Findings

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Large farms are becoming a major economic force
More large farms are profitable and they earn more
Net incomes varied widely by farm type
Margins, while falling, fell the least among large farms
The differences between large and small grow as large farms invest more
Key ratios highlight higher debt as well as higher turnover and profitability for large farms
Conclusions

Large farms are becoming a major economic force

While smaller farms dominate in numbers, large farms carry the economic clout in both revenue and profits. Farms with annual revenue of $500,000 and over made up just 11% of all Canadian farms in 2005 but accounted for 55% of revenue as illustrated in Figure 1.

The economic impact of size is undeniable and the cutoff for potential economic viability seems to be around $250,000. Below that, the majority of farm family income came from off-farm sources. For farms with revenue of $250,000 and over, on-farm income and government payments were the major earning sources for the farm families (Figure 2). Above $499,999 in annual revenue, net farm income became the largest contributor to family income.

Note that the share of income from government payments does not fall dramatically with size, especially for farms with revenues up to $2,499,999. However, it declines for each successive revenue class above $499,999. Farms in the $100,000-$249,999 revenue class obtained about 38% of their income from government programs, but government support still contributed 30% for farms in the $1,000,000 to $2,499,999 class in 2005.

The greatest proportion of government payments went to large farms because of their sales volumes although smaller farms received a greater percentage of payments relative to revenue. In 1999, the smallest farms typically received 6.5 cents/sales dollar and the largest received 1.1 cents/sales dollar. In 2005, the smallest received 15 cents/sales dollar and the largest received 3.4 cents. However, of the $2.8 billion in government payments received by farms in 2005, $1.5 billion went to farms with revenues greater than or equal to $250,000.

More large farms are profitable and they earn more

While making money was a challenge for most small farms, many of the largest farms fared reasonably well. In Figure 3, each data point represents the mean level of net income for a particular quartile and revenue class. In every revenue class, farms in the first net income quartile lost money in 2005. However, as revenue increased above $499,999, farms in the top two quartiles earned net incomes in excess of $100,000. For farms earning at least $2.5 million, net incomes for the upper three quartiles were at least $200,000.

Net incomes varied widely by farm type

There were marked differences in incomes by farm type. Table 2 shows average net farm income, excluding government payments for the bottom and top income quartiles in each revenue class above $250,000. Beef farms in the first quartile experienced the greatest average losses in 2005 across all revenue classes while dairy was the only sector to experience any positive earnings. Among the top performing quartile, several types of farms in the two highest revenue classes enjoyed net farm incomes exceeding $499,999. Interestingly, beef farms earned the most in both $1,000,000-$2,499,999 and $2.5 million and over classes.

Margins, while falling, fell the least among large farms

Operating margins have fallen for all farms but they have fallen less in percentage terms among the large farms. Average margins in 2005 were 6.5% for farms in the $250,000-$499,999 revenue class, 9.9% for farms with revenue from $500,000 to under $1 million, 12.1% for farms in the $1 million to under $2.5 million revenue class and 10.1% for farms with revenue of $2.5 million and over. These percentages have fallen from 16.7%, 14.6%, 14.0%, and 11.2% respectively in 1999. The change in margins was inversely related to farm size, with the largest class experiencing the smallest decline in operating margins.

The differences between large and small grow as large farms invest more

Figure 4 shows average net investment levels in 2005 by revenue class and quartile. One of the surprises is the general consistency of investment across quartiles for the first four revenue classes. Investment was fairly flat across quartiles, though there was some variability from one to the next. For farms with at least $1 million in revenues though, there is a clearer trend towards greater capital investment for the upper quartiles. Overall, the significant difference in investment between large and small farms may make it increasingly difficult for smaller firms to compete in the future.

Key ratios highlight higher debt as well as higher turnover and profitability for large farms

Large farms had sizeable levels of debt and high debt to equity ratios, but they also had more efficient sales to asset ratios and a higher return on equity, as illustrated in Table 3. The ratio of sales to assets shows a big increase with revenues of $2.5 million and higher. The largest farms are much more efficient in generating revenue from their assets than smaller farms. Note that on every measure excepting debt to equity for $250,000-$499,999 farms, ratios deteriorated between 1999 and 2005. This was a difficult period for Canadian farms of all sizes.

Conclusions

The trend toward larger farms seems to be strongly reinforced by the financial results achieved by those farms. Debt appears to be an essential component of growth but for most farms, the payoff resulting from investment is significant. Higher incomes and higher investment may ensure the trend continues. Although many worry that these larger operations will increasingly become non-family farms, results from the Census of Agriculture (Statistics Canada 2007) indicate that the opposite is occurring: while there are a growing number of corporate farms, the proportion of those corporations owned by families is increasing. The family farm of the future may be corporate, multi-generational and focused on growth and profitability. That in turn may be beneficial for the both competitiveness of Canadian agriculture and for farming families.