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Making a profit in agriculture?
Dr. Victor Martin

The Drought Monitor, as of this past Tuesday, shows the pattern of last week lessening a bit with extreme and severe drought encompassing much of Northwest and Southwest Kansas as last week. Most of Barton, Stafford, Pawnee, Rice and Reno counties are now listed as abnormally dry as opposed to moderate drought. This doesn’t include the rain/snow that fell in parts of Kansas last Wednesday. The six to ten-day outlook (Dec. 9-13) indicates slightly above normal temperatures for the state. Precipitation should be normal to slightly above normal. The eight to 14 day outlook (Dec. 11-17) indicates normal temperatures and below normal precipitation.  

2020 has certainly presented challenges for everyone: trade wars, COVID-19, weather and elections have impacted everyone. The agricultural sector of the economy is no exception. Government intervention throughout the economy and with workers has been a topic of great debate and disagreement. Again, the Ag sector is no exception. Payments to producers to offset prices from the “trade wars” and payments related to the pandemic and other payments draw heated debate from all political sides and from the public in general. Today, instead of diving into these philosophical arguments, let’s briefly consider how producers make profits considering the environment they exist in.

• PRO = TR – TC. Profits equal total revenues (TR) minus total costs (TC). Total revenue is simply the quantity sold times the unit price. Total costs are simply the sum of the total fixed costs (TFC) plus the total variable costs (TVC). Fixed costs are those costs paid whether or not you produce anything or not and include items such as rent, loan payments, and so on. Variable costs are only incurred when something is produced. Costs come from the factors of production: land, labor, capital and management.

• Revenue increases the more you sell but that doesn’t necessarily mean you have increased profits. That is a function of how much your costs are. That is a function of the next bullet point.

• Actually making a profit on what is sold is a function of how much it costs you to produce each unit you sell. Producers with low or no fixed costs are in a better position to make a profit. Those who are only incurring variable costs are in a much better position to make a profit. But that doesn’t mean they will make a profit,

• Producers are primarily in a situation of perfect competition. In English, this means they are price takers. They have no ability to determine the price of what they sell. They take it or leave it. Which means their ability to make a profit is determined by their ability to be efficient. And efficiency is determined by minimizing costs of production. Sounds simple but producers must deal with the last bullet point.

• Producers in the U.S. are indeed efficient, maybe too efficient over the last many decades. The result is typically a surplus. This was addressed by increasing exports meaning international markets and competition with other producers. And also finding alternative uses such as biofuels and plastics. Another compounding factor is that many Ag products have limited shelf life or in the case of livestock take money to keep waiting for higher prices. Add in the vagaries of weather or the opposite which results in bumper crops. Finally consider that while producers may be in perfect competition, the markets they sell to are becoming more and more concentrated.

All of this means that in spite of being efficient, good managers, it can be impossible to make a profit.  

Dr. Victor L. Martin is the agriculture instructor/coordinator for Barton Community College. He can be reached at 620-792-9207, ext. 207.