Farm size matters when it comes to profit

Pennsylvania farmland

UNIVERSITY PARK, Pa. — Many would argue that bigger doesn’t necessarily mean better.

But when it comes to the profitability and survival of Pennsylvania farms, size apparently matters, according to a report compiled by economists in Penn State’s College of Agricultural Sciences.

Theodore Alter, professor of agricultural, environmental and regional economics, and Theodore Fuller, development economist, both in the Department of Agricultural Economics, Sociology, and Education, co-authored the report, Pennsylvania Agriculture: Where the Action Is!

Incorporating data from the U.S. Department of Agriculture’s 2012 Census of Agriculture — the most recent available — the researchers looked at farm size and farm incomes, with an eye toward determining what classes of farms can better weather low commodity prices, which have fallen sharply since the census was completed.

The report includes color-coded maps with county-level data and makes liberal use of graphs and charts to illustrate the state of Pennsylvania agriculture in 2012.

Low commodity prices

“Many sectors of Pennsylvania agriculture are in a tight spot in 2017,” said Alter, who is co-director of Penn State’s Center for Economic and Community Development.

“The prices farmers receive for four major commodities — milk, corn for grain, soybeans and wheat — have been volatile and have declined in the last five years, likely cutting profit margins and farm incomes. And that raises the question: Which farms can adjust and survive an extended decline in commodity prices?”

Fuller noted that the long-term trend nationally, including in Pennsylvania, has been an increase in the number of “large” farms and a decrease in the number of “small” farms.

“It’s too soon to draw conclusions about how the fall in commodity prices between 2012 and 2016 has influenced farm size and numbers, but a close look at Pennsylvania farms in 2012 suggests that farm incomes are closely linked to farm size,” said Fuller.

Farm size

In their analysis, the researchers grouped the 59,309 farms that existed in Pennsylvania in 2012 into four categories: 2,901 “Mega-Farms” (sales of $500,000 or more), 8,913 “Large Farms” ($100,000-$499,999 in sales), 16,728 “Medium Farms” ($10,000-$99,999) and 30,767 “Small Farms” (sales under $10,000).

Mega-farms accounted for $4.6 billion in farm product sales or 62 percent of the state’s total.

That compared to $2.2 billion in sales for large farms (29 percent of the total), $0.6 billion in sales for medium farms (8 percent of the total), and $0.1 billion in sales for small farms (1 percent of the total).

The average net cash income on those sales was $451,620 for mega-farms, $74,316 for large farms, and $5,545 for medium farms.

However, the average cash income for small farms was in the red to the tune of more than $7,100.

About nine of every 10 mega-farms and large farms — 92 and 88 percent, respectively — had a gain in net income, and 68 percent of medium farms did as well. On the other hand, only 23 percent of small farms saw their net income rise.

Farm production

The economists also looked at the relationship between productivity and farm size, and they found that mega-farms and large farms outpaced medium and small farms on three key productivity measures in 2012.

For example, small and medium farms lagged on average milk sales per cow, which brought in $100 and $1,500, respectively.

By comparison, large farms sold $3,500 of milk per cow, and mega-farms collected $4,100 per cow.

Likewise, the average number of bushels per acre of corn for grain ranged from 99 for small farms to 132 for mega-farms.

Farm expenses

Farm expenses as a percent of product sales told a similar story. Expenses were 76 percent and 73 percent of sales for mega-farms and large farms, respectively.

Medium farms’ expenses represented 92 percent of sales, and small farms had expenses that were 344 percent of sales, fueling their negative net cash income.

“Not surprisingly, these numbers suggest that productivity feeds farm incomes,” Alter said.

In light of declining commodity prices in recent years, not all farms may have the capacity to adjust and continue farming successfully, Fuller said.

“Is bigger better? These data suggest that it’s a good bet if the goal is long-term profitability.”

The full report can be found online at:

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