I do not think you can make it as a small farmer in the United States anymore. I find it very sad that I have reached this conclusion, as I am ideologically sympathetic to the argument that producing food from the land is on the short list of fantastic human achievement you can accomplish in life.
But the profit per acre just isn’t there anymore.
I was looking at the recent University of Iowa estimates for the costs per acre associated with corn, and I can’t but reminisce about the old quip often applied to newspaper investing “What’s the best way to make a small fortune in this industry? Start with a large fortune.”
If you wanted to grow corn in the Midwest, your per acre costs would be approximately: $85.80 in seed, $57.66 in nitrogen, $18.36 in phosphate, $11 in potash, $9.34 in lime, $32.40 in herbicide, $20.30 in insecticide, $9.00 in crop insurance, $9.00 in miscellaneous, $10.05 in interest on debt accumulated to farm, $6.70 amortized for a combine, $3.00 amortized for a grain cart, $5.49 amortized for a haul, $16.53 in dry, and $2.81 for a handle/auger. To prove my point, I’ll assume that the land itself requires no borrowing and the farmer pays himself no salary and only elects to live off the land (meaning my projections will be unduly rosy if you were thinking about hiring a third party to farm on your behalf.)
This means that your farming costs per acre are $297.44.
Right now, corn is selling for $3.63 per bushel.
The typical farm yields anywhere from 145 to 185 bushels of corn per acre (this is the 25/75 split, meaning that 25% of farmers get less than 145 bushels per acre, and 25% of farmers get more than 185 bushels per acre.) These figures assume no crop rotation, and that corn is planted following a corn harvest.
The revenue, then, is somewhere between $526.35 and $671.55 per acre. We’ll assume, then, that the average acre of corn produces $598.95 in revenue. After those $297.44 in expenses, that is a pre-tax profit of $301.51.
If, somehow, this article circulates among corn farmers, I know that the $301.51 is a wildly unrealistic profit figure. That is because it assumes that the land is owned outright, there is no drought, and no hired help at any point. Some combination of a leveraged mortgage, high debt on the farm equipment, a drought, or extensive hired help on the farm can easily lower the pre-tax profit per acre down to the $150 range.
As of last September, the average price of Iowa farmland was $6,486 per acre. In a best case scenario, you will earn a 4.62% return on the land if you own the land outright, have adequate rainfall, and do everything yourself. If you have a mortgage on the farm, hire help, or carry high debt, the $150 pre-tax profit per acre would only give you a yield of 2.31%.
That is backbreaking work in exchange for a weak payoff—you could passively own a block of AT&T stock and collect your 4.91% dividend and earn a higher return than a farmer. I hate that farming in general, and corn farming in particular is so poorly rewarded, but I have to state reality as it is rather than how I wish it would be.
The median household income in Iowa is around $54,000. What if you are a farmer with the modest goal of earning the median income for your estate? Assuming a blended return in which you generate 3.46% in profit per acre of farming, you need to own $1.58 million worth of farmland to make it work. At the price of $6,486 per acre, that means you would need to own at least 283 acres to approximate a lifestyle of the Iowa middle class. If you have to borrow heavily, the figure could move up towards 400 acres.
The sad part is that farming is a sentimental, family industry. Most people don’t become farmers because they sat in a room and rationally weighed all of their career options—they chose it because their mothers and fathers were farmers and their grandmothers and grandfathers were farmers. It runs in their blood. But unless you stand to inherit thousands of acres in farmland, you are likely to participate in an occupation in which you will earn less than the generations of family members that came before you.
It is a painful conclusion for me to reach—especially because I have watched so many of my friends shy leave productive fields to become bankers and *cough* lawyers so I have an inherent bias in favor of people who actually produce things rather than collect a transactional/regulatory override from the production of others—but the math does not work in favor of small scale farming anymore. If you grew up in a farming household or anticipate being a crop farmer on less than 200 acres, my conclusion is that you need to get out—now. The discomfort and pain of change is difficult but ultimately preferable to spending decades of your life toiling and relying upon luck in order to generate cash flows that approximate a minimum wage McJob.
Originally posted 2017-04-21 19:13:23.