Views:5 Author:Raylene Nickel Publish Time: 2019-03-27 Origin:Site
Making changes in production strategies or farm enterprises takes analysis and courage to adapt. But in the end, having the willingness to embrace change offers opportunities.
A real need for expansion, for instance, can spring from a family’s decision to include a son or daughter in the operation. On the opposite side of the coin, tight finances might signal a need for downsizing.
“There are numerous growth and downsizing alternatives that are available,” says Michael Boehlje, agricultural economist at Purdue University. “We encourage farmers exploring alternative growth and downsizing options to use scenario analysis to gauge the impact of each alternative on the farm’s balance sheet and income statement. When evaluating alternatives, it is important to gauge the impact of each alternative on net returns, risk, and the farm’s managerial capacity and resource base.”
These are just seven of the ways to change a business in order to operate with greater financial resiliency.
This strategy is often used when additional farm-business partners are coming on board. But Boehlje advises expanding with caution.
“Expansion of facility size or acres is the most common strategic move for many farmers,” says Boehlje. “Though commonly used, this option should only be pursued after all possible efficiencies have been exploited. Expanding an inefficient operation just leads to a larger inefficient operation.”
“This option allows farmers to focus managerial time on improving efficiency and reducing cost,” says Boehlje. “Lower-cost producers tend to have the ability to stay competitive.”
Reduced costs and higher production efficiencies could come from fine-tuning cultural practices related to feeding livestock, for instance, or applying chemicals or fertilizers. “Farmers might think outside of the box in order to achieve greater efficiencies,” he says.
“This option typically involves producing more output with the same fixed asset base,” says Boehlje. “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.”
Double-cropping or grazing livestock on cover crops or crop aftermath could increase output from fixed assets.
Diversification adds new enterprises, and these have the potential to reduce overhead costs and spread risk. But the potential downside of diversification is the increased management required.
“Diversification is desirable if you can control costs in the new enterprise and manage the learning curve that’s required,” says Boehlje. “Developing a product or service from something you’re currently producing or doing reduces risk. Some farmers, for instance, leverage a machinery line by doing custom work for other farmers. I know some farmers who do a very good job of analyzing farm records or production data, such as yield maps. They’ve been able to expand that skill set into a fee-service business.
“When considering these options, look around and see who else is doing the enterprise you’re thinking of starting,” he says. “Ask yourself, ‘Why can I do this better, and can I do it on a scale that is going to be competitive in the marketplace?’ ”
“This option replicates the existing operation on a different site rather than expanding the current unit,” says Boehlje. “As such, it allows for decentralized management in smaller units and economies of size best suited to the enterprise.”
Hog-finishing units and both conventional and grass-based dairies lend themselves to replication of operations.
Integration involves a forward or backward movement into input supply or processing. “Examples would include becoming a seed or chemical dealer, processing your own milk or beef, or even doing direct sales to consumers through farmers markets,” says Boehlje.
While some on-farm or farmer-owned processing and direct marketing of farm-produced products have indeed succeeded, Boehlje encourages caution when considering such enterprises. “Farmers in the past have not always appreciated that getting into additional stages of the value chain for processed products takes an entirely new skill set,” he says.
“The decision to downsize the business is often linked with a strategy to exit the business, but this need not be the case,” says Boehlje. “Downsizing may actually help improve the focus or the efficiency of the business. This is particularly true if there is financial stress in the business or if it is excessively leveraged, losing money, or having difficulty generating enough revenue to cover costs.”
In the current business climate, he points out, some rental agreements for land, for instance, are too high relative to crop income, causing farmers to suffer financial loss. If negotiating a lower rental rate is not possible, letting go of the land could be an option.
“One of the toughest things for farmers to do is to give up rented land,” says Boehlje. “But it could be a way to reduce the red ink in the business. Letting go of some land may not restore a farm to operating in the black, but it may improve working capital and the financial resiliency to better withstand losses. Overall, it could reduce the possible vulnerability to having to exit the business completely.”
Selling assets to pay down debt also could result in greater working capital and stronger financial resiliency.
When best ways to grow an operation seem unclear, taking a wait-and-see approach has merit. “Buying time may provide for new opportunities to manifest themselves,” says Boehlje.“If this strategy is used, it is still important to develop a decision trigger that will result in action.”
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