Often when we talk about growing a business, the assumption is that the way to do it is by growing in size. In agriculture, that could be farming more land, increasing the number of livestock, buying more quota, among others.
One of my favourite mantras is that “better is better before bigger is better.” In other words, expanding and sustaining a successful farm operation doesn’t always mean you need to be bigger. The reality is that expansion is just one of a number of ways to grow your operation.
Determining why you want to grow and the fit with your strategic vision is a critical first step, even before deciding on how you will grow. Are you bringing in other family members, looking to improve productivity, aiming to capture economies of scale, or making better use of your assets? Having a clear view of the “why” will help you assess the “how.”
So if expanding the size of your operation isn’t the only way to grow, what are the other options? There are several. You can focus on one enterprise to improve productivity, drive out costs and increase profit margins. You can produce more with the same footprint to spread fixed costs over more output. You can diversify by adding a new enterprise.
Finally, also consider your options to move up or down the supply chain into production or processing. When considering value-added processing, you could look at transforming something you grow into something gourmet.
Following are some examples:
A livestock and crop farmer could move to only produce crops. The focus is on being an above-average producer with high efficiency, lower costs and higher profit margins.
A greenhouse grower could increase the density of crop production to generate more product per square metre. This results in more output from the same fixed assets.
A beef farmer could add cash crop production to diversify the operation. Price cycles in agriculture are such that when one commodity is down, chances are another commodity is up. In this instance, diversification spreads out the risk.
An oilseed producer could move into specially processed grains or oilseeds. By moving up the supply chain, more value can be captured by the producer.
A dairy farmer builds a barn and buys more cows and quota. This example of increasing the size of the operation often results in economies of scale.
With so many choices of ways to grow your operation, how do you decide which one is right for you? First, go back to why you want to grow. Is there any one option that satisfies your specific reasons for considering growth? Consider your options in terms of strategic fit, projected returns, risk, the amount of capital required, the cost and ease of entry and exit, how much value will be created. Also consider if you have the skills and competencies within your current employees and in management to be successful.
When you are considering your options, be sure to involve other people who will be impacted by the changes. I recall a mid-sized dairy operation that was considering expanding by purchasing more land, building a new barn and buying more quota. When the younger generation was brought into the discussions, it was clear that their goals were quite different, and that taking on the debt that would be required to finance the expansion was not something they were comfortable with. As a result, the cows and quota were sold and the farm is now a cash crop operation.
Once you are clear on what you want to achieve by growing your operation, and you’ve explored the different ways you can grow, and you know that there is alignment with other people in your organization, it’s time to put pen to paper and develop the business plan. A business plan will allow you to incorporate the growth with your existing operation and will help you do an internal and external analysis of your chosen option. You will then be able to model the impact on your current operation’s balance sheet and income statement and how you will finance the growth plan.
Taking time to explore the options for growth is time well spent. As with many things in life, what’s right for you and your operation may be very different from what’s right for your neighbour or another farm business operator. Successful farm businesses incorporate business planning into their decision-making process to ensure all options are considered and the decisions that are made are the best ones to enable the farm business to continue to grow and to thrive.
Gwen Paddock, senior director, agriculture at RBC is a specialist in agribusiness. Since earning her B.Sc. with a major in agriculture economics she has been working with agriculture clients. A farmer at heart, Paddock was raised on a beef cow-calf farm outside Guelph, Ont., and participated in 4-H and Junior Farmers.