Danny Klinefelter: The ROI for Being 5% Better

Do you sweat the small stuff? Do you aim to be above average in marketing, production and management? If you don’t, you’re leaving money on the table. ( AgWeb )

Do you sweat the small stuff? Do you aim to be above average in marketing, production and management? If you don’t, you’re leaving money on the table, according to Danny Klinefelter, professor emeritus and Extension economist at Texas A&M University. 

How does he know? Following the 1980s, Klinefelter conducted a private study of a major agricultural lender’s portfolio, looking for what sets high-profit farmers apart.

“As bad as times were for agriculture during the farm financial crisis of the 1980s, one of the things that struck us was that a significant number of farmers remained profitable,” he says. “Their market value net worth may have declined with land values falling by half, but their earned net worth kept increasing.”

The study looked at farmers’ financial performance, specifically earned net worth, between 1982 and 1987. They categorized the farmers by what they produced and segregated them into the top 25% and bottom 25% in terms of profit.

“We looked at production per unit, net price received per unit, cost per unit and leverage,” Klinefelter says. “It was interesting that leverage appeared to be as much a result of, as it was a cause of problems. If the rate of return on equity (ROE) was higher than the rate of return on assets (ROA) with greater leverage, it required better risk management and focus on liquidity, but it also resulted in greater profitability. If ROE was less than ROA, being highly leveraged took the business down faster.”

Essentially, he says, leverage was the straw that broke the back of farms that were unprofitable, had poorly structured debt or lacked sufficient liquidity. 

What surprised the researchers the most, however, were the differences in production, prices received and cost of production. 


“The top 25% were only about 5% above average in all three areas, while the bottom 25% were about 5% below average,” Klinefelter says. “The important point is that the top producers tend to sustain their advantage over time and the gains compound themselves in the form of accumulated equity.”

Klinefelter provides this example. Assume an average corn yield of 210 bu. per acre, an average price of $3.60 per bushel and per-acre cost of $600, which would generate a return to the operator and land of $156 per acre. What would be the impact on per acre operations and land return beating the averages by 5%?

Factors Operator and Land Return
Yield Only  $193.80
Price Only $193.80
Cost Only $186.00
Yield and Price $233.49
Yield and Cost $223.80
Price and Cost $223.80
Yield, Price, and Cost  $263.49


Conversely, the per acre net acre impact of being 5% below average would be:

Factors Operator and Land Return
Yield Only $118.20
Price Only $118.20
Cost Only $126.00
Yield and Price $82.29
Yield and Cost $88.20
Price and Cost $88.23
Yield, Price, and Cost  $52.29

“Many producers question the ability to generate higher yields and at the same time have lower costs,” Klinefelter says. “However, it occurs frequently.”

How? Through work with leading producers and the The Executive Program for Agricultural Producers (TEPAP), Klinefelter has seen several management practices that give farmers a competitive edge. Here are a few examples. 

Land Rents: Producers can rent the same quality ground but pay less by having strong relationships with their landlord or because they have reputations for being better stewards or managers. Additionally, farmers who are better negotiators can reduce prices. (Read More: Strategies To Nail Your Cash Rent Negotiations)

Resource Use: Some farmers achieve lower costs through economies of scale, by sharing resources with other farmers or simply by making more efficient use of their resources. Some double shift to reduce machinery costs per acre. “We see farmers all the time with the same equipment and labor force on 2,500 acres that another producer uses to farm 5,000 acres,” he says.

Collaborative Farming: Farmers can share equipment and even labor with producers in other parts of the county or on a collaborative basis at the local level. Some joint purchase to achieve better input prices or share the cost of specialized management or technical expertise. (Read More: Collaborative Cost-cutting: Formally Farming Together)

“The possibilities and the examples are endless,” Klinefelter says. “But there are always ways to do better and it comes down to management and being willing to change.”
 

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