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Sizing it up

01/12/2012 @ 11:19am

Ken Kunz says that life is good. He's content to be on the home farm near Elmwood, Nebraska, where he and his wife, Chris, are raising their two children.

He's grateful for last year's ample crops and thankful for the cushion of current commodity prices.

Kunz doesn't predict the future, but he's sure about one thing. “Things aren't going to stay this good for long,” he says.

Kunz, 44, graduated from high school during the heart of the 1980s farm debt crisis and one decade after Secretary of Agriculture Butz used the bully pulpit to admonish farmers: “Get big, or get out.”

With help from his family, he gained a foothold in farming. In the 1990s, along with other farmers, he was propelled forward by a tide of advances in crop-production inputs, laborsaving machinery, and technology. As a new market for ethanol emerged in 2000 and government-subsidized crop insurance shaved production risks, he's seen farm size spike.

Kunz pegs his operation – about 1,200 rented and owned acres – on the upper end of small. “The cost of land and the competition for land from larger farmers are our biggest challenges,” he says.

Kunz is not alone. The number of very large U.S. farms (over $500,000 in inflation-adjusted annual sales) has grown sharply. So has the share of production.

Simmering beneath the surface of any discussion about the structure of agriculture is a debate about farm size. The rhetoric typically generates more heat than light. Is there any middle ground?

Successful Farming magazine surveyed farmers to see how they measure up. The AgAdvisor study reveals that 52% rank themselves as small; 41% say they're midsize. Only 7% say their operation is large.

“A lot of the perception of size is shaped by neighbors and how much they farm,” says Michael Duffy, Iowa State University ag economist. “A big farmer is someone bigger than you.”

Large farms, as defined by USDA, have gross incomes of $250,000 to $1 million. They represent about 12% of farms and over 80% of production. A new USDA counting method shows growth in the smallest farms (income under $10,000).

The number and market share of all other farms has declined. Midsize farms – too small to compete in consolidated commodity markets and too large and commodity-driven to direct-market – persevere, often with off-farm income. On over half of small commercial farms (under $250,000 gross income), the operator or spouse works off-farm.

The low large-farmer perception in the survey may be tied to the finding that 70% farm with two or more generations. Their acres, set apart from the total unit, may not seem large.

“Each has sales on its own, but Census data can't separate it out,” Duffy says. “The majority report as one operator.”

The debate about farm size often becomes mired in the question of the optimal size to achieve efficiencies of scale.

Based on Iowa Farm Business Association data for row-crop farms, cost of production starts to lose its efficiencies of size advantage between 400 and 600 acres. “There's some evidence that beyond that, it's flat,” Duffy says.

Farmers selling bulk commodities expand beyond that to make more money. “You can farm with tight margins if you have a lot of volume,” he says. “But the margins keep getting tighter and tighter.”

Expansion also enables farmers to:

● Grow crops over a larger area, providing some yield boost and diversification against weather risk.

● Use larger equipment more efficiently or to obtain discounts by buying larger volumes of inputs, resulting in lower capital or variable input costs per acre.

But larger farmers face sizeable challenges. “As scale of operation expands, total management time also grows,” says Gary Schnitkey, University of Illinois ag economist. “Management decisions about marketing, inputs, and timing of field operations expand with each acre added.”

Growth may also spawn inefficiencies. Farmers often travel 50 to 60 miles to farm rented land. Lack of time limits attention to detail. “Sometimes when you farm so many acres, you almost have to do it, so to speak, by brute force,” Duffy says.

“I was riding in a field with a farmer when I noticed what looked like an insect problem,” he says. “He told me if he had time, he'd stop the combine and look at it. A farmer with fewer acres might have stopped, examined the problem, and known what to do the next spring.”

Recent University of Illinois farmdoc research, based on Illinois Farm Business Farm Management data over three time periods, indicates the relationship between profit and farm size may ebb and flow with economic times.

In periods of poor to moderate profitability, driven by low to moderate commodity prices, operations with more than 500 acres tend to be more profitable than those with fewer than 500 acres, Schnitkey says. “During the more recent time period of higher prices and larger farm incomes, smaller farms with less than 500 acres reported slightly larger incomes than larger operations,” he says.

Schnitkey suggests that greater net income per acre on smaller farms during good times may relate to paying less cash rent than larger farmers. “Larger farmers still are making more money,” he says.

But size alone is an imperfect measure. A farmer selling high-value vegetables may require only 5 acres. “At the Beginning Farmer Center, we talk about altering the production model to raise noncommodity or alternate crops like organic or food-grade soybeans,” Duffy says. “Growing green beans in a high tunnel can earn a premium for the earliest crop.”

If you zero in on gross sales, 37% of the AgAdvisor panel define a large farm as over $1 million in gross farm sales. Duffy says one rule of thumb is it takes $100,000 in gross sales to earn $15,000. “If you estimate that it takes three hours per acre of fieldwork and you have 500 acres, you're not employed full time,” he says.

That's why a high proportion of farms (with gross sales below $250,000) add value by raising livestock. “Animals spread labor and add value, making your output more valuable and lowering your costs,” Duffy says.

Livestock production is large scale and capital-intensive today. But smaller, well-managed operations remain profitable. Dave and Laura Hommel, along with his parents, raise grain and hogs near Eldora, Iowa. The 2010 Master Pork Producers have a farrow-to-finish operation with a 750-head wean-to-finish building. They market about 1,400 hogs annually.

“We're a family operation and hire very little outside help,” Hommel says.

Small commercial farms made up 22% of cow/calf or stocker production in 2007. Value-added pork, poultry, and beef offer an alternative market for small producers.

Management matters

Management and marketing are critical tools to widen margins and increase profits. Duffy advises farmers to:

● Get as much profit as possible for crops; this includes sharper marketing.

● Improve input management; fix problems impacting yield margin.

Keeping labor costs down is key. In the AgAdvisor survey, 40% of farmers with 5,000 or more acres cite more labor as a need for continued success.

Matching machinery investment and acres is critical. “Four areas – marketing, equipment costs per acre, labor costs per acre, and agronomic factors like seed selection, tillage, weed control, compaction, and timeliness – account for the major divergence in profits,” says Moe Russell, Russell Consulting, Inc., Panora, Iowa.

Sharing machinery, such as sprayers, is a strategy to hold down per-acre machinery costs and gain reliable labor.

Near Rowley, Iowa, Chris Barron and his brother-in-law, Rick Matthiesen, along with a dozen other farmers, pool machinery and purchase inputs jointly.

Farmers in the network own an average of 600 acres. Barron says they average $42 to $85 more net return per acre from more efficient equipment use plus better marketing and leverage with input suppliers. “Our goal isn't farming more acres,” he says. “It's increasing profit margins.”

Land costs exert a major impact on profitability. Decisions about how to finance expansion – through land leases or purchase – have both short- and long-term impacts on farm profitability.

Renting more land – regardless of cost – ratchets up risk, cautions a new University of Illinois farmdoc report.

“When lower commodity prices occur, farms with high amounts of cash rent will face difficult decisions,” Schnitkey says. “If steps aren't taken to lower cash rents, the result will be large financial losses.”

Managing rising input costs is a linchpin to success. The AgAdvisor survey reveals that inputs are a top concern for farms over 5,000 acres, as well as farms with up to 499 acres.

That's not surprising. USDA pegs total 2011 production expenses up by 12%.

“Cost control will become more important again,” Schnitkey says. “Farmers who maintain control will be in a better situation when commodity prices decline.”

That's Rick Dado's current goal. (See sidebar on page 46.) The Amery, Wisconsin, dairy producer, is focused on reducing risk and improved positioning.

Finally, energy costs eventually may drop the farm size ceiling. “In agriculture, $8 out of every $10 spent is related to oil,” says Dave Kohl, professor emeritus of ag economics, Virginia Tech, Blacksburg.

“There will be more opportunities in the next 10 years than there were in the last 35 years,” he says. “But stakes are higher because there are more opportunities to fail. It's all about positioning and managing volatility.”

Optimism persists

A 2010 USDA report, Small Farms in the U.S., Persistence Under Pressure, by Robert Hoppe, states that although small commercial farms will slowly decline, they'll remain integral to the agricultural landscape for three reasons:

1. Some will resist competitive pressures because of positive – and even high – operating profit margins.

2. Others with negative operating profits have positive net farm income (net income undervalues operator labor).

3. Remaining small commercial operators will accept losses, relying on off-farm income to cover farm and family costs.

The AgAdvisor poll shows that 64% are optimistic about the future of midsize farmers. “It depends how they define success,” Duffy says. The key relates to goals. “I ask young farmers to think about what they want,” he says. “As they become larger, they need more personnel manager skills. Is that what they want?”

Other life goals enter into the decision, Dave Kohl advises young farmers. “One of the biggest problems among large farmers focused on growing their business is divorce,” he says. “They need balance between their personal and business lives.”

But demographics is a strong driver of growth trends. Many small commercial farmers are 65 years or older. Between 1991 and 2007, the share of farms at the low end of the large farm category (gross cash income of $250,000 to $499,999) operated by older farmers more than doubled. They're also expected to encounter losses in share of farms and production.

“There's a big trend of land going into trust,” Duffy says. “With each successive generation, you get more dispersed ownership and consolidated management.”

The approaching tsunami of aging farmers, paired with historically high land values, isn't likely to reverse the rising tide of large farms and lift the lifeboats of small and midsize farmers.

The future is likely to be dominated by oil tanker farms and speed boat farms, Duffy says. “Each has its pros and cons. When opportunities arise, speed boats can move and change more quickly.”

For instance, greater use of technology and social media could offer smaller, younger farmers an edge. “They're advertising on Craigslist for better prices and to find cheaper equipment,” Duffy says.

Kohl says one size doesn't fit all. “Mid-size farmers need to keep debt and lifestyle modest,” he says. “Live in balance with a better-is-better strategy – not a bigger-is-better philosophy. Aim for efficiency with modest growth.”

He adds, “Many midsize farmers tell me the best crop they grow is their children. Being a smaller, traditional farmer allows them more time to pass on their values.”

Ken Kunz agrees. “Our kids are growing up fast,” he says. “I'm less optimistic about the future of farming than I was 20 years ago. But we'll do what we can to make it work for the next generation.”


Optimistic, but Down to Earth

Farmers are setting their sights on growth. Asked about their biggest need for future success, 41% of the AgAdvisor research panel respondents say “more land.” This is true for farmers with 500 to 5,000 acres. But 41% want to “stay the same” size. At both ends of the size spectrum, farmers report reducing input costs as their biggest need.

More labor is tied with lower input costs as the greatest need for farmers with 5,000+ acres.

Competition from larger farmers is cited as the most frequent challenge to continued success, followed by managing rising energy costs.

Farmers with fewer than 500 acres are more concerned about energy costs than farmers with more acres.

AgAdvisor panelists report that 63% of their family income is derived from their farm or ranch business.

The majority are optimistic about the future of midsize farms. But 28%, ranging in age, “aren't sure.” Middle-aged farmers are less optimistic than younger producers.