Dakota Farmer: Learn secrets of high-profit farms

By Keith Torgerson
Published in the October 2013 issue of Dakota Farmer

One day I was visiting at one of the farms I work with, and the operator mentioned that all of the high-profit farms in the North Dakota Farm Management Program were the larger farms, simply because they had a larger acreage base to work with.

In 2012, the high-profit farms averaged 3,204 acres, while the average-profit farms averaged 1,731 crop acres, or about 54% of the size of the high-profit group. The high-profit farms, as a group, also averaged $68 more profit per acre than the average farm.

I thought about it for a minute and told him that was not always the case for each larger-acreage farm. Here are some of the points or observations that I have made about high-profit farms since I began serving as a farm management instructor at the North Dakota State College of Science in 1978:

■ High-profit farms tend to have more consistent yields, and their yields are higher than those on the average farm. For example, if you look at the soybean yield from the 2012 Red River Valley averages, the average-profit farm on cash rented land had a yield of 39.63 bushels per acre, while the high-profit farms had a yield of 46.68 bushels. The reason for this yield difference is partly due to weather, but the high-profit farms tend to do a better job of focusing on all aspects of production, including drainage, technology and planting those crops whose genetics best fit the soil type for that area.

■ High-profit farms spend more time analyzing what type of crop insurance best fi ts their cropping program and their land type. They do not buy enterprise unit crop insurance because it’s cheaper, but because it does the best job of reducing risk.

■ High-profit farms work with other farmers to lower costs. This would include buying inputs together or sharing a piece of equipment, thus reducing overhead or fixed expenses. Total costs for 2012 on cash-rented soybeans from the Red River Valley averages for 2012 were $344.10 for the average farm and $331.97 for the highprofit farms. Net return per acre for the high-profit farm was $110.12 higher than for the average farm. If you had 1,000 acres of beans that would amount to an additional $110,012 of net farm income. Net return per acre for corn showed the same type of data with the high-profit farms having a net return that was $245.05 higher than the average farm. The same principles apply to the livestock industry. If we look at the 2012 North Dakota Farm Management State Average’s Report for the beef cow-calf enterprise, the high-profit herds are showing a net return of $175.55 more per cow than the average herds. This significant difference is generated by a number of items, including more production and fewer expenses per cow.

■ High-profit farms benchmark their performance. Benchmarking, or comparative analysis, helps them determine if their decisions on machinery and inputs are having the desired effect on their cost structure for the individual enterprises. These benchmarking numbers come from the annual average reports that are generated by the Farm Management Programs in North Dakota, Minnesota and South Dakota.

■ High-profit farms look at their total costs per enterprise and analyze each cost. For example, my custom cost may be high, but my labor costs are low. These farms realize they are using more custom work in exchange for not hiring additional labor. If both costs were high, it shows that perhaps they should be doing more of the work themselves. If total costs are higher than the averages, high-profit farms spend considerable time figuring out how to make adjustments for the next cropping year. They also use the benchmarking to compare their financial ratios and make management decisions based on how they are sitting compared to their peers.

■ High-profit farms are exceptionally well informed and have a strong management team, and distinct business and personal goals. The management team is made up of agriculture professionals that are working with the farm, and usually includes
the crop insurance agent, banker, farm management instructor, veterinarian, crop consultant and any other person who is working closely with a specific area of the farm business.

■ High-profit farms do not always receive the highest price for their product, but they are using their marketing decisions to reduce risk. They also have a plan in place to reduce the risk of what the farm’s greatest risk might be. For example, farmers who are highly leveraged will have a plan in place to reduce their risk on interest rates should interest rates go higher. A large dairy farmer would need to have a plan in place if his or her hired labor did not show up for work. The high-profit farms tend to seek out answers to problems before they arise.

■ High-profit farms use the information from all of their records to help them determine where to spend their time and to get the best return on their investment of both time and money. They have a very positive attitude and adopt new technologies
quickly and appropriately. The above characteristics of profitable farms and farmer operators leads them to have a lower cost per unit of production. Farming is a business and the farm operator should use all the resources he or she can to make informed decisions and, hopefully, these decisions will lead to many profitable years.

See the full article online at http://magissues.farmprogress.com/DFM/DK10Oct13/dfm032.pdf.

Department: Agriculture

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