Managing Profitable Farm Expansion: From the Office to the Field
January 24, 2017
A graduate of Iowa State University studying Ag business, economics, international Ag, and political science, Dakota went to work for a large diversified farming operation and private equity group in central Iowa. Working in Business Development, Dakota aided in the growth of the farm in additional states through development, acquisition, and management. Today, Dakota works with professional farms in the western Corn Belt helping them reach their potential and meet their growth goals (including Farm Expansion).
How do you define farm expansion?
Farm expansion is often defined as “getting bigger,” but the action of expanding is actually far more complex than that. Most farmers today can quickly identify the farms in their area that are growing in acres, people, facilities, or even equipment. But what about their balance sheets? Expansion and growth still refers to visible, physical aspects, but now more than ever farmers also want to grow profits, find new revenue streams, or even build new capabilities.
Farm expansion does not have to mean added complexity— with the right tools and processes in place, farm expansion can be “business as usual” as opposed to increased difficulty and headache. Rest assured a 2,000-acre farm without the right tools and processes can be more of a headache for the CEO than an operation that is 20,000 acres with the right systems and organization.
Why, and how, is farm expansion critical to the long-term success of a farm business?
Let’s be very clear, consolidation in farming is real, and it’s not slowing down. Sadly, right now there are a number of farms going out of business in today’s commodity market. But on the other side of struggle is opportunity. Farms are expanding all over the country, even in economic environments like these.
The key to taking advantage of these growth opportunities is understanding your own financial health, having the right processes and tools in place, and the discipline to take advantage of only the opportunities that fit your vision. It’s not about acres, size of the bin site, or number of people. It is about meeting the long terms strategic goals of your business and strengthening your balance sheet accordingly.
Based on your experience working with farms, what are the 5 best practices that any farmer should keep in mind to make sure they’re tackling farm expansion effectively?
- Get your house in order. Know your cost of production, your profitable acres, have established streamlined SOP’s (Standard Operating Procedures), and understand your business top to bottom and inside and out. It’s hard to manage 5,000 acres well when you can’t manage your existing 4,000 acres very well. Getting bigger will not make you a better manager.
- Find better friends. Remember what your mom, dad, or mentor would always say growing up: “You’re the average of those you surround yourself with.” The same goes for your farm and benchmarking it against others. Many land grant universities create extension budgets to help farmers know where they stand, but these tools are not good enough for the best farmers. If you really want to grow your farm, benchmark yourself against the best. The best farms are pushing new boundaries on cost management, marketing discipline, and operational efficiency.
- Have scalable processes. Look around you, specifically at other non-farm businesses running revenues of a comparable size (or better yet, the size you’re aiming for). Are they tracking their inventories on pieces of paper in cabs of trucks? Are their settlement sheets buried in a pile of magazines from their suppliers? You need tools and processes in place to structure, track, and optimize the everyday workings of your farm. At a humble size some processes may seem excessive and unnecessary, but if 5,000 acres came up for rent right next door, would you be ready? The tools to help with that are available to every professional farm today.
- Cash flow. Cash flow. Cash flow. One of the most important analyses farms will do when evaluating growth opportunities is a cash flow projection. New opportunities need to cash flow for farms, but how do you project cash flow if you have no idea what your cost of production is, or how your 5-year marketing average compares to the market? Know what’s coming in and out (and when) so you know which kind of opportunities you’re looking for.
- Evaluate growth opportunities in the context of your goals. If you don’t know where you want your farm to be in 5, 10, or 20 years it is really hard to make the right turns and decisions to get there. Opportunities for growth presented or pursued need to fit your overall long-term strategic vision for your farm. Maybe that includes bringing additional family members back to farm, maybe that includes a cash-out, maybe that includes transitioning into niche markets. Growth needs to fit your strategic vision for the farm; otherwise it just becomes an expensive distraction.
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