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North Dakota Producers Suddenly Manage Larger Farms

n farm financial management, it is generally recognized that the best measure of farm size is gross revenue, not acreage.

Farms suddenly got larger last year, which has provided both opportunities and challenges for producers, according to Andrew Swenson, North Dakota State University Extension Service farm management specialist.

In farm financial management, it is generally recognized that the best measure of farm size is gross revenue, not acreage. It provides a standard of comparison among different types of farms and for farms in different geographic regions.

For example, it is a means to compare a 2,500-acre cash grain farm, 500-acre dairy and 7,000-acre cattle ranch all in Emmons County or a 1,500-acre Richland County corn-soybean farm with a 3,000-acre Divide County farm raising durum, dry peas and lentils.

In 2007, the median gross cash revenue of farms enrolled in the North Dakota Farm Business Management Education program increased by one-fourth, after an average annual increase of about 5 percent during the previous 10 years. The increase in median accrual gross revenue (cash revenue plus adjustments for inventory changes) for 2007 was even greater - by one-half. Most operators now are managing much larger farms.

“The positive aspect of larger farms, as measured by gross revenue, is obvious,” Swenson says. “Hopefully, it will translate into more profit, but that depends on costs.”

In North Dakota, historically, for every dollar of gross farm revenue, there are 80 to 85 cents worth of expenses, which include depreciation and interest. This leaves 15 to 20 cents of net farm income. If this relationship holds, greater revenue means greater total profit.

In 2007, costs were the highest in history (until this year), but were trumped by record high commodity prices and strong yields. For each dollar of gross revenue, producers netted about 31 cents instead of the typical 15 to 20 cents. Producers batted two for two by having more total sales and a greater profit margin per-dollar of sales.

We know the good news about 2007, but what can be the downside of managing these larger farms in 2008?

“Decisions made on larger farms impact larger sums of money going out as expenses and coming in as revenue,” Swenson says. “Many producers relish the challenge and the opportunity it presents. However, there can be a certain amount of uneasiness and foreboding about being thrust into this position. One 50-plus producer told me that he didn’t like it because he was forced to operate more like a businessperson. He was referring to the pressure of managing risk for his larger farm in the current environment of exploding input costs and volatile crop prices, not to mention the concern about the fickle northern Great Plains weather.

“The producer dug deep into the risk management toolbox before the first seed was planted,” Swenson adds. “He made some adjustments to the crop rotation, paid double to triple last year’s premium cost for revenue crop insurance and forward contracted much more of the potential crop than in the past. He purchased nitrogen fertilizer last winter to lock in a price at a mere 30 percent higher than what he paid last year, but neglected to purchase phosphorus fertilizer until planting and paid the price. He paid more than twice last year’s cost. A lesson this year is that revenue and cost factors must be managed in concert to target a net revenue range.”

The amount of risk or variability of income a producer can live with is a factor of his or her knowledge of risk management tools and probabilities, plus the person’s psychological and financial ability to bear risk.

“Risk management takes time and comes at a cost, either in cash and/or profit potential,” Swenson says. “Only 20/20 hindsight reveals the best strategies. It’s always been important, but, in 2008, it has been taken it to a new level.”

NDSU Agriculture Communication

Source:Andy Swenson, (701) 231-7379, andrew.swenson@ndsu.edu
Editor:Rich Mattern, (701) 231-6136, richard.mattern@ndsu.edu
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