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Two-phase path to growth
Growth is the lifeblood of thriving farms. But how exactly do you do it correctly?
Farm expansion can allow you to bring in family members, which can enable the farm to survive and thrive for at least another generation.
Still, there are other factors you may not consider, like the impact of adding more employees.
“You may be an OK manager of employees you have had for 25 years,” says Mike Boehlje, Purdue University agricultural economist. “You know what they are thinking. But that may not be the case when you start adding the next set of employees.”
Boehlje and Brent Gloy, a Purdue University Extension agricultural economist, presented a two-phase growth framework at last summer's Top Crop Farmer Workshop at Purdue.
This first phase consists of focusing, intensifying, and expanding.
You should first strive to focus on a narrow activity that makes you a top-notch business person. For example, grain producers should be tweaking their production and marketing abilities to be best in class.
In this component, you need to transform yourself from plant manager to CEO.
A plant manger knows factors like crop yields and input costs; a CEO mentality takes this a step further by concentrating on metrics like operating profit margins and asset turnover ratios.
“When I do a business analysis, the first two things I examine are operation profit margins and asset turnover,” says Boehlje. “Most farming businesses have decent operating profit margins. But the asset turnover ratio is terrible for many of them. That is due to underutilized assets on farms.”
Boehlje says technology now exists for you to boost asset turnover ratio. One farm he works with has a goal of operating planting and harvesting equipment in the field for 22 hours per day with two hours of daily downtime for maintenance.
“With technology like GPS, it is possible to do this, and it will increase favorable asset turnover ratio,” says Boehlje. “You can use more equipment over more acres in a typical season.”
The “intensify” component also consists of you identifying slack resources in your operation.
“Every operation has resources that are not used efficiently,” says Gloy. Identifying and then booting them can fulfill both business focus and intensity.
Here's where you can capture the economies of scale that expansion brings. Historically, economies of scale have been overrated in grain production, says Gloy. “You don't have to have 9,000 acres to make money growing grain,” he says.
Boehlje and Gloy note, however, that may be changing.
“There are studies that suggest the curve might tip back up toward more acres,” says Boehlje. “Larger grain farmers get bigger discounts on equipment for multiple unit purchases. They get better access to product offerings and bigger seed discounts.”
Gloy and Boehlje advise going through the Focused Growth Scorecard courtesy of Purdue (see chart at the bottom of this page). Rank yourself on a 1-to-5 scale. If you rank on the high end, you're ready. If not, work through the low-scoring items first to boost your score before proceeding.
After working through these components, you're now ready for Phase 2, which includes the steps of replicating, networking, integrating, and diversifying.
This component mimics multiple plants owned by a business. Rather than boosting a 3,000-cow dairy operation to 4,000 cows, one dairy has installed 3,000-cow units in a dozen locations. This mimics a multiple-plant strategy that industry uses.
“They've determined that a 3,000-cow dairy is the most efficient size,” says Boehlje. “This is the way pork companies have done it, too.”
Replication also enables you to reap the benefits of geographic diversification.
“As you get bigger and bigger, you may start bidding against yourself for land in a small geographic region,” notes Boehlje. “This can drive up your cost profoundly. Branching out geographically can nix this and give you geographic diversification. This can help manage weather volatility by spreading land farmed over a wider region.
“There is road time involved, but once you get implements in a field, there is rarely downtime,” he says.
This concept can bring buying or selling advantages, including preferred customer and supplier networks. This enables you to glean better input buys. It's during this phase you may want to look at subcontracting out parts of your operation.
“This won't work for everyone, but subcontracting parts of an operation out is a common strategy for a number of ag businesses,” adds Gloy. “The seed industry uses networking extensively. They develop traits and then license them out.”
Click image to download a Focused Growth Scorecard (PDF)
In this component, you attempt to accomplish goals like slicing market access risk and improving supply chain product and information flows. If all goes according to plan, this enables you to capture more margin.
One example involves vertical integration by farmers owning their own grain or meat processing plants.
Be careful, however. “Most farmer-owned processing plants have not been successful,” says Boehlje. “If you do it, hire the best management you can and let them manage it.”
Gloy says ridding yourself of the middleman is risky. If you're entering processing, you may find that the middleman is doing something that's hard for you to mimic.
This is more complex than a livestock producer entering grain production. When markets are up, it's sweet. A down agricultural market, though, will sink both enterprises.
True diversification entails entering another business negatively correlated to agriculture's income stream.
Gloy says getting better before geting bigger is not a cliché. “That's the whole strategy behind Phase 1,” he says.
“You first need to objectively appraise your resources in terms of land, labor, and capital,” Boehlje says. “You need a profound understanding of the competitive environment. Get a handle on where trends are heading.
“Remember that growth requires a strong financial base,” he says. “Then, think about how, in the long term, you manage your business to meet your goals.”