Growing the farm? Consider the costs

An expansion of your seeded acreage can create more problems than anticipated. If not managed properly, relatively small expansions can decrease a farm’s profitability.

On paper, it can look good. You expand your grain farm by renting or buying additional land . You anticipate farming the extra land without upgrading equipment. Spreading your fixed costs over more acres lowers your cost per acre. Presto, you’re more efficient.

It’s a good theory, and it can work, but all too often the extra land creates a time crunch at seeding and/or harvest. If yields are reduced, the cost of producing each bushel will increase. High land and equipment values can also increase the risk of reduced profitability.

Know your sweet spot

When Hebert Grain Ventures at Fairlight, Sask., grew to 12,000 acres, managing partner Kristjan Hebert readily admitted the operation was more cost-efficient at 8,000 acres. At that size, one large 80-foot seed drill running 24 hours a day could handle seeding, and two large combines could handle harvest.

“Moving from 8,000 to 12,000 acres was tough…We feel we need to get to 16,000 acres to be back in a sweet spot for efficiency,” says Herbert, speaking in 2017.

High land and equipment values, too, can increase the risk of reduced profitability.

Hebert says adding incremental harvesting capacity is relatively easy with custom combiners. Seeding can be tougher to outsource, and buying a second, smaller seed drill is typically more costly per foot of drill, once you factor in the cost of the tank and the tractor.

“The human side is even worse than the equipment to scale up,” says Hebert, who has a background in farm financial management. “Good people are vital.” He estimates that in his operation, one full-time person is required for each additional 2,000 acres. Hebert prefers to have people in place and then scale up, rather than scale up and then scramble for people.

While there are sweet spots in the size continuum, Hebert believes the managers who focus on profit maximization and constant improvement will be the most efficient at any size. Today, HGV is many times larger than it was during that 8,000-to-12,000-acre stretch. The farm has built out multiple dedicated teams, invested heavily in processes and planning, and structured the operation so that scale and efficiency work in tandem once again. The challenges of that earlier growth stage set the foundation for how HGV now manages the complexity of running a large and progressive farm.

“Better is better, before bigger is better,” Hebert says.

Higher price points

Eric Micheels, agriculture finance and business management professor in the University of Saskatchewan’s department of agricultural and resource economics, says the higher cost of acquiring land and equipment doesn’t fundamentally change what farm business operators need to consider before expanding, but it does make having a strategic growth plan more important.

Maintaining flexibility is also necessary, however, given that land purchase opportunities do not always arrive at the most opportune moments.

“Nothing has gotten cheaper. Well-managed farms probably have a growth strategy in terms of how many acres they’re trying to get to. That being said, land doesn’t often come up for sale in a predictable pattern. Sometimes you have to deviate from the intended strategy,” says Micheels.

“If you want to grow and land comes up close by the home quarter, there may be some pressures to try to make that work. It’s easier to adjust equipment than it is to adjust land. Nothing is right or wrong. It’s probably not ideal for the immediate term. But with judicious financial management, you can make that work.”

“If that land comes up, what does it mean for mortgage payments? Labour availability? Do we have labour capacity? It’s better to have that slack resource in place before you expand.”

Pick the right machine(s)

Terry Aberhart, operator of Saskatchewan’s Aberhart Farms Inc. and board member with the Farm Management Council, agrees that high land and equipment values, as well as production inputs, make it ever-more important to really understand production costs.

When it comes to equipment, the capacity of large modern machines to cover more acres can make farm expansion, whether through purchased or rented land, more logistically feasible. But the reality is that even one-year-old high-capacity combines can cost close to $1 million. Given the cost, says Aberhart, it might be worth considering alternatives, such as purchasing more than one older machine at a reduced price, to cover the same acreage. The important thing is not that one approach may be better than another, but that each farm carefully understands the full cost of operating equipment and the implications of additional debt and financing on their financial situation.

“When you stop to fix a section on a million-dollar machine versus three or four smaller machines, downtime, repairs, and those types of things are much more important,” Aberhart says. He adds that other means of improving efficiency, such as leveraging the suite of digital tools available in modern combines to reduce fuel consumption and save time, are also factors. Even the use of plant growth regulators, he says, can increase efficiency by getting more crop through the combine in a shorter time.

“With the amount of expense the larger equipment is coming in at, you start thinking more about how maybe we can leverage more people. That’s one of the biggest challenges in any business is finding the right people,” says Aberhart. “We need to focus on building structure, systems and culture to attract and retain good people. Without people, you can't do anything.”

Aberhart also points to efficiencies of scale as something which, in his experience, “doesn’t really exist.” Higher profitability instead comes from better management.

“To back down after you make an investment, it takes a long time to bring costs down. Today more than ever, farms need to be super diligent about managing the costs they can control. The only thing we can really manage is the stuff around equipment, the team, and those kinds of resources.”