What determines profitability on a farm? Among the many factors are those that cannot be controlled, and those that can be controlled. A producer will have the opportunity to determine how much is spent for inputs which will have a direct impact on revenue, and subsequently on profitability. But what are those decisions? For this 500th edition of the farm gate blog, we'll look at production expense.

Profitability is a function of weather (can be controlled with crop insurance), trade policies (farmers have to depend upon the government negotiators), interest rates (that is a duty of the Federal Reserve), and government programs (the 2007 Farm Bill is being constructed now.) But an individual farmer has relatively little input in any of those. However, individuals can manage for profitability, and that is the essence of a 5 year survey taken by Kansas State economists Chris Crosby, Kevin Dhuyvetter, and Terry Kastens with the help of the Kansas Farm Management Association. Their report provides a description of high, medium, and low profit producers, which you can compare to your operation.

Non-irrigated corn. The difference between high and low profit farms was $91 per acre, despite variable yields and prices across all three categories. Gross income averaged $2.42 per acre more for the low profit farms than the high profit farms, consequently over 100% of the difference in net profit was due to cost differences. Machinery had the biggest impact on cost and was over $31 less for the high profit farms than the lower profit farms. However, there was only $3.29 per acre difference between high and mid profit farms for machinery costs. High profit farms had less cost per acre in all categories compared to low profit farms, except for crop insurance, but the difference was only a dime per acre. High profit farms had more acreage than other mid or low profit farms.

Non-irrigated wheat. The average difference in profit between high and low profit operations was $65.39 per acre, and high profit operations were $26.83 better than the mid profit farms. Market prices were all within $0.11 per bushel, but high profit farms had better yields by 7.5 bushels per acre compared to mid profit farms, but were only 4.5 bushels per acre better than the low profit farms. The better yields and prices allowed the high profit farms to gross $11 more per acre than low profit farms and $24.66 more than mid profit farms. Of the $65 per acre difference in profitability, 18% was from income, and 82% was from cost control. Machinery was $24.18 per acre less for high profit than low profit, and had lower costs in all other categories with some having a 20% or more margin. Mid profit farms had 82% more acres than low profit farms and 6% more acreage than high profit farms.

Non-irrigated soybeans. High profit operations netted $74.52 more per acre than the low profit farms and $26.57 more per acre than mid profit farms. High profit farms had 2.8 bushels per acre more yield than mid profit farms and 6.9 bushels per acre more than low profit farms. That provided $27.28 more income for high profit farms than low profit farms. Of the $74 per acre span in profitability, 29% was related to gross income and 71% due to costs, with machinery having the biggest impact. Machine costs were $21.88 per acre lower for high versus low profit farms, and other costs all were less for high profit farms than low profit farms, with most of the difference being 20% or more. High profit farms also had the most acreage, and low profit farms had the least, suggesting economy of size.

Summary:
Significant profitability swings exist between high and low profit farms, indicating the extent of returns to management for managing costs. Most of the difference was due to cost compared to income, indicating yield and markets had less of an impact on profitability than did cost controls. In most cases the high profit farms all had less cost per acre or cost per bushel than did the low profit farms. Machinery costs were the largest segment of expense, and high profit operations all had lower costs per acre than the lower profit farms. Additionally, the higher profit farms were generally the larger operations, but not always, indicating some economy of size can be expected.