BIG FARMS MAKE $19 MORE PER ACRE
Big farms make more money, a lot more. Not only do they have more acres, but they make more money per acre than smaller farms. That’s the word from Terry Kastens, ag economist with Kansas State University. He refutes the idea that big farms have smaller margins, but make up for it with higher volume. “That’s bullshit,” he said bluntly during his presentation at the Canadian Farm Business Management Council’s Managing Excellence in Agriculture conference in January. They have higher volume AND higher margins.
Kastens says the biggest one-third of U. S. farms, based on data from 1998 to 2007, make an extra $19 per acre over the average farm. “And this disparity between large and small farms gets larger every year,” he says. It’s worth noting that Kastens, in addition to being an economist is also a big farmer. His family has 15,000 acres of cropland and 5,000 acres of grass.
I watched an archived version of Kastens’ talk online at www.cfbmc.com.It’s in the AgriWebinar section.
WHY ARE BIG FARMS MORE PROFITABLE?
Kastens gives five reasons:
1. They have much lower costs per acre, particularly for machinery and labour.
2. They get higher yields.
3. With bigger volumes, they can negotiate higher prices.
4. They farm more intensively.
5. They are faster adopters of technology that will lower costs per acre or increase yields.
“Economies of size is the driving force,” he says. “Per unit costs fall as business grows.”
SMALLER FARMERS, DON’T LOSE HOPE
Many people hate Kastens’ message. “But if I don’t say it, that doesn’t make it go away,” he says. “If you know the direction things are going, you can react to it.”
And he does say that the best-managed smaller farms are in fact more profitable than the average third of big farms. “Management still matters more than size,” he says. But if you want to farm alone or with one child, you’ve got to get “fully employed,” he says. You need enough land to keep you doing highly productive work on a full time basis.
OTHER ZINGERS FROM KASTENS:
1. Finding niche markets is a way of success for some people, he says. “But a niche is nothing but a commodity in the making. If you’re in a niche and making good money, don’t expect to make it for long.” Others will come into the niche and eventually make it a commodity.
2. Young people can start farming as an employee. “Why do they have to start as a businessperson?” he says. “No other business works that way.”
3. Don’t be afraid of debt. “Debt is your least-cost capital source. You had best have a good attitude toward debt, or you’ll have really slow growth,” Kastens says. He recommends a farm maintain a debt to equity ratio of 40 to 60 per cent. “Choose a ratio you’re happy with and grow the farm while keeping it there.”
4. He recommends accrual accounting. “That way you know where you are, financially, at any moment in time.” Knowing this, you’ll be surprised at the better decisions you make, he says.
BENEFITS OF ACCRUAL ACCOUNTING
Inspired by Terry Kastens, I e-mailed Ron Friesen, a partner specializing in taxation with MNP in Saskatoon, and asked him four quick questions about accrual accounting. Here are his answers.
1. What is accrual accounting?
As opposed to the cash basis of accounting, which reports revenues and expenses as they flow through the bank account, accrual accounting reports transactions as they are “realized.” For example, accrual accounting at a cut-off of say December 31 would report the inventory the farmer had on hand at that date, the accounts receivable (for example deferred grain sales), the accounts payable, etc. As a result, accrual accounting gives you a much more accurate balance sheet. It also provides the user with an accurate picture of the net income for the period, as opposed to cash accounting, which simply provides you with a summary of cash receipts and disbursements.
2. What are the benefits?
The benefits are significant. For starters, any farmer with bank debt will normally need to report some type of accrual accounting to his banker. The banker wants to know the true financial health of the farm. So if the farmer already has an accrual financial statement, the information is already available to the banker. (For farmers with larger bank debt, the banker will often require an accountant-prepared accrual financial statement to meet debt covenants.) With a properly prepared accrual financial statement, the farmer may be in a better position to negotiate interest rates, repayment terms and collateral. An accrual statement also provides the farmer with an accurate picture of profit, which he or she can then use to make business decisions for future years. The accrual statement provides an accurate reflection of the future tax liability, which can help a farmer decide on the level of current tax to pay. A proper accrual statement must be reported to the AgriStability program, which then generates the payment calculation.
3. Why don’t more farmers use accrual instead of cash accounting?
I would suggest the largest reason for this is because the Income Tax Act (Canada) allows them to tax their income on the cash basis. As a result, they don’t need an accrual reporting for tax purposes. However, as farm sizes increase, bankers are forcing the issue, and farmers in general are paying more attention to accrual numbers to make business decisions. Accrual reporting generally involves additional costs as the accountant is more involved in the process, so this may be a factor in some cases.
4. If a farmer wants to switch to accrual accounting, what are the first steps?
Really all they have to do is give their accountant a complete listing of their inventory, accounts receivable, accounts payable, and loan balances as at the year-end, and the accrual report can be issued. One of the problems you run into is that many farmers are still not incorporated, and so they really are not required to file a balance sheet. Therefore they don’t incur the extra cost to get this done. Keep in mind that the farmer can prepare accrual statements, but still pay tax on the cash basis.
My wife got a 16-page booklet called “Oat Cuisine” inserted in one of her magazines. It was full of health messages and recipes. Quaker sponsored the booklet. Most of the health information is online at quakerchallenge.ca.
Ottawa-based dietician Helene Charlebois wrote the introduction. “A staple in most homes, oats have emerged as a “super grain” with multiple health benefits,” she writes.
An article on the next page says, “Oats can be described as whole grain nutrition therapy in helping to manage cholesterol, weight and blood sugar.” The article concludes with “What’s more, the oats found in Quaker products are 100 per cent Canadian grown.”
Quaker is a big supporter of Canadian oat growers. It has to be. They are its biggest suppliers. Without Canadian growers, it would have to source oats overseas. Quaker sends representatives to Prairie oat growers meetings. The company encourages communication at all levels, including with breeders and farmers. I think the direct relationship between Prairie oat growers and one of their single biggest customers — maybe their biggest — is a shining example for all other crops.
Walter Finlay, who farms near Souris, Man., phoned to clarify a point I made in my March 2 comment, “If the CWB can opt out…” I had written, “Barley still in farmers’ bins now cannot be sold into the pool to gain from earlier high-priced sales.” Walter says any barley that has “already been accepted for malt” is still in the pool, even if the barley is still in farmers’ bins.
We will have a bunch of articles on precision farming tools and techniques in our April 20 issue. I’m working on article ideas right now. If you’re wondering about some aspect of precision farming and you would like an article to help explain it, please let me know. I’d appreciate your feedback. My contact information is at the left on this page.