Converting from Low to High Margins

January - March 2003

Craig Chase , farm management field specialist

Situation
The agricultural industry in Iowa and the U.S. is dominated by commodity production, which is a high-volume, low-profit margin industry. Narrow profit margins force farm businesses to grow in assets, output and labor income to remain profitable. Small- and medium-sized farms are faced with the difficulty of remaining economically viable in this business environment because they rely solely on family capital versus venture capital. Many farmers are asking how to convert their current low margin commodity production system into one with a higher margin structure.

Interest is increasing in vegetable production, which is a low volume, high-profit margin industry. Two acres of vegetables could net $7,200 whereas it could take up to 360 acres of corn and soybeans (at $20 net per acre) to net that amount. Total machinery and land investment for the two-acre vegetable farm could be under $12,000 whereas the 360-acre corn-soybean farm could have over $800,000 invested in land and equipment.

Response
Although small acreage vegetable production is unlikely to replace commodity agriculture in Iowa , it is a way to add income to small- or medium-sized farm families or acreage owners with little invested capital. New vegetable producers, however, are faced with a multitude of questions such as how are vegetables grown, what product mix of vegetables should be grown, what markets are available and how do they compare regarding economic returns? To help answer the first question, Iowa State has developed a series of horticultural bulletins. To answer the profitability questions, researchers have begun to look at vegetable crop profitability and marketing outlets for four small vegetable producers in Iowa .

The study completed the first year of a multiple year project. Initial economic analyses were conducted for eight herb and vegetable crops: asparagus, basil, carrots, eggplant, garlic, snow peas, strawberries and tomatoes. Each crop, except strawberries, was converted to a standard 4 ft. x 100 ft. bed. Bed numbers per acre vary by density, but 60 beds per acre would be common. Crop net returns were calculated by subtracting all costs (including land and labor) from gross revenues. Net returns varied widely but averaged about $60 per bed ($3,600 per acre). Additional analyses were conducted to obtain total costs per marketable unit, allowing producers to compare costs with potential markets. One producer used his newly-found cost information to bargain a selling price to a local restaurant knowing he was getting paid for his labor, land and crop management.

Impact
The project will continue to gather information from these producers for at least another year (a third year may be possible, based on funding). Additional producers are being sought to verify the production numbers obtained so far and additional crop budgets will be developed. Preliminary extension publications will be written following the second production year of the program.

Iowa State University Extension is looking at and beginning to answer questions regarding economics of small-scale vegetable farming. With this added information, potential vegetable growers can make informed decisions regarding whether vegetable crops should be grown given the potential risks and rewards. If interested in joining the project or learning more about economics of vegetable production, contact Craig Chase at 319-234-6811 or cchase@iastate.edu.

Page last updated: July 7, 2006
Page maintained by Linda Schultz, lschultz@iastate.edu