Photos by Deb Gau Garen Paulson spoke to an audience of southwest Minnesota farmers during January’s Winter Crops Day at the Southwest Research & Outreach Center in Lamberton.

LAMBERTON — It’s a big question facing farmers, Garen Paulson said — does farming more acres mean better profits?

Based on financial data from southern Minnesota, bigger isn’t necessarily better, said Paulson, assistant Extension educator at the University of Minnesota Southwest Research & Outreach Center in Lamberton.

“I think we need to look at improving our efficiency before we can get bigger,” he said.

Paulson was one of the presenters at January’s Winter Crops Day at the SWROC. Using data from the FINBIN farm financial database, Paulson looked at the differences in production and other costs for farms of different sizes.

“FINBIN is a collection of about 3,500 farms from several states in the upper Midwest,” he said. “The group that I work with, Southwest Minnesota Farm Business Management, is a part of that FINBIN data. It’s actual on-farm research. It’s not survey data.”

Paulson said that when considering whether to farm more acres, farmers are aware of the idea of economy of scale.

“Theory says this should work, right? We should be able to add a few more acres, our costs should go down, more profit to us. But what about in practice? Is that really what happens?” he said.

Paulson said he looked at FINBIN data for cost of production by farm size.

“There was about 900 farms, and I looked at just the southern third of Minnesota. I looked at corn on cash rent, and we can sort it into eight groups by size,” Paulson said. The groups ranged from farms with less than 50 acres of corn, to more than 2,000 acres of corn per farm.

“Most farms in southern Minnesota are roughly half corn, half beans. So you would double those acres to get the actual farm size,” Paulson said.

Paulson said he looked at data for net farm income first.

“Profits have a huge impact on what our costs of production are.” Paulson said the data showed increasing profits up until “some very good years” around 2010 through 2012. Since then, profits were up and down, between periods of good times and tight profit margins. It’s not a new phenomenon, he said.

“I can take you back to the ’90s, to the ’80s, to the ’70s, and it’s that same up and down,” he said.

When profits go up, the cost to grow an acre of corn also goes up, Paulson said. But the peak in cost comes a year or so after the peak in profit, he said.

Using FINBIN data for corn on cash rent, Paulson also looked at the average costs of production for a bushel of corn in southern Minnesota in times with tight margins, and in good times. In the tight margin times of 2015-2019, the average cost of production was pretty consistent across farms of different sizes.

“In theory, we should see as farms get bigger, the theory is it costs less to grow a bushel of corn. We certainly don’t see that in the data,” Paulson said. “My lowest group is $3.74,” he said, while the highest average production cost was about $3.77 a bushel. “It’s very steady over the tight margin times.”

During good times, like 2012 and 2013, and 2020 through 2023, the data showed a different pattern in the average cost of production. The farms with less than 50 acres of corn, and the farms with more than 2,000 acres of corn, had the highest production costs, Paulson said.

“These groups in the middle here probably averaged $4.30, something like that. Our biggest farms cost about $4.50,” while the smallest farms averaged around $4.48, he said. “But, what was the average price of corn during that time? Five and a quarter. So there was some profits there.”

“During the tight margin times, my average price of corn was $3.80. There’s not much profit there. Just a couple, three, four, five cents,” Paulson said.

Paulson then went over the cost per bushel of agronomy inputs like seed, fertilizer and chemicals in both tight margin times and good times. The costs stayed pretty steady across different farm sizes.

“So, near as I can tell, these agronomy inputs pretty much cost the same for everybody, over the size of the farm,” he said.

Paulson said the data showed that bigger farms did have an advantage when it came to spreading the cost of machinery, equipment, and operator and management expenses over more acres. But the opposite was true for rent, operating interest, and labor.

“It takes our bigger farms more on a per-bushel basis to cover that rent, operating interest and labor, both in the tight margin times and in the good times,” he said.

While the data didn’t show a clear efficiency of scale for big farms, Paulson said, “I do know that better is better.” High-profit farms were ones that were efficient, he said.

When sorting farms by net returns, Paulson said, “The very highest-profit don’t necessarily farm the most acres, both in the tight margins and in the good times.” He said factors like consistently growing a good crop, being “expert marketers,” and being good at cost control all had an impact on profit.

“While we didn’t wee increased efficiencies with more acres, there wasn’t really a decreased efficiency,” Paulson said. “So if you can see a profit margin, increased acres will work. The cost of production did not improve, but it didn’t get worse,” except when crop yields couldn’t be maintained, he said.

Paulson said the Southwest Minnesota Farm Business Managment Association could help farmers with getting a handle on their finances.

Paulson said the association is a group of 120 farms that collaborate with the University of Minnesota.

“We do a thorough analysis, we do confidential benchmarking with these folks. And then in a confidential way, they share that data with the university so we can do research on it,” he said.

Paulson said the group was formed in the 1930s, by a group of farmers who wanted to implement better farm management practices.