During the past few years, net farm incomes have been in the neighborhood of $80 billion. That's about on par with incomes from the late 1990s when you adjust for inflation, yet the average farming operation is three times larger.
At the same time, farms' average rate of return has shrunk from about 4% to 7% annually in the '90s to 2 to 3% or less in recent years, according to data from FINBIN, one of the nation's largest databases of farm financial and production benchmarking information.
"These levels, with the much higher investment they're given, are very low rates of return," said Bob Craven, director of the Center for Farm Financial Management at the University of Minnesota, which administers the database.
Despite the challenging environment, Craven said there are farms that are thriving. The top 20% of most profitable producers in the FINBIN database had a median net farm income of $217,000 last year, six times the average of all farms in the database. The bottom 20% of producers lost an average of $55,850 in 2018.
There's a certain amount of fluctuation in farms' rankings from one year to the next, but Craven said about 5% stayed in the top category for seven of the past 10 years.
He added the FINBIN data disproves a popular hypothesis that farms that own a greater percentage of their land are more profitable, with both high- and low-profit producers owning about 20% of their acres.
Instead, Craven's colleague Pauline Van Nurden said hedging behavior, capital management and cost of production are the primary differences between high- and low-income farms.
Among Minnesota farmers in the FINBIN database with more than $1 million in gross annual revenue, she found average cash corn price was similar: $3.29 per bushel among high-income farms and $3.35 among low-income farms. High-income farms had a clear advantage when it came to hedging gains and losses, however, adding more than $48,000 to their bottom lines compared to the low-income group's $5,000.
"Hedging is where we see our high-profit farms taking advantage of opportunities, doing a better job of risk management and protecting their farm in the process," she said.
High-income farms also do a better job managing their capital expenses. Until 2014, both high- and low-income farms spent about the same amount in machinery, but during the past five years, high-income farms invested $200 per acre less on machinery, which includes depreciation, interest expense, intermediate interest, machinery leases, fuel, repairs and custom hire.
They also tend to be low-cost producers. FINBIN data shows there's a 30% spread between high- and low-cost producers, but the lowest cost producers also get an average of 10% higher yields. The result is a $1.87-per-bushel difference in break-evens.
"It's about being a little bit better at a lot of things," Van Nurden said. "So, be a little better at production, a little bit better at marketing, a little bit better at cost control and a little bit better at capital management. All of those little things add up to a big impact.