Agriculture operates in a global market and prices (input and output) are influenced by factors around the world and these impact on farm profits. In addition, agriculture is a complex business and the farm operator can make the difference between success and failure. There is a wide variation in profitability across farms but to maximise investment performance operators must strive for or be in the top quartile of performance.

Of the main ‘cash grain’ crops, corn and soybean are more profitable than wheat, but specialist crops (Graph 2 and Key Facts) such as rice and permanent crops offer higher rewards but with significantly higher production costs and capital requirements. We focus on cropping but there are opportunities in intensive (pigs, poultry) and extensive livestock (cattle) operations.

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^{Source: USDA}

Agriculture is a medium to long-term investment and apart from the annual weather variations commodity price volatility must be factored into business plans. This has increased over the past 10 years as the supply/demand balance has tightened.

A major drought in 2012 caused a significant spike in corn and soybean prices, which followed a long period of relatively stable prices with low volatility. The long term price trend has been positive and we expect this to continue with increasing volatility.

Range of crops

Apart from the range of profitability across different crops, there is also a range within crops across the regions of the US. Soil types, climatic conditions, scale and proximity to key transport links and storage facilities are all factors which contribute to these variations. Graph 3, using corn as an example, illustrates some of these variables across the two key corn-producing farming regions.

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^{Source: USDA}

Higher average crop yields and financial performance are recorded in the Heartland despite the average enterprise size being lower than the neighbouring regions.

Our analysis of this region shows that enterprise size has been growing faster, to increase efficiencies of scale, and has increased by 40% since 1996. This is in contrast to the Northern Great Plains (30%) and the Prairie Gateway (8%).

The Heartland is close to key transport links through the Mississippi river and benefits from good soils and climatic conditions, which all contribute to higher performance.

These provide a good foundation for further performance growth and efficiencies using the latest technologies, which include improved genetics combined with soil and plant mapping using GPS to maximise input efficiencies and a sustainable use of resources.

Government support

US farmers receive government support and these payments are regarded as an important contributor to farm incomes. These were expected to bring the total payments down, but lower than forecast corn prices have had the opposite effect and total payments in 2015 are expected to exceed $12 billion.

In addition, there has also been a shift from ‘Fixed Direct Payments’ to ‘revenue based crop insurance’ as illustrated in Graph 4.

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^{Source: USDA}

Non-farming landowners are, on average, able to capture a share of these subsidies. There is also federal funding in place for agriculture but the levels of funding vary significantly between states.

The bulk of this federal funding is tending to support smaller farms. This helps to maintain the social fabric of rural areas through being delivered to states which do not have as large scale production, and represent small proportions of the total export income from agriculture.

Specialist crops - Key facts

■ High value crops include rice, cotton, tree nuts (such as almonds, macadamia and pistachio), orchards, soft and citrus fruit, vegetables and grapes.

■ These crops tend to be intensively cropped and regionally located. For example California, according to USDA statistics, was the leading fresh market for vegetables and melons in 2014 producing 60% of the total US value of these crops.

■ The abundance of water, including for irrigation, in the Mississippi Delta creates the opportunity for intensive field cropping. Key crops are cotton and rice but the agronomic conditions are ideal for a variety of high value crops.

■ High value crop production is a viable alternative to commodity cash crops but it often requires:

• increased management and marketing skills
• higher capital and labour input
• dedicated storage and distribution facilities – the output is often perishable – specialist markets and an increased presence along the supply chain

■ As with any investment decision, deciding between commodity cash cropping and more intensive high value farming operations is all to do with managing the risk and return profile