The debate about whether farms should grow larger or stay at the approximate size they are now has been circulating for years.
Understanding the issues and making the proper management decisions on farm size can be complex.
Farms increase in size for different reasons.
Having the next generation return to the farm drives growth. When a son or daughter returns to the farm, they require a wage or profit share. They also want a role in management. Both require that the farm increase its productive base
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Per unit profit is another driver. Generally, profit margins are small. Doubling the size of the farm from 2,500 acres or more than 5,000 acres theoretically doubles the aggregate profit margin.
Growth can be a function of making efficient use of physical assets, such as the number of acres required to best use a new air seeder, combine or high clearance sprayer.
Financial efficiencies can also be achieved. There are little or no efficiencies to be gained in using direct costs (fertilizer and chemical for example) although some efficiencies may be gained in volume discounts.
Spreading fixed costs (depreciation, interest, administration) over more acres can result in better financial performance.
The chart from University of Illinois, top right, is dated but does illustrate the points.
There is no recipe for size. Finding the sweet spots in terms of asset and fixed cost utilization can be achieved. It is difficult to sustain the efficiencies as situations change, requiring continual analysis and adjustment.
There are internal and external events that create change and affect financial performance. Internal events are things that originate, and can be controlled, within the business, such as children returning to the farm or increasing the size of the farm. External events occur but are more difficult, or impossible to manage.
For example, farmers in the United States are trying to manage through a severe drought.
Another example, closer to home, is farmland, in terms of escalating prices and availability at any price in some areas. This leads us back to the better and better, or bigger and bigger debate.
I regularly talk to farmers who are wondering how they will be able to find land for sale or for rent.
Those who find themselves in situations where land is available for purchase wonder how much to pay for it. Capital is a limited resource and leveraging a purchase adds incremental risk.
Some of the farmers have decided to work at increasing bottom line performance by getting ‘better and better’ as opposed to getting bigger. They have the financial and managerial capacity to increase in size but in the near term, are going to focus on internal improvements.
Others have chosen to pay what it takes to acquire the land and increase the size of their operations. And so the debate continues.
