Better is better: larger farm size not linked to improved profitability

When it comes to farm profitability and land base, bigger isn’t better; better is better.

That’s one of the findings of a recent study led by Dr. Gregg Ibendahl, associate professor with Kansas State University. The study looked at 10 years of data for a range of farm sizes, from about 500 acres to several thousand acres, seeking to understand if a larger land base correlated to more profitability for the farm business.

Ibendahl says that the hypothesis was that farms need to be a certain size to be profitable, but the data just didn’t prove that. Part of the reason could be that the farms included in the study were already large enough to be an efficient size. Those smaller farms, he says, showed the same level of profitability as the much larger farms.

With all the talk of economies of scale and lowering the cost of production, Ibendahl says many will likely be surprised by the findings. He says that smaller farms may be leveraging the use of custom operators versus owning equipment outright as a factor, for example.

What then does lead to profitability? In looking back over 10 years, and ranking each of the involved farms, certain farms consistently did well year after year. Also, one of the most profitable and the least profitable farms had about the same land size. The difference? Their level of farm debt. “Debt load was perhaps the biggest drag on profitability,” he says.

And that’s troubling, as farm debt has been steadily increasing for the last 26 years. Lower interest rates can be great for interest savings, but in tough years, it may also mean that farmers are consuming equity from which to live off. If interest rates start to creep up, what will that mean for farms? The question of sufficient liquidity and working capital are just so crucial.

Listen below to hear the full discussion with Dr. Ibendahl and Shaun Haney:

Read the full report from Kansas State University, here.

Editor’s note: this article originally said Dr. Ibendahl was with the University of Kansas. This has been corrected to say Kansas State University.

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