April 4, 2002

Needed: More ‘Marginal’ Farm Businesses

The term "marginal" farmer or rancher used to refer to producers who either operated in some substandard manner or managed financially troubled units that were on the brink of bankruptcy. Today, in the era of value-added agriculture, "marginal" refers to producers who operate their business with a focus on margins, says Cole Gustafson of the North Dakota State University agribusiness department.

A margin, Gustafson says, is simply the difference between per-unit selling costs and variable costs of production. "Value-added producers seek out niche markets that offer them the highest margin for their product," he says.

Producing commodities like corn or wheat is traditionally a low margin business. Compounding the problem, agricultural prices are highly variable over time.

"When any profitable opportunities appear, farmers and ranchers expand production in an effort to increase profits. But, in the aggregate, total production increases and margins erode to zero as surpluses develop," Gustafson says.

The challenge to the value-added producer is to establish and maintain a favorable margin. The focus, he says, should not be on physical production but on the revenue produced.

For example, says Gustafson, a corn producer should be less concerned with yield per acre and more concerned with the revenue per acre that high starch corn, waxy corn or some other unique product can generate. The physical yield might be less, but total income and profit can be higher if there is a niche market for a specific product. In theory, a producer should be able to maintain a profitable margin and be less dependent on shifts in the commodity market.

"If you are not working with a large enough margin to start with, even a small drop in price can be disastrous," he says. For example, a 5 percent drop in prices for a farm operating on a 10 percent margin would require a 100 percent increase in acreage to generate the same level of income. On the other hand, a farm with a 30 percent margin would only have to increase acres by 20 percent to maintain level of income.

Producers in value-added markets search out markets that are unique and not easily entered by others. They may have a production process or resource that others can’t easily duplicate. So, says Gustafson, when they start to realize a margin on sales of their product they are able to preserve it and capture the benefits for themselves.

Working with a higher margin means price fluctuations are less damaging, but working with a unique product or market probably also means more price stability, he says.

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Source: Cole Gustafson,(701) 231-7096, cgustofs@ndsuext.nodak.edu
Editor: Gary Moran, (701) 231-7865, gmoran@ndsuext.nodak.edu