LUBBOCK, Texas – It should come as no surprise to anyone who’s ever participated in or observed a farm operation, but success depends on more than just timely rains and an open harvest season.
Irrigation doesn’t guarantee success, either. Diversification provides no silver bullet. “The key factors to anticipate future success in a farm operation include ratios of expense to receipts, income per acre and debt to assets,” says Texas Extension risk management specialist Jay Yates.
Yates discussed the role of technology in managing farm risks during the recent Southwest Crops Production Conference in Lubbock. “Expense to receipts is critical,” he said. “And keeping debt low makes a huge difference in profitability.”
He said attitude also plays a role. “A more progressive attitude tends to be more successful.”
Yates said analysis of some 400 farm operations that participated in a FARM Assistance program, showed that successful farmers are not afraid to try new things, but “ they may not always be the first to try them.”
His analyses showed that 59 percent of West Texas cotton acreage had no seed technology. But 36 percent did use Roundup Ready technology. Only 2 percent were planted to stacked gene varieties and 3 percent to Bt cotton varieties.
“Bt has not been as important in the High Plains as in other locations,” Yates said, “because of limited bollworm pressure.”
Yates’ data also show that dryland farms continue to play an important role in High Plains production. Farmers still grow 44 percent of their acreage without irrigation. But 40 percent use pivot irrigation; 11 percent have furrow irrigation and 5 percent have added drip systems.
Yates said pivot irrigation use was evenly divided among the most successful, the middle level and the bottom tier growers (38 percent, 30 percent and 32 percent, respectively).
Of the top growers, 55 percent compared to 18 percent of the middle level and 27 percent of the bottom level used drip systems.
“And we have 43 percent of dryland producers in the successful range. The key is low cost,” he said.
Yates said data show that the top farms show a return on assets of 23.8 percent. The middle level comes in significantly less than that but still a positive 7.8 percent. The lower level comes in at a negative 18.8 percent. The average of all farms was 4.3 percent
Crop production accounted for 87.2 percent of the top farm enterprise mix with 1.6 percent in livestock and 11.2 percent with diversified operations.
Yates also noted that livestock operations offered the lowest return on assets. Crop farms claimed the best return at 7.6 percent. Diversified farms came in at 1.6 percent.
“Diversification is not necessarily a key to success,” Yates said.
“Top farms are able to stay above break even but the bottom group consistently reports negative incomes.”
Yates said the most successful farms report less off-farm income than do the other two ranks. “The successful ones concentrate on the farm operation,” he said.
He said the middle group actually shows the lowest debt to asset ratio. “The top rank is willing to take on a little more debt if it shows a return on investment,” he said. “Anytime a farm gets more than a 50 percent debt load it hits a danger zone.”
Yates said the FARM Assistance program provides a financial analysis of alternative operating strategies for farms.
“This is a strategic planning tool designed to analyze the financial future of farm and ranch operations under risk,” he said.
“Our goal is to evaluate the future impacts of management decisions before a commitment is made.”
Farms participating in the program submit current financial statements, production plans for all enterprises, farm program and insurance data and non-farm activities. The projection looks out 10 years and incorporates risk in both production and markets. It also reports key financial performance measures and a comparative analysis of alternative enterprises.
“We want to determine where the operation is today and identify the structure of the operation,” Yates said. “Then we develop a 10-year projection, including risk factors.”
Projections also include an average return on assets, an average 10-year annual percentage change in real net worth and the average probability of cash shortages.
“Finally, we correlate current measures to future success.”