Thursday, September 16, 2010

Small Farm Profit Margins

Small farms appear more profitable if net farm income is examined rather than operating profit margins. Although most small farms had a negative operating profit margin, a majority of each small-farm type generated positive net farm income.

The different results are attributed mostly to differences in the way the two measures treat unpaid labor by the operator and other persons. Operating profit—the numerator of the operating profit margin—is calculated with a deduction for unpaid labor to reflect the opportunity cost of labor provided without payment. Net farm income, in contrast, makes no such deduction.

Average net farm income varies with sales class and is low for small farms, compared with that for large and very large family farms. The variation in net income reflects the wide variation in gross farm income, which ranges from roughly $25,000 for the average retirement and residential/lifestyle farm to $1.3 million for very large family farms, on average.

source: usda [pdf]