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What affects profit?

After analyzing three years of Farm Business Farm Management data, Gary Schnitkey saw something he had never seen before. The University of Illinois economist noticed that high-profit farmers are better marketers.

Key Points

• Study shows higher-profit farmers are better marketers.

• More-profitable farmers have significantly lower power costs.

• Input costs are fairly level from high- to mid- to low-profit farms.

In sifting through the data, Schnitkey sorted farm operations into three groups (high, middle and low) according to return on investment. Every time he’s done this exercise in the past, differences crop up on the cost side of the equation. However, this is the first time he’s noticed that high-profit farmers were selling crops at a consistently higher price.

“My guess is they’re not any better price pickers,” Schnitkey surmises. “Instead, I think they’re better at following market signals, choosing the proper delivery point or making good storage decisions.”

Darrel Good, another U of I economist, thinks the profitability difference is largely tied to the decisions farmers made in 2008. “I think we’re seeing that some of the farmers were able to catch the spike in corn prices that year.”

Whatever the reason, he can only guess at this point. “We typically do an analysis of FBFM data every few years,” Good says. “It will be interesting if it shows up again, or if it was just an anomaly.”

Power costs more for some

The other points of analysis have more consistency. One of the largest determinants of profitability is power costs, Schnitkey says. The low-profit group spent an average of $81 per acre on power costs from 2005 to 2008. During that same time, the high-profit producers spent only $63.

Schnitkey says it really comes down to two things: matching harvest equipment to farm size and the number of tractors on-farm. “Harvest is over 50% of the farm’s equipment cost,” he notes. “Getting it the right size is key in keeping power costs down.”

High-profit farmers with 1,000 to 2,000 acres typically have two tractors: one for planting and one for tillage. “I’m not talking about 30-year-old tractors you use to run augers,” Schnitkey notes.

Some farmers will swear by operating a fleet of old, or new, equipment. However, Schnitkey’s analysis says one approach isn’t more cost-effective than the other. “If you’re operating new equipment, you’re going to have higher depreciation and lower repair costs,” he adds. “The inverse is true for used equipment. Therefore, the two tend to cancel each other out.”

In addition, Schnitkey reminds no-tillers that it may not be wise to keep a shed full of tillage equipment if it’s not used. “It’s still costing them money to keep it around,” he adds.

Same input costs

The analysis also revealed that high-return farmers don’t spend less on inputs. Schnitkey realizes there may be some savings in bulk storage of inputs in specific cases. But overall, high-profit farms spent about the same on inputs from 2005 to 2008. Again, this data may be a little skewed with the drastic run-up in nitrogen prices from 2008 to 2009.

Overall, the high-profit farms had gross revenue of $639 per acre, while the low-profit group returned $567 per acre. Schnitkey did not include land costs in the analysis. Since cash rent and whether ground has been paid for could drastically affect profitability, he chose to exclude the info to keep the playing field level.

This article published in the April, 2010 edition of PRAIRIE FARMER.

All rights reserved. Copyright Farm Progress Cos. 2010.