, Metzger has observed the following seven practices typically shared by high-profit operators.
1. Aim to produce consistent yields. “High-profit farmers are broad-based and tend to look at all aspects of their business,” says Metzger. “They tend to have better yields that vary less from year to year.”
2. Evaluate technology. “High-profit farmers tend to look at how technology applies to their farm and how they might use it,” he says. “Low-profit farmers might tend to adopt the technology without evaluating its usefulness on their individual operations. High-profit producers plan further into the future. They’re goal oriented; they consider what the technology does and what’s beyond it.”
3. Use comparative analyses. By keeping and studying production and financial records, high-profit operators tend to use benchmarking to compare themselves with other farmers’ track records.
While outlying numbers coming from an individual farm can pinpoint strong suites, these can also serve as red flags pointing to possible hot spots of production failure or financial trouble.
For instance, last year’s high-profit soybean growers operating on owned land in southeastern North Dakota had a per-acre cost of production of $243. Low-profit producers spent $319 an acre while producing 8 bushels per acre less than the high-profit producers.
4. Contain input costs. “Low-profit producers have a tendency to spend more money per acre on seed, fertilizer, chemical, fuel, repairs, and crop insurance,” says Metzger. “They tend to spend $10 an acre more in overhead costs such as farm insurance and depreciation.”
High-profit producers, by comparison, tend to evaluate inputs from a broad-based perspective. For instance, they tend to limit nitrogen (N) applications to soil-test recommendations rather than applying N at random rates based on perceived need. In the same vein, they may spot-apply herbicide rather than apply chemical to a whole field.
5. Reduce machinery costs. “High-profit producers spent $74 an acre in machinery costs, while low-profit producers spent $112,” says Metzger. “That’s a big advantage.”
6. Adapt early. When new technology or innovative management practices offer promising efficiencies, high-profit producers tend to be early adapters.
7. Gather information. High-profit producers seek out information from key support people such as lenders, veterinarians, crop consultants, and FBM instructors.
“They stay up to date,” says Metzger. “For instance, when they receive analyses from FBM, they study the information and try to understand what it tells them about their operation and how changes in management and finances might affect the whole farm.”
The cumulative effect of efficient practices makes the difference between high and low profitability.
“High-profit producers are trying to find ways to mesh low prices with high costs,” says Metzger. “They’re looking to the long-term future of their operation.”
How The Program Works
FBM programs exist throughout the country, but they are most prevalent in the Midwest and particularly in the Upper Midwest.
In North Dakota, the tuition fee varies by region, with a cost of $630 per year per farm being one example.
When you enroll, you are expected to supply FBM staff with a balance sheet and a set of field and financial records.
“We analyze your information, and a lot of times we teach record keeping and software use,” says FBM instructor Steve Metzger. “Records support the analyses that FBM staff put together for you. Everything has to be accounted for so you can see where you’re heading.”
(Source – http://www.agriculture.com/farm-management/finances-accounting/7-practices-highprofit-operats-are_306-ar51658)