Foresight for Successful Cropping Systems:

Characteristics of High Profit Farms and Farmers

By Zachary Fore, U of M Extension Cropping Systems Specialist, forex002@umn.edu

What are the key components of profitable crop farms?  I have pondered this question for a long time, and maybe you have too. It is difficult to find simple formulas for complex issues.  Crop farms come in an infinite variety of shapes and sizes. Farmers likewise come with a wide variety of skills, talents, and philosophies.  Even so, are there specific characteristics that successful farms have in common? 

In my search to help answer this question, I have found numerous sources of information on the characteristics of high profit farms and farmers from many sources including Australia and Canada (where there is little government support of agriculture), Illinois, Kansas, and North Dakota.  Although some of these sources are well outside of this region, I think much of what they write is applicable for Northern Plains grain producers. Following is a summary of the key characteristics they identified:

Australia – Ten Characteristics of High Profit Farmers
1. They are production driven.  Always produce more per acre than average.

2. They have good expense control, resulting in a low cost per unit of production.  Dollars per acre spent may be higher, but input dollars are spent in ways that increase yields, resulting in a lower cost per unit produced.

3. They sell their products for a premium -- take advantage of price premiums for quality or other factors.

4. They take time to be exceptionally well informed.

5. They run a simple management system. They minimize the number of different enterprises, and focus on areas that have the highest and most predictable potential for profit.

6. They do not overspend on equipment.

7. They set goals, plan, and clearly identify objectives.

8. They have a good grasp of their financial affairs.

9. They are prepared to take risks and can cope with debt.

10. They thoroughly enjoy what they do.

Source: ‘How to Run a High Profit Farm’, Holmes Sackett & Associates, www.hs-a.com.au

Key conclusion: “All of the above ten features can be condensed into one simple benchmark for commodity producers – cost of production. The most consistent overall feature of high profit farms is a low cost per unit of production.”

Canada
Successful Farmers:

1. Have an optimistic attitude about their future in agriculture.

2. Think like an executive, visualize the big picture, and consider “what if” scenarios.

3. View change as opportunity.

4. Possess a broad blend of skills including interpersonal, communications, and listening skills.

5. Push for information rather than waiting for it to come to them, often going right to the source.

6. Innovate new approaches to business arrangements, such as networking, alliances, and diversification.

7. Keep up-to-date on marketing strategies.

8. Understand risk and are willing to accept it.

9. Know their operations well, including having and using thorough financial records.

10. Use the available tools.

Source: Canadian Farming, Fall 2001

Key conclusion: “Good management is not about doing any one thing 1,000% better. It’s about doing 1,000 little things 1% better.”

Illinois
Notable characteristics of the high profit group compared to the low profit group include:

1. They farm more acres.

2. They own less land (7% vs. 25%), and rely more on share rent (in recent years, the landlord has shared the pain of low crop prices).

3. They have lower costs in all categories.

4. High profit farms usually are not in the high profit category every year, but they typically are in the high profit category often over a period of years.

5. They may take an average price, while they strive to reduce variability, and focus on maintaining low costs and increasing farm size.

6. They adopt technology faster.

Source: Gary Schnitkey, University of Illinois extension economist, “Traits of Profitable Farms,” Top Producer February, 2002

Key Conclusion: “Overwhelmingly, controlling costs per unit of production is the most important factor in profitability, based on a comparison of 600 corn-soybean operations with similar soil. Price received per bushel was within pennies in each profitability category, so marketing is not a significant advantage. The top group’s corn yields were 12 bu.—about 8%—better than the lowest group’s, but bean yields did not differ significantly, and it is not that larger farmers are using more fertilizer or crop inputs.” (see Table 1 below).

Table 1. Comparison of High and Low Profit Groups (six-year average return)   Low Profit Group Hight Profit Group Total acres 672 1,007 Owned 171 (25%) 74 (7%) Share rent 311 (46%) 789 (78%) Cash rent 190 (28%) 144 (14%) Total Costs ($/A) 430 340 Land 133 98 Power 71 55 Building 23 19 Labor 50 30 Variable Inputs 99 92 Other 54 46 Yields (bu./A)     Corn 148 160 Soybeans 47 50 Prices($/bu.)     Corn 2.48 2.50 Soybeans 6.25 6.02 (Source: ‘Traits of Profitable Farms’, Top Producer Feb. 2002)

Kansas
Records from more than 1,000 farms that were continually enrolled in the Kansas Farm Management Program from 1987-1996 were used to analyze the effect of management on profitability. Overall, the study indicates that farmers should focus:

• first on cost per unit of production;

• then on technology adoption;

• then on yield;

• and lastly on price.

Source: ‘Crop Management Factors: What is Important?’  Terry L. Kastens, Kevin C. Dhuyvetter, Heather Novens, and Danny Klinefelter.

North Dakota
Highest profit farms:

• Had lower expense per unit of production

• Had lower interest expense

• Owned less land

• Were larger

• Had higher crop returns per acre

Source: ‘Profit Consistency and Management Characteristics for Successful North Dakota Farms, 1995-2000’, Richard D. Taylor, Won W. Koo, and Andrew Swenson, NDSU, Fargo, ND.

Conclusions
I found these various lists of characteristics to be very interesting, though not surprising.  The most common characteristic observed: that profitability is highly correlated with having a low cost per unit of production. This is interesting but is it very useful? It’s like saying “If you sell it for more than it cost you to produce it, you will make money. And, if you can increase your selling price and/or reduce your production costs, you can make more money.” 

That’s not exactly a profound discovery. I think the important thing is “what characteristics of profitable farms and farmers lead them to have a low cost per unit of production?” From the conclusions above and from my own experience, I think these are the key characteristics for farmers in this region:

• They focus on production and have consistently high yields.

• They have an excellent handle on the financials of their business -- they know where their profits are coming from, and they spend their time where they get the best returns.

• They are exceptionally well informed and take time to plan.

• They adopt new technologies quickly and appropriately.

• They keep equipment costs in line.

• They have a positive attitude.

Adopt or adhere to those characteristics, and I believe you’ll greatly improve the profit potential of your cropping system.