DOLLARS & CENTS
Dr . David Kohl energizes agricultural lenders , producers and business persons with his keen insight into the agricultural industry through extensive travel , research , and exposure during his career . He is Professor Emeritus of Agricultural Finance and Small Business Management and Entrepreneurship at Virginia Tech , Blacksburg , VA . Dr . Kohl has traveled over 8 million miles in his professional career and conducted over 6,000 workshops and seminars for a variety of agricultural audiences . Dr . Kohl ’ s personal involvement with agriculture and interaction with key industry players provide a unique perspective into the future trends of the agricultural industry and economy .
18 HEARTBEAT | SUMMER 2016
The Widening Gap of Profitability .
The economic reset encompassing agriculture and rural America bares both financial and behavioral implications for producers . In my travels , I see some producers in a perpetual state of denial . Others procrastinate hoping for weather adversity to rebound commodity prices . Whatever the case , there appears to be a widening gap of farm profitability regardless of the enterprise . In order to understand this trend , we need to examine farm data . The 2015 FINBIN data from the University of Minnesota ’ s Center for Financial Farm Management is an excellent resource . This data summarizes performance from over 8000 farms from multiple states . Additionally , this database represents above average producers who maintain good records . Of course , in these economic times , above average practices are required for success . Overall Difference Makers Examining median net farm income , the top 20 percent of farms generated $ 184,483 . This is a stark contrast to all farms , whose median profits were $ 27,217 . The low 20 percent of farms recorded a median profit of negative $ 73,321 . That calculates to more than one-quarter of $ 1 million difference in profits between the top and the bottom 20 percent of farms . Clearly , an astounding difference !
Of course , this raises the question of what the top 20 percent of farms are doing as compared to the rest of the spectrum . Well , the difference can be summarized in two words : proactive management . In this case , proactive management is in the form of cost adjustments and most noticeably , in the cash rent category . The cash rents of the high profit group were $ 63 less per acre than the low income farms . Others areas of cost adjustment included fertilizer , crop drying , and fuel costs . Cumulatively , these reductions ranged from $ 20- $ 50 per acre . In the top 20 percent , farms generated an average profit of $ 139 per acre in 2015 . The average profit for the lower 20 percent was negative $ 163 per acre . This makes the bottom line difference over $ 300 per acre which is significant for any operation .
In the livestock industry , there are similar situations and observations . Those farms exhibiting top profitability are focused on feed , labor and repair cost controls . Some of these producers have diversified as a mechanism to complement their other enterprises . Two classic examples are the use of manure to reduce fertilizer costs for crop operations and feeding lower cost grain to economically increase benefit for the livestock enterprises . Financial Performance Turning to some of the key financial ratios , the disparity becomes much more apparent . The term debt and lease coverage ratio was over 170 percent for the top 20 percent of farms while the low 20 percent was at 38 percent . This gap demonstrates an insufficiency in earnings to cover debt service