by Michael Langemeier and James Mintert, Center for Commercial Agriculture, Purdue University
There are numerous reasons why a farm may want to expand including the following: reduce costs, improve profit margins, improve asset utilization, bring in new family members, invest retained earnings, and more fully utilize the skills of key managers (Boehlje and Langemeier, 2016).
The first three reasons are related to economies of size. In general, larger businesses have lower per-unit costs, higher profit margins, and are able to more fully utilize assets such as machinery and buildings, which improves the asset turnover ratio.
Larger businesses also tend to retain more of their retained earnings (net farm income minus owner withdrawals), investing these retained earnings back into the business is a common strategy in family-owned businesses such as farms.
In addition to the factors noted above, it seems logical that producers that are more optimistic about the future are more likely to expand their businesses. This article explores the relationship between producer sentiment and farm growth.
Ag Economy Barometer
The Purdue University-CME Group Ag Economy Barometer index is computed each month to gauge producer sentiment for a group of U.S. agricultural producers (Mintert and Langemeier, 2023). The barometer’s index for February 2023 was 125 indicating that average sentiment was more positive than during the index’s base period (i.e., fourth quarter of 2015 and first quarter of 2016).
The Ag Economy Barometer index is sub-divided into two sub-indices: the Index of Current Conditions and Index of Future Expectations. Index values for February 2023 for the two sub-indices were 134 for the Index of Current Conditions and 121 for the Index of Future Expectations.
In February 2023, the producer sentiment survey also posed a question pertaining to farm growth. Specifically, survey respondents were asked what annual growth rate they expected for their farm over the next five years. The results for this question can be found in Figure 1. Approximately 50% of the survey respondents said their farm either had “no plans to grow” (33%) or “plan to exit or retire” (16%).
Respondents who expect their farm to grow “less than 5% annually” or “from 5 to 10% annually” represented 19% and 22% of the total respondents, respectively. The percentage of respondents who expect their farm to grow 10% or more represented approximately 10% of the total respondents. To provide some context to these percentages a 5% (10%) annual growth rate would result in a doubling of farm size in 14 (7) years.
Given that most of the survey respondents are full-time farmers, it may be surprising that approximately 50% of the respondents have no plans to expand their operations.
It is important to remember, however, that at any given time, there are farms that do not have a successor identified. These farms are often starting to wind down their operations and have little or no interest in expansion.
Barometer surveys have included the farm growth question annually starting in February 2016. Interestingly, the percentage of farms with no plans to expand has stayed relatively constant over the years. For example, in 2019, the year before COVID-19, 50% of the survey respondents expressed no plans to expand their farms (38% had no plans to grow and 12% planned to reduce their farm size).
Differences in Producer Sentiment among Farm Growth Categories
What explains the wide differences in farm growth prospects among respondents to the Ag Economy Barometer survey? We don’t have information pertaining to each survey respondent’s farm size or financial metrics. However, we can create a producer sentiment score for each individual farm.
Table 1 contains the Ag Economy Barometer index calculations, as well as the two sub-indices, for respondents falling into three farm growth categories. The first category is composed of respondents who expect to reduce their farm’s size, the second category is composed of respondents who expect their farm’s size to remain unchanged, and the third category by respondents who expect to expand their operations in the next five years.
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