When I took economics in University, one of the concepts that I was taught was economies of scale. This concept is defined as obtaining cost advantages that a business obtains due to expansion. In farming there is a constant thirst by farmers to add land or head space to their operation. It is quite common for fellow farmers to judge success by the size of the operation and not profitability. Of course this makes sense because profitability is not a public figure due to the fact most farms are private enterprises.
As your farm grows larger the potential rises for lower costs of inputs, better interest rates and increased commodity market access. Another benefit of improved economies of scale is the lower of your fixed costs per units produced. A great example of this is spreading your office expenses (overhead) over more acres farmed provided that you keep your office expenses flat.
There are challenges for growing farms that are trying to achieve the optimal size and gain real economies of scale. As I talk to many farm customers that are larger farms, there are several common issues that they have to deal with that can be challenging:
- Finding staff–For the past five years, finding staff has been terribly difficult. On top of this there has been high rates of turnover as it has become trendy to look for the greener grass all the time.
- Managing staff–When you are working for yourself it is easy to justify that you need to work a little harder or longer hours to get the job done. When you are dealing with employees you must manage the balance of their personal life and the jobs at hand. This is not as easy as one would suspect because not all employees view the company’s objectives as their own and may have different values or personal goals.
- Handling the change in role–As farms get larger the owner must begin to make choices as to what is the best use of his or her time. This is a challenge for any business owner as the business succeeds. Being the entrepreneur is a much different role than the manager.
- Competing with smaller operations head to head–Larger operations have larger overhead costs than in comparison to smaller operations. The larger operation is fighting to survive on volume and thinner margins against a low overhead, smaller operation. To make this clearer think of bidding on custom feeding.
Don’t get me wrong the trend of larger farms is not going to slow and it does happen for a reason as equipment gets gets more productive and the quest for economies of scale are present. Like any other business you need to understand that as your farm grows the role that you may play as the farm owner is going to change and challenges will always be there. Bigger does not mean better for everyone.