By Jed Beach

The term “scaling up” has become something of a buzzword lately within the farming community. Roughly defined, “scaling up” means increasing the amount of production (acres, animals, etc.), yields (lbs., gallons, bunches, etc.), and revenues, both on an individual farm level and on a regional level.

While scaling up is a phrase I hear farmers use sometimes, it’s more often a term I encounter among folks in the ag services & support community – government agencies such as the extension service, nonprofits, etc. Often, these groups are engaged in programs to help farmers in their area scale up.

The logic goes something like this: while local farms have done a great job establishing themselves with direct markets (CSA’s, farmers markets, etc.) and high-value wholesale markets (fine dining and co-ops), they are only reaching a small proportion of the overall marketplace – 4-8% depending on the research you read.

Meanwhile, a large “middle ground” of consumers would buy more food from local farms, if they could get it where they already shop, at prices that aren’t too much higher. To meet this unmet demand, we need more farms to scale up.

While this macro-focused observation is generally true, there has in my observation been a significant mismatch between the number of ag service programs that want farmers to scale up and the number of farmers that decide to do so. This is because the business goals of an individual farm may or may not be well served by scaling up – oftentimes, there are better ways for a farmer to achieve his or her desire for profit or quality of life that don’t require growth.

For an individual farm, scaling up can be a means to increasing profits. When done correctly, scaling up enables you to lower your costs of production and access markets that you may not have been able to access before (this can be especially advantageous if you farm in an area where direct markets are somewhat saturated).

However, there are often other easier business strategies a farm can enact to increase profitability before scaling up; and scaling up entails a lot of risky changes to your farming system which you should be aware of before attempting it. In this article, I lay out a “checklist” of sorts to help you decide whether or not an increase in scale is in your farm’s best interest. But first, I’ll discuss some ways to improve your profitability and quality of life without scaling up; and I’ll show you a way to calculate just how big you might need to scale up to meet your profit goals.

Better before bigger
Before considering an increase in scale, it is always better to look for ways to improve farm efficiency first – to do it better before you do it bigger.

One of the best indicators of your farm efficiency is your gross margin. To calculate gross margin, you will need at least one years’ worth of profit and loss information for your farm. First, you should separate out your expenses into “fixed” and “variable.” “Variable” costs are inputs which rise with each additional acre (or animal) you produce.

Common variable costs on farms include seed, fertilizer, most hired labor, packaging, row covers, plastic mulches, trellising materials, and pest or weed control. “Fixed” costs don’t rise with additional production; they include things like insurance, equipment depreciation, loan interest, and rent. I always recommend that you include your desired salary as a fixed cost, even if it doesn’t show up that way on your tax return!

Next, subtract your variable costs from your gross revenue (AKA your sales). This calculates your “gross profit.” Next, divide your gross profit by your gross revenues. This calculates your gross margin – the percentage of every dollar in sales you make that is gross profit. Gross margin is an important measurement of efficiency for any farm – it measures your ability to convert sales into gross profit. The higher the gross margin, the better.

If you make changes to improve your efficiency, they should be reflected in an improved gross margin. I am often asked what a “good” gross margin is for a farm. My answer is usually to caution you against comparing yourself against benchmarks like that; diversified farms produce a diversity of successful combinations of gross margins and fixed costs to meet their goals.

The best technique is to track your gross margin over time and note if you can associate changes in your production system to changes in your gross margin; to try to beat yourself over time. However, as a general rule of thumb, if your gross margin is less than 50%, you should consider ways to improve it before you consider scaling up.

There have already been a number of articles written about efficiency improvements in this magazine- check the archives for more detailed suggestions. Here are a couple of the most common ways for a farm to improve its efficiency:

Raise prices on any crop where you sell out faster that you have available crop – up to where you are just selling out of your available inventory.

Improve yields for a crop.

Match sales to production as accurately as possible. See my article “Matching sales to production” from the September 2016 GFM.

Invest in equipment and systems to save on labor cost. For a simple method to evaluate when a piece of equipment is worth investing in, see my January 2017 GFM article “Common financial mistakes farmers make and how to fix them.”

Before we consider scaling up, I will usually run over this list with a farm to see if there are any “low hanging fruit” solutions we can implement that improve the gross margin.

How big to scale up?
Once the gross margin is somewhere close to where we want it to be, the next question to answer is, “How big would I need to scale up?” There is scale, and then there is scale; generally, most farmers I work with want their businesses to be the minimum size it needs to be in order to meet their financial and quality-of-life goals.

This size can be roughly estimated by conducting a breakeven analysis. A “breakeven” point is the level of sales your farm needs in order to cover its expenses – and, if you include your desired salary as an expense (which you should), your breakeven measures the level of sales at which your farm pays all your expenses and you.

To calculate your breakeven, divide your fixed costs (including your salary) by your gross margin. This produces your breakeven point – the level of sales at which you pay all your expenses and yourself. Your breakeven point is a rough approximation of the scale your business would need for you to pay all your expenses and yourself.

Breakeven calculations can also be used to measure sales needed for incremental changes. For instance, let’s say you are earning enough profit, but feeling stretched too thin, and want to hire an assistant farm manager for $30,000 per year to achieve a better quality of life. You know your gross margin is 50%. You can divide your new position’s salary ($30k) by your gross margin (50%) to measure the additional level of sales you will need in order to justify hiring an assistant manager – in this case, $60,000.

It’s important to note that improvements in your gross margin decrease your breakeven; that is, improving your efficiency lowers the level of scale you need to pay your expenses and yourself. For instance, if that farm above improved its gross margin to 60%, it would need sales of $50,000 to cover that new position ($10,000 less).

The checklist
If you’ve concluded that your gross margin is about where you can get it to be, and you calculated your breakeven level, then I’ve provided the following checklist of considerations that you may want to take into account when deciding if and how to scale up.

Desire
The first – and, arguably, most important – consideration is whether or not you want to scale up. Would scaling up to your breakeven point produce for you the kind of farm you want to have, the kind of life you want to live?

What I usually advise farms to do is to write down (or draw) a vision statement representing their farm in an ideal state in about five years’ time.

What does their farm look like?

How many acres, animals, etc., of what crops? What types of customers are they working with?

Who is working on the farm?

What are the farm owners doing on the farm? What are their finances like? Etc.

Is the vision statement dissonant with the scale required by the breakeven point?

If so, then it’s not a good idea to start scaling up. Even if you execute your business plan perfectly, it won’t take you where you want to go, and you’ll be unhappy. Something else needs to change instead.

Production
Scaling up will affect your farm production. It’s especially important to scale up the crops and products that are among your more profitable; scaling up those that are less profitable will result in less profit.

Are you confident that you know how much it costs you to produce one unit (bunch, pound etc.) of each crop you intend to scale up? That at this price you will be able to pay all your expenses and yourself? If you don’t know how to calculate unit cost, see my May 2018 GFM article “Wholesale with confidence by calculating your unit cost.”

Are you confident that you can produce the crops you intend to scale up to a consistent grade and quantity?

Do you have the appropriate level of mechanization for your intended scale?

Do you have the food safety processes needed to work with your intended customers?

Market
While scaling up can provide you with access to new, larger markets, the customers in those markets may have different needs and expectations than the customers you are used to working with. For instance, many farms who are established at direct marketing work with loyal “locavore” customers, who tend to focus on healthy eating, to trust what a farmer says more than a food industry expert, to eschew packaging on the grounds that’s it’s environmentally wasteful, and to be more tolerant of inconsistencies in availability and crop appearance.

Working with larger markets often means working with customers who are less tolerant of inconsistency and who want more convenient plastic packaging. It’s important to understand the types of customers you will be serving all along the supply chain – distributors, retailers, and end users – and what their expectations will be before you scale up.

One of the biggest challenges a farm that’s scaling up faces is to communicate their brand to more distant audiences. For farms that direct market, they themselves are synonymous with their brand – their customers seek them out because they have a personal connection and loyalty.

As a farm scales up, it gets harder, then impossible, to maintain this personal connection with every customer. Yet consumers still crave the personal story that goes with making a local purchase. This is where it becomes critical for the farm to develop promotional materials – packaging, social media, website – that stand in as a proxy for that personal connection and tell the farmer’s story to more distant audiences.

Personnel
One of the biggest challenges I’ve seen for farms attempting to scale up is the transformation of their personnel management structure. Small farms are generally run by one or two farmers, who spend much of their time directly engaged in farming tasks. They directly supervise the people they hire, and often develop close relationships with them. If there’s a question, the farmer is usually nearby.

When a farm scales up, the farmer finds him or herself doing less farmwork and more management. The farmer is less able to be present everywhere all the time, and must develop more documentation – staff training manuals, food safety plans, standard operating procedures, etc. – to stand in for his or her personal knowledge. The success of the fam relies less on the farmer’s direct farming skills and more on his or her ability to hire, train, and supervise people.

This is not a skillset that all successful farmers necessarily have – some do, some don’t. If you don’t like the prospect of having your role on your farm shift toward being a people supervisor, scaling up may not be right for you.

Finances
Even if a farmer has the desire, the production capacity, the markets, and the people skills necessary to scale up, there are cash flow hurdles that may stand in the way as a farm gets started with scaling up. Often, scaling up requires a farm to make significant investments – first in equipment, and then in the increased variable costs necessary to produce increased crops. Since the investments are higher, the farm will need more than its typical cash reserve to finance them. Add this to the fact that many larger wholesale customers won’t pay suppliers for 30, 60, or even 90 days after receiving an invoice, and it’s easy to see why scaling up can lead to a cash flow crunch.

Farms that seek financing for scaling may also find that banks, in their conservative fashion, often will base their decision to lend money on the profit a farm turned last year, before scaling up – which often means the financing is insufficient to meet the full goals of scaling up. In some ways, this is a blessing – it can force the farm to grow at a slower rate, which reduces the risk.

Scaling up can be an important, and often desirable or necessary, part of a farmer’s toolkit to improve their profits and quality of life. As I’ve shown, however, scaling up entails new layers of production, marketing, personnel, and financial complexity. Farms that embark upon a plan to scale up without a good understanding of these new complexities may encounter significant frustration and stress. Scaling up is a strategy best employed in a manner that is slow, iterative, and smart – not simply because it’s a buzzword.

Jed Beach is a farm business consultant and organic vegetable farmer in Lincolnville, Maine. He and his wife operate 3 Bug Farm, where they wholesale greens, herbs and other crops to stores and restaurants. Jed provides business planning services and crop profitability assessments to farmers through his practice, FarmSmart. More information can be found at www.farmsmartmaine.com.