Monday, March 21, 2011

Small farm reprieve...

As I lay awake last night trying to figure out how to make crown molding fit on a downward curving section of ceiling (don't ask), I started doing some farm arithmetic. Using rough numbers, of course, it dawned on me that smaller [usually inherited] farms could now be something other than a source of extra income for the owners.

As prices have risen, so have margins.  We're taking over twice the gross profit acre from our farm - total revenue minus variable costs (fer, seed, chem, fuel, rent) - than just a couple of years ago. And that is with much higher rents.

Farmers rightfully point out that rents are rising to shrink that margin, but c'mon - owners are not taking all the increase by a long shot. (Shiny Metal sales makes this evident) In fact, the split of gross profit to owner and operator is closer to even than it has been for some time, by my figures. More importantly, the combined return is now a 2+ advantage.

The upshot is not just more income from a small amount of rented acres, but a whopping increase for owner-operators of small farms, especially if you inherited say 200 acres free and clear. And many of these might have serviceable equipment from Dad that can be run for years more with little machinery costs.

Suddenly 200-500 acre operations are earning a respectable living wage. Thanks to low inflation, that number hasn't risen like other costs. This changes the consolidation dynamic, as the pressure for outside income drops drastically. For those close to retirement, it also means scaling back to owned land looks like a great way to keep going with far less hassle/effort and still bring in ample income.

I obviously overlooked the 1-2 punch and underestimated how rapidly and far income levels would rise for both owners and operators, and what the combination of those streams would mean on a small scale. One possible conclusion is we could see a slowing of consolidation for some areas and operators who now are much farther from the edge, and for whom rising rents are not just a cost, but an added bonus.

10 comments:

Anonymous said...

You discovered what I have experienced the last 5 years. After being out bid on 1100 A out of 3500 I decided to sell everything and farm my 520 acres with limited equipment (no-till) and rented combine. I have had six figure profits every year and lots of time for family and travel. At age 64 I don't understand the mentality of having to farm half the county, driving others out of business and making enemies. Life is too short.

John Phipps said...

anon:

I'm happy for you, but you gotta admit this option didn't exist when corn was $2.20.

How long this higher margin can continue is what I'm trying to figure out.

Anonymous said...

Slow to the party as always John, but glad to see you could make it. I guess The strenous calcalations of multiple compound angles on trim mouldings has cleared some of the cobwebs out of the cranium. I find that if all I think about is the usual farm stuff or internet stuff, my thinking gets very limited quickly. Always good to interject some difficult math problems of a different nature into the mix to keep the thinking fresh.

Anonymous said...

John,
I'm sorry small farmers living off inheritances annoy you so much when they should be doing the right thing and retreat to the safety and servitude of a cubicle or factory someplace for the greater good of efficiency. Perhaps it will only take one more generation to be rid of these wretched yeomen and bask in the glory of a depopulated countryside.

John Phipps said...

anon:

Small farms don't annoy me - they just seemed to be on a fast track to extinction due to any number of factors I have mentioned before.

My point was the critical mass necessary for a farm-income only family has undergone a swift and unexpected (I don't recall many forecasting years of $6 corn) shift, forcing me to recalculate what the countryside might look like in a generation or so.

These small operations also seem to be the last stage of farm existence as they are really tough to pass on unless you use primogeniture or the oncoming generation will wait until ~40+ to start.

Please read my next TP Perspective where I explain how we have developed and embraced winner-take-all agriculture. It's not just guys like me who are describe what we see in our industry, it's the choices we all make.

Anonymous said...

John.
What is the meaning of primogenture? Sorry, I went to school in IN.

John Phipps said...

anon:

Hey - I went to an IN school (college).

Primogeniture is an ancient practice of the estate going entirely to the eldest son.

Also thrones, etc.

Under some laws systems (Irish, Scot, e.g.) estates were non-partible.

Anonymous said...

John,
Thanks for ansewering the question, and as I am the oldest sibling, should I inherit the whole estate? Don't think so! And my bro. would agree!!! Though IN farmland is not worth quite as much as good IL farmland.

Derek said...

I'm too small to qualify for a subscription to TP magazine!

John Phipps said...

derek:

Umm...are you sure you are counting "all" of your acres and rounding up to the nearest thousand?