There are many reasons for a farm to consider expanding or growing, even in today’s environment of tight margins. Here are nine options for expanding the farm business, from the Center for Commercial Agriculture at Purdue University.
1Focus or specialize
Many farms like to stick to what they know. This option allows the farm to focus managerial time on improving efficiency and reducing cost. Lower cost producers tend to have the ability to stay competitive.
2Intensify or modernize
This option involves producing more output with the same fixed asset base. A more intensely run operation spreads fixed costs over greater output, lowering overall cost of production per unit produced and improving the asset turnover ratio. This option often involves the adoption of modern production technologies.
The most common strategic move is an expansion of facility size or acres. This option should only be pursued after all possible efficiencies have been exploited. Expanding an inefficient operation can lead to a larger inefficient operation.
Diversification involves the addition of new enterprises. In addition to potentially reducing overhead costs per unit produced, this option can also reduce risk.
The fifth option is to replicate the existing operation on a different site rather than expansion of the current unit. This option allows for decentralized management in smaller units. It also reflects the fact that it may be difficult to find the acreage to expand in the location of the original unit.
The sixth option is to integrate by moving forward, backward, or horizontally into production or processing. Examples would include finishing hogs, producing turkeys, or producing eggs under contract. These examples have implications on farm net returns and risk.
Networking allows a group of smaller operations to look like a larger operation in the marketplace. Examples of networks include buying groups, machinery sharing arrangements, and using personnel, including operators, across farms.
A farm’s management team may survey current conditions and determine that they are not sure what direction to take. In the short run, inaction may have merit. Buying time may provide for new opportunities to manifest themselves. If this strategy is pursued, it is still important to develop a decision trigger that will result in action.
There are many in farming who are surveying their situation and wondering if continuing to operate at the current size or a larger size is the most logical plan. Therefore, one strategic size option is to reduce the size of the business. Downsizing may help improve the focus of the business or the efficiency of the business.
Source: What are my Options to Grow? Michael Boehlje and Michael Langemeier, Center for Commercial Agriculture, Purdue University.
(Farm and Dairy is featuring a series of “101” columns throughout the year to help young and beginning farmers master farm living. From finances to management to machinery repair and animal care, farmers do it all.)
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