Practices of Profitable Producers

What is the single most important thing you can do to operate profitably? Turns out, there is no one silver bullet. Profitability lies hidden in the many nooks and crannies of a farming operation.

“Profitable producers are experts at efficiency; they do everything just a little bit better than average,” said Garen Paulson, University of Minnesota Extension educator in farm business management. “They can produce top crops at lower cost without sacrificing productivity. If you can manage many costs just a little bit better, our research shows that these small improvements really add up.”

Paulson leads the field staff for the Southwest Minnesota Farm Business Management Association. The association is made up of 120 mixed-enterprise farmers sharing financial and enterprise data. From the data, staff economists provide association members with individualized financial and farm enterprise analyses and confidential peer-farm benchmarking. They also consult with farmer-members one-on-one.

The association’s farm-analysis data shows wide differences in net farm income. In 2023, the data showed average net farm income to be $34,756. However, the average net farm income for the most profitable 20% of farms was $319,446, while the least profitable 20% of farms had a net loss of $332,305.

“The average net farm income in 2023 was skewed lower by lower profit in larger livestock farms,” Paulson said. “This was a change from 2022, when farms of all profitability levels experienced positive earnings.”

While efficiencies in management can certainly improve profitability, weather and prices of crops and inputs also play a key role in shaping profitability.

“In one analysis, we … found that crop yield, crop prices, and input costs were the biggest drivers of net income per acre,” said Gregg Ibendahl, Extension agricultural economist at Kansas State University. Along with other economists, Ibendahl analyzes data from the 1,500 farmer-participants in the Kansas Farm Management Association (KFMA). The KFMA provides its members with accrual-basis whole-farm and enterprise analysis, as well as financial benchmarking for comparing performance with that of similar farms.

While management can indeed impact yield and revenue, holding down production costs can go a long way toward improving profitability. “Controlling costs plays a big role in managing for a positive net farm income,” Ibendahl said.

These are the practices Paulson and Ibendahl found typify the most profitable producers:

Keeping Detailed Financial Records

“The most profitable producers in our program do regular farm financial analysis, so that they can see where they are at financially, how they got there, and where they are going,” Paulson said.

He advised using accrual accounting, creating balance sheets, income statements, and calculating break-even profitability on an enterprise basis. “You can use this information for marketing and cost control,” he said.

Tracking family living costs is critical. “Keep family living costs in line with earnings,” he said.

When possible, participating in a farm business management group permits internal and peer benchmarking. This process reveals strengths and weaknesses in your operation.

Managing Debt

Ibendahl analyzed records of several hundred KFMA farmers, trying to identify practices most likely to impact farm profitability. “I expected to see that farm size played a role, but that was not the case,” he said. “What I did find was that debt played a role. The least profitable farmers tended to have the highest debt loads.

“I would be careful about adding debt to the farm,” he advised. “We need to keep an eye on interest rates, because we don’t know what the future holds. If land values crash, it would affect farmers’ debt-to-asset ratios.”

Managing Land and Machinery Costs

Land costs comprise the lion’s share of cost of production. While a competitive market for land may make its cost seem hard to manage, Ibendahl offers some suggestions. “It’s important to have some ability to control rental costs,” he said. “There is room for negotiation with landlords. When bidding on new land, you might promote your commitment and ability to manage the land well.”

You might also discuss with landlords the option of share leases, where both stakeholders share expenses. Flex leases are an option as well, Ibendahl said.

Do your homework before leasing new ground. “Top producers have been able to find pieces of ground that will produce well and provide a good rate of return,” Paulson said. “They stay away from ground that is overpriced for the production it’ll yield. Do a financial analysis on new ground before taking it on. Make sure the costs and return provide profitability. If they don’t, don’t be afraid to walk away from land that is too expensive.”

Avoid purchasing machinery you don’t need. Because equipment racks up a large share of production cost, Paulson advised right-sizing your equipment line to the number of acres you manage. “Our highest-profit producers have just enough equipment to manage the crops they grow,” he said. “They don’t have equipment sitting around that they don’t need. And they maintain equipment in good condition, so that they can get field operations done in a timely manner.”

With similar concerns about equipment, Ibendahl advised: “Watch your machinery numbers. In many cases, farmers tend to buy a lot of machinery in the good years in order to reduce taxes. But be careful so that you don’t rack up a lot of depreciation costs by doing that.”

Watching for Windows of Opportunity

High-profit producers often buy fertilizer and fuel during times when prices are lowest. Prices for fertilizer tend to be lowest in fall, Ibendahl said; prices for fuel tend to be lowest in winter.

Watch, too, for windows of opportunity that can help build profitability through timely marketing. “Watch the futures market, and follow marketing advice,” Ibendahl said. “Outside people can help with marketing.”

Paulson summed up: “Profitability is all about efficiency and keeping cost of production under control without sacrificing production. The ag economy is very cyclical, and being efficient helps top managers face times of tight profit margins and also thrive in the good times.”