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Farm Size & Margin Managment
Jun 05, 2011
Does farm operation size determine profit levels? Do more acres equal more profit to the bottom line? What are your management skills and what are your specific goals? There are efficiencies of scale with more acres, however; more acres won't magically improve your margins without proper management.
Over the past several years I've worked with many different growers in helping them document and better understand their cost of production. I’ve observed in most every case that size is not a direct factor when it comes to profitability or effective margin management. I‘ve noticed that operations with a long-term strategic plan are the most effective margin managers. These growers tend to always have a focus on the specific details of their operation. They set a priority on documentation, agronomy, marketing, cost of production analysis, information management, and accounting. All of these practices should be used whether you have 100 acres or 10,000 acres.
These top managers also have one common trait. They focus their time and energy on what they do best within their operation. They are willing to hire experts or partner with others in order to be effective in areas they have challenges. For example, you may be a great mechanic but struggle with agronomic information. You may be good at making marketing decisions but lack in accounting or information management. Whatever the case may be, try to focus on what you do well and enjoy. If you can focus on the projects you enjoy, your efficiency will improve to its full potential. When it comes to the things you don't enjoy or aren’t good at, hire professionals or partner with someone to complete those tasks. Both your productivity and quality of life will improve! The more complex our industry becomes the more difficult it is to be effective in every area by yourself. As we move into the summer, I'll be expanding on this topic in more detail.
As I work on cost of production analysis with many unique operations it's been interesting to see how priorities differ. Last March I worked with a 1,000 acre grower with the goal of making $100 per acre margin. He was looking for an overall bottom line profit of $100,000. Some of his goals were to improve risk management and pay down debt. Less than one hour later, I found myself having a discussion with another producer who had the same goal of $100,000 bottom line profit. The difference with the second grower was that he had 2000 acres instead of just 1000. This producer had set a goal of making $50 per acre margin. The second producer had been going through some significant growth and had several line item expenses that were higher. The second grower also had acreage growth as one of his priorities. There is basically no one correct answer for everyone. Set your own individual mission based on your long-term plans and build goals to accomplish success for your operation. Every region of the country is unique. Every farmer is unique.
Caution: Another observation is with respect to overall growth. I’ve noticed some antagonism in certain parts of the country as operations within the same area choose different business models. Some are focused on growth, some may be focused on risk management, and others may be focused on just refining and improving their existing operations. Be careful to stay focused on your specific operations plans and strategies. I've noticed in some areas, frustration and even anger among producers regarding land or growth opportunities. Frustration, jealousy, or angry emotions will never allow for clear and concise business decisions. Staying focused on your individual mission and goals will pay dividends much more effectively than wasting time with concern of what your competition is doing. Keep in mind, a focus on profit margins rather than just acres farmed may be the model that creates the best long-term solution. Farm size is ultimately your personal choice.
If you have questions on cost of production analysis or margin management please feel free to e mail or call me with your questions. We have several effective tools available.