Thursday, June 19, 2014
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Kansas: Maximize Profits Through Better Management

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Crop producers have experienced record-high prices for their commodities the past few years–so how are some of these producers still losing money? Although weather, and specifically drought conditions, can play a role in crop and profit loss, management also plays a major role in profitability.

An economic analysis conducted by Kansas State University agricultural economists sought to identify factors that make the difference in profits for Kansas’ major crop enterprises. The analysis compared high-profit, mid-profit and low-profit operations using Kansas Farm Management Association crop enterprise data from the past three years, 2011-2013.

Kevin Dhuyvetter, agricultural economist and former K-State faculty member, along with Lacey Ward, K-State agricultural economics graduate student, conducted the analysis. Dhuyvetter said it is an update of studies previously done that examined the same main crop enterprises in Kansas–dryland corn, irrigated corn, sorghum, wheat, soybeans, double-crop soybeans and alfalfa. They had varying numbers of farms, depending on the enterprise.

Three years of data helped smooth through circumstances that might happen in any one year, he said. The analysis required that the farms in each enterprise be included in the data report all three years. The three-year average returns for all farms were sorted and split into thirds. The analysis showed a tremendous difference in the profit, or the returns to management, between the top third and bottom third.

“For example, think of the non-irrigated crops like wheat, corn, milo and soybeans,” Dhuyvetter said. “We’re talking $116 up to $150, $160 per acre difference between the top third and bottom third. There are some soybean farmers out there making $150, $160 more per acre than other soybean farmers. That’s a huge difference when you think of dryland farming, where the average rent across the state tends to be $60-$70 (per acre).”

The difference between the average profit for high-profit and low-profit farms ranged from $113 for double-crop soybeans to $335 for irrigated corn, the researchers found.

Focus on management and yield improvement

Why such large gaps between high-profit and low-profit farms? The 2011-2013 analysis showed a bit different results compared to years past, Ward said. In the past, often times costs was the big driver in the differences between the top third and bottom third.

“This time, the thing that’s different as opposed to some earlier studies is most of the differences between the top and bottom thirds are due to income, not costs,” she said. “Costs obviously are still important, and some crops more important than others, but income is the big driver.”

A lot of people think that those who get the high prices make the money, Dhuyvetter said, but price isn’t the dominant income driver. Yield is the dominant driver as to why some producers make more money than others.

“Now, if you happen to get high yields because you caught a rain and other people didn’t, there’s not a lot you can do about that, but these are three-year averages,” he said. “For most of the crops, we didn’t see any strong regional tendencies. So, I think the yield still relates to management. Some people are just doing a better job of getting higher yields.”

Costs still important

The analysis showed the top third, or the most profitable group, not only generated the highest income, almost always due to highest yield, but those producers also kept their costs in check, Ward said. This indicates that producers can achieve good yields without having excessively high costs.

“You don’t have to spend a ton of money to get the highest yields,” she said.

“We have people out there getting better yields than their neighbors and not spending any more money per acre,” Dhuyvetter added.

The one cost that consistently was the big difference between the high third and low third was machinery, Dhuyvetter said, which has been the case in past analyses.

“While we didn’t specifically look at a size effect, the one thing that’s pretty consistent is the farms in the top third, profit-wise, tend to be bigger, and that’s why I think they have lower machinery costs,” he said. “They’re just doing a better job at spreading fixed costs over more acres. It’s economies of scale.”

The crop enterprise that was most surprising in the 2011-2013 analysis was alfalfa, Dhuyvetter said. The high third had the highest yield and the lowest machinery costs.

“If there’s one crop you think high yields will be associated with high machinery costs, with baling and hauling hay, it’s alfalfa,” he said. “The most successful people still had lower machinery costs.”

Inputs such as seed and fertilizer may or may not be lower for the top third, the researchers found, which means those costs were not directly related to yield.

“The other thing we know about this time period, we had some tough areas of the state, areas that didn’t get a lot of rain for the years analyzed,” Dhuyvetter said. “One thing we saw was crop insurance indemnity payments for some crops, specifically non-irrigated corn, were much higher than we’ve ever seen in the past. However, that wasn’t a big driver in explaining profitability differences, because typically all farms, low-profit, mid-profit and high-profit, tended to have crop insurance.”

Recognize where you stand

Dhuyvetter said it’s important for producers to recognize where they fall in line from a profitability standpoint and particularly if they’re in the bottom third, identify ways to apply better management strategies and cut costs. Producers can obtain the data and access the 2011-2013 analysis paper at K-State’s AgManager website (here).

“On the cow-calf, it’s almost all cost related,” he said, “not price or weight of calves.”

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