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For your farm: Does size matter?

Jeff Caldwell 05/04/2011 @ 1:13pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

Is bigger always better...when it comes to your farm?

It's debated often by economists and management specialists around the country. A lot goes into what makes a farm profitable, and size does sometimes influence how a farm can best leverage those variables in their favor.

So, the short answer, say University of Illinois ag economists Mak Kern and Nick Paulson, is yes: The bigger, the better...if you can handle the growing and changing challenges of scaling up.

"There may be increasing returns to scale for grain farms, or that some normalized measure of profitability may be enhanced by expanding the scale of the operation," Kern and Paulson say in a recent report. "However, size can also introduce challenges."

The first of those challenges, Kern and Paulson say, is a simple matter of time. With farm growth comes an increase in the amount of time needed for basic farm management, from the simplest management task to major decisions, like buying more land.

"The number of management decisions which must be made regarding marketing, inputs, and the timing of field operations expand with each additional acre or farm added to the operation," the economists say. "Furthermore, decisions regarding the financing of expansion -- through land leases or purchase -- will also have both short- and long-term impacts on farm profitability."

Does a farm's size make these types of management decisions tougher or does it just accentuate the consequences of them? Agriculture.com Farm Business Talk member Canuck_2 says it's the latter.

"The one thing that does not matter about size is management. A good mechanic (and manager) can keep capital cost to a minimum on a smaller operation, hence better 'net' at the end of the year," Canuck_2 says. "A large operator with poor maintenance is probably guaranteed a loss.

"If you make money then larger may make more. If you are losing money, larger is probably only going to make the losses bigger," he adds.

In fact, Illinois Farm Business Farm Management (FBFM) data show that from 2007 to 2009, the highest farm incomes were reported on those smaller than 500 acres in size in that state, though for 2002-2004, there wasn't as solid a correlation between farm size and average farm income, leading Kern and Paulson to conclude that other more direct factors -- like grain market prices and input costs -- are more influential to income than farm size.

"Profit does vary with farm size, but the direction of that relationship may vary with the economic characteristics of the time period analyzed. In periods of poor to moderate profitability driven by low to moderate commodity prices, operations with more than 500 acres tended to be more profitable than farms with less than 500 acres," they say. "However, 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."

When it comes to the size range for your farm, Farm Business Member Kay/NC says it's most important to find the point where you're most comfortable in making cash flow. And, the value of a specific-sized farm may be altogether different in different regions.

"There is a point of diminishing returns...when a farm is too small to afford any equipment, when it ceases to be anything but a hobby," she says. "That may not be an acreage determination...location can determine a lot of the equation."

 

 

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