Ten years ago, I studied the differences in per-acre net income between the top 25% and the bottom 25% of producers in an ag lender's portfolio resulting from differences in production, net price received and cost of production.
The differences weren't that great, but the net income difference was significant. The top 25% were only about 5% above average on the three factors analyzed, while the bottom 25% were about 5% below average.
Later studies by the Universities of Illinois and Minnesota and Kansas State University using their farm business records found similar results. All three found about $100/acre differences in net farm income between the two groups.
The important thing was that the top producers sustained their advantage over time. If we had looked at the top 10%, the differences would undoubtedly have been even greater.
I thought it might be interesting to look at the per-acre net income effect of performing 5% and 10% above average in terms of various combinations of production, price and cost.
The scenarios assume a baseline of 200-bu. corn, $4/bu. and a per-acre cost of $650, generating a net income of $150/acre (see table).
Some producers will question the ability to generate higher yields while simultaneously having lower costs. However, it occurs frequently. Producers renting the same quality ground in the same area often pay significantly different rent. Sometimes it's because of their relationship with the landlord, sometimes because of being better negotiators and sometimes because of their reputations for being better stewards or managers.
Some achieve lower rents by providing additional services. Still others achieve lower costs through economies of scale, by sharing resources with other farmers or simply by making more efficient use of their resources.
I see farmers all the time with the same equipment and labor force on 2,500 acres that another producer uses to farm 4,000 acres. Several TEPAP (The Executive Program for Agricultural Producers) participants share equipment and even labor with producers in other parts of the country. Some joint purchase to achieve better input prices. The possibilities and the examples are endless, but there's always a way to do better and it comes down to management and being willing to change.
Danny Klinefelter is professor of agricultural economics at Texas A&M University and director of The Executive Program for Agricultural Producers (TEPAP). He serves as executive secretary for the Association of Agricultural Production Executives and president of Klinefelter Farms. He is author of seven books on agricultural finance and farm business management.