Managing Assets on Small or Limited-Resource Farms

Managing a small farm enterprise requires a logical business plan to develop and allocate the farm assets. This plan must provide small operations with some flexible rule-of-thumb suggestions that apply sound economic principles of management.

Small farm operations have distinct characteristics that must be considered. Many small-farm operators exploring new technologies make the mistake of applying budgets and economic assumptions that are scaled down versions of those of big operations. These managers end up committing their scarce resources to doubtful ventures that ultimately fail. Rarely do small-scale operations that are losing money on an experimental venture have the working capital and the financial stability or cash flow to push the enterprise into the black.

Select New but Proven Ventures

One program that works specifically with small-scale farms and farmers is the University of Maryland Small-Scale Agricultural Research Program at the University of Maryland Eastern Shore (UMES).

The program has devised five key management suggestions for small-scale farm operations:

Commit at least, but not more than, 1 percent of total gross sales to research and evaluation of new products or services.

Risk no more than 1 percent of total farm assets in the development of any new venture.

Expand a product or service based on demonstrated profits, not expectations.

Diversify to control your presence in the existing marketplace.

Limit expansion to not more than a 20 percent increase in gross sales per year.

If managers commit 1 percent of their total gross sales toward research and evaluation of new enterprises, the resulting controlled approach to exploring new products and technologies can prevent impulsive investments in unproven economic ventures.

Market Strategies. Small-scale, limited-resource farms should base selection of new ventures, or diversification, on market strategy. It is important for farm operators to commit farm assets only to products or services that strengthen their existing marketing program. Small operations can obtain a market advantage by providing value-added products or services such as innovative pick-your-own operations, specialty fruits and vegetables, and organic and health foods.

These market strategies take advantage of niche markets by anticipating new trends and producing for expanding market demands. These products provide a market presence and prove a basic business principle--diversify to gain more control of the market.

Complementary Ventures. Productivity and efficiency are traditionally measured in terms of yields or production-per-animal, but small-scale farm operators must develop management programs based on the productivity and efficiency of the entire operation over many years. Complementary ventures, with reciprocal requirements such as combining plant, animal, and fish production can maximize the use of on-farm resources and minimize risk. Similar concepts are being examined under projects such as Low-Input Sustainable Agriculture (LISA), regenerative farming techniques (for example, at the Rodale Institute), and others. (See Part V, Chapters 3 and 4 on Low-Input Sustainable Agriculture.)

Innovative Technology. Small-scale operators are unable to purchase, acquire, or maintain assets competitively with larger agricultural operations. Yet, both in number and in economic return to the rural community, small farms have the opportunity to contribute to the local economy by researching new techniques and increasing community assets. The development of innovative technology and products on an experimental scale can take advantage of opportunities available to small operations. But because of outside developmental pressures, small farm managers must assign farm assets to activities that strengthen or sustain the operation.

Unique Opportunities. When scarce resources are involved, costs and net return cannot be controlled by working in traditional enterprises such as field com, wheat, soybeans, traditional livestock, and major fruits and vegetables. These volume products typically lack market adaptability and may provide only a marginal return. Recognize unique marketing opportunities that add value to agricultural products or services while using existing farm assets for more control over returns.

For example, a small farm manager with experience growing field corn can begin to diversify into seed corn, ornamental corn, colored corn, baby corn, or Halloween shuck products. These products easily use existing assets, including the grower's experience, to explore and develop a market without risking more than 1 percent of the total farm assets. Introducing any new product or service requires time, product recognition, and promotion. These corn items use the principle set forth by UMES that growers should not commit over I percent of their total farm assets to a product until it begins to yield a profit.

In other examples, a farmer could easily switch a small dairy herd slowly from hormonal-additive feeds to organic feeds to satisfy a new market niche. Vegetable growers operating retail stands along major highways are constantly incorporating new varieties (colors, shapes, and sizes) to maintain customer interest. Many growers now produce pick-your-own chrysanthemums and other field crops as visual aids to stop traffic and maintain a market presence. These diversified products neither become major production items nor significantly decrease costs; however, they provide a degree of stability in the marketplace. Costs can be minimized by maintaining a presence in one type of market and satisfying a demand.

Limit Growth

Management and ownership are often synonymous in small-scale agricultural operations being run by one or two members of a family. The decision affecting the allocation of farm assets is often made following sound management practices weighed by individual expectations and goals. Successful farm managers, or entrepreneurs, are continually testing and developing new product lines or services. However, diversification and expansion in any business leads to stress and requires more technical evaluation.

To counter these problems, the UMES program suggests that small farmers cap their annual growth rate at 20 percent in gross sales. This provides an opportunity for farm managers to evaluate the operation and to eliminate or curtail production if necessary. This simplifies the farm program and prevents burnout as the operation evolves. Restricting growth to a 20-percent increase in gross sales forces farmers to keep only those components that reap the highest profits. Other assets can then be idled, rotated, rejuvenated, or stored. The goal of any limited- resource farm manager is to make more while using less.

Proceed with Caution

Management problems on part-time and small-scale farms cannot be eliminated by good management practices alone. A sound business plan must be developed too. Small-scale farm managers must first recognize both their limitations and opportunities, then establish a plan that reflects their expectations, and apply good management techniques for maintenance and operation.

For more information about programs in your region that address the needs of small farm operations, contact the Office of Small-Scale Agriculture, USDA/ CSRS/SPPS, 14th & Independence Avenue, SW, Washington, DC 20251-2200. (See Part VII, Chapter 6 on a regional approach to the management needs of small-scale farms.)

John W. Wysong, Professor of Agricultural and Resource Economics, University of Maryland at College Park, College Park, MD, and Thomas S. Handwerker, Assistant Professor, Small-Scale Agricultural Research, University of Maryland Eastern Shore, Princess Anne, MD.

Making It Work

In 1986, my farming operation was falling short of making debt payments, and my family was making sacrifices that were becoming difficult to accept. I knew there had to be something better, either leaving farming or finding a better way to farm.

The County Extension Agent suggested that I meet with a farm management specialist working with the Tennessee MANAGE program. At our first meeting we reviewed the financial condition of my farm, developed budgets, and drafted a long-range farm plan, which showed that my income should be large enough to provide us with a good living.

Long-Range Plans

At the next session, we updated the long-range plan with some corrected information and made a multi-year cash-flow projection. It became obvious that the repayment schedule would have to be adjusted. I was ahead with one lender and behind with another. (See Part II, Chapter 1; Part III, Chapters 5-7, and Part IV, Chapter 3 for more information on planning and budgeting.)

I submitted the reports to my two major lenders, and as a result both lenders worked with me to restructure my loan payments. One lowered the interest on my assignments, and the other put me on principal only for 1 year.

Controlling Cash-Flow

In the years that have followed, I have run a cash-flow projection each year. This has allowed me to gain a loan guarantee through a bank and further reduce my assignment to one lender. Annual planning has given me more control over cash-flow, and I have made more progress in paying off my debts.

Our family has reduced some of the shortfalls in our finances, and we are now able to better enjoy our life and look forward to a brighter future in farming.

Based on an interview with a Tennessee farmer by Jim Looft, Area Farm Management Specialist, Agricultural Extension Service, University of Tennessee, Springfield, TN.