Profit Pointers: Define Growth in Profit, Not Acres

Profit Pointers: Define Growth in Profit, Not Acres

Getting acreage at any cost is not a business model for growth

How do I continue growing my farm when prices have dropped, and I can't bid competitively on new ground? --  E.P., Missouri

Many farmers associate farm growth with adding more acres. The thinking is: "I need to get more acres and expand to become more profitable and efficient."

Gaining acres can make farms more efficient, but does it necessarily make them more profitable? You need to look at growth in terms of your balance sheet, not just how many acres you add.

Farmers who are bidding high cash rent levels for new ground may only be thinking about getting additional acres. But if the cash rent is so high that the ground isn't profitable, then they are actually going backward.

Getting acreage at any cost is not a business model for growth, says Water Street Solutions' Darren Frye.

The concept of "expansion through contraction" may be necessary if a landlord is seeking high cash rent that's not going to work for your operation. The right answer could even be to let the ground go, as long as there aren't any additional repercussions. It will feel counterintuitive, but may be the right decision for your overall operation in the long run.

When you define growth as maximizing profit rather than acres, there will be opportunities down the road. This long-term approach may open the door for future acreage.

If we do see low margins during the next few years, some farmers who focused on getting acres at any cost may lose that expensive ground. Their overall operations could even be in jeopardy. Producers with strong balance sheets would be in good position to pick up that ground, through profitable cash rent or purchasing.

Frye is president and CEO of Water Street Solutions. His blog and column, Finance First, appears at www.farmfutures.com and in the magazine each month.

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Do you have a farm management question for our experts? Everyone could use some outside advice once in a while.

Farm Futures would like to help. Jerry and Jason Moss, authors of the monthly column "Manager's Notebook," along with Darren Frye, who writes "Finance First," would be glad to help you with your finance and farm management issues.

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