The Farm Growth Formula
- craigmacfie
- Dec 6, 2024
- 3 min read
By Craig Macfie
Capital + Risk + Execution = Farm Growth
“Change is inevitable, growth is optional” is a quote from John C. Maxwell. It’s easy to look around the ag industry and see examples of a changing landscape and growth. Suppliers, competitors and customers are consolidating and growing.
Farm growth and consolidation are often met with scorn that’s more noticeable than in other industries. The difference is your neighbours and friends are also your competitors. Also most agree that rural depopulation and fewer families in the countryside is a good thing.
Yet farms continue to grow and consolidate with every generation. And no one is looking to walk back the technological advances that have been made. Some operations have grown faster than others. And some have even diversified into other enterprises.
The current speed and cost of farm consolidation might have you wondering if growth is possible for your operation going forward. In my experience, it will require solving your own farm growth formula of (capital + risk + execution).
Capital
Financial capital could be cash or working capital available to be deployed. Or, it could mean equity or credit limit in the operation available to be leveraged. Increasingly, it could mean equity investors interested in growing alongside you.
Without capital there cannot be growth. Lenders require security that they’ll be repaid. Which is exactly why they refer to your assets as security. It’s the backstop that will ensure they get repaid.
Off-farm employment is good way to generate capital for your farm business. It allows a means of paying for living expenses and to reinvest farming profits which helps fuel and propel growth. Off- farm employment is sometimes a necessity during downturns in ag cycles.
Capital can also come in the form of contributed equity. Land down payments, for example, can be avoided if sufficient equity exists in the operation. Contributed equity can also come in the form of family members co-signing a loan application.
Human capital will also be required to grow your farm. Increasingly this means working in the field and in the office.
Risk
With risk comes reward. Without taking the plunge and accepting some uncertainty, growth cannot occur. Banks are in the business of assessing, grading and rewarding risk. A bank’s risk rating works similar to a basis at the grain elevator. Your individual risk rating is the interest rate premium you pay over a benchmark rate.
Your lender is like a business partner. Banks are in the business of generating returns for their money at an acceptable level of risk. If the relationship goes well, both businesses will benefit. A harsh truth is a lender will end a relationship before they lose money on you. Farm owners should have the same mindset with their business enterprises.
AgriShield (find it at www.myagrishield.ca) is an online farm risk assessment and management tool. Risks are identified, graded and prioritized. Most operators are familiar with managing production, financial and marketing risk. AgriShield includes these risk families along with business strategy, business environment, and people.
Execution
Sometimes drought and commodity markets are a reason for financial losses, but they can’t be an excuse. If everyone receives the same rainfall and sells into the same commodity markets, the lowest cost producer will come out ahead. What steps are you taking to lower your cost of production? This is increasingly difficult and increasingly important with the price inflation of recent years.
Entrepreneurs need to have a mindset or willingness to go through a wall for their business. This is what execution looks and feels like. There will be setback, sometimes daily, but you push on. Execution is setting a goal and seeing it through. Execution is having others say, ‘I could have done that.’ Yet, few have the skills, drive or finish required to see it through.
In Patrick Lencioni’s book ‘The 6 Types of Working Genius,’ execution is referred to as ‘tenacity’. Every organization needs to have someone with tenacity, or else nothing will get finished. The geniuses identified in Lencioni’s book include wonder, invention, discernment, galvanizing, enablement, and tenacity. If your farm team is interested in doing personality assessments this winter, I recommend Lencioni’s book.
But First...
Rather than expansion, your operation may need to dig itself out of a financial hole. Doing so will require the same formula of capital + risk + execution. Conquering this mountain will be a growth moment and cause for celebration. Whatever your farm’s current situation, remember change is inevitable, but future growth is optional.
This article originally appeared in the December 2024 issue of Country Guide.
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