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.