10 Questions to Ask Before Growing Your Farm

July 8, 2016 11:31 AM
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Challenging times can also be opportunistic times.

“We have a tendency during economic downturns to not think about the opportunities,” says Mike Boehlje, ag economist, Purdue University.

Very good producers will have more opportunities than they can handle during the next few years, so they will have to think systematically about which ones to pursue, Boehlje told attendees of Purdue University’s 2016 Top Farmer Conference.

Economic downturns can provide opportunities such as reduced values for assets including land and machinery, acquisitions, new business ventures and churn in the land rental market, Boehlje explains.

Yet these opportunities involve risk. Before farmers commit to them, Boehlje says, they need to conduct a critical self-appraisal. Here are the questions he suggests considering:

1. Why grow? And why not? Do you plan to reduce costs, bring in new family members or invest cash? Could this new venture create too many responsibilities or spread resources too thin?

2. What are my options to grow? Should you pursue more acres or livestock enterprises? Can you capture other stages of the value chain? Would the venture allow you to diversify or specialize?

3. What strategic issues should influence my growth choices? Do you see a strong or new market potential? Does the venture maximize your team’s competencies and capabilities? What is the competition?

4. How should growth ventures be evaluated? What is the strategic fit to your operation? Do you expect more growth? How will you measure success?

5. What skills and competencies do I need to grow? Skills can be more limiting than capital, Boehlje says. Will the new venture challenge your team too much? Do you need to develop management capacity before you buy the new venture, build it or do both?

6. How do I finance the growth? How will the venture affect your equity or debt? Can you lease or pursue a joint venture to reduce your financial investment?

7. What business model do I use to grow? You have many options. Should you consider a merger or acquisition, franchise, partnership or investor?

8. How will expansion impact my current operation? Will it improve efficiencies and lower costs? Will it provide better asset utilization? Will it divert your leadership’s attention?

9. What are the start-up/scale-up challenges? Will you face construction delays or cash-flow shortages? How will it affect your working capital?

10. What is my sustainable growth rate? What are your expected earnings and rate of return for the venture? What withdrawals will you make? How will it affect your debt use or leverage?

You can use Purdue’s online tool called Farm Growth: Venture Analysis and Business Models to analyze decisions you make based on these questions.

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