Each time we ask Farm Futures Business Summit attendees which stories they want us to explore, one topic tops all others. Can you guess what it is?

You got it: Farm expansion.

Unfortunately, many believe expansion is the solution to every farm’s problems. But without planning and good management, it can often make one small problem even worse. There’s a hundred ways to grow a farm, and just as many ways to screw it up.

Growth isn’t as simple as outbidding your neighbor for the farm that just came up for sale. Any expansion needs a plan first. In fact, your plan to add should also look at what to subtract. Is it time to get rid of lazy assets? If so, have you analyzed which assets make the most money and which you should dump? What will generate cash? What’s your basis?

Economics over emotion

Expansion is sometimes more about emotion than economics. If you’re going to make a purchase, you need to justify it by asking a series of questions. What if you run the numbers first and don’t like what you see? Do you still go ahead and bid, just because the bank says you’re good to go?

It’s no secret there’s financial stress in farming; some of it leads to bankruptcy. In other cases, it leads to serious change in business structure. That’s where the ‘subtraction’ factor comes in. Maybe expansion does make sense, but not before you examine all your assets and consider what you should get rid of, says Ashley Arrington, real estate director at Ag Resource Management. “You don’t want to sell your most productive piece, even if that’s the piece that’s most attractive to potential buyers. What is working for me, what is hurting me, what generates cash? Then go through tax scenarios, basis, and start laying it out.

“Try to determine what generates cash if you need cash, but also just trying to see what’s not working, too; shed the piece of ground that’s the least productive.”

BUSINESS GROWTH: “Add layers of expansion only after you are certain you have the skills to manage what you have now,” says Ashley Arrington, real estate director at Ag Resource Management.

Arrington has seen the good, bad and ugly in trying to help farm clients. She helps farmers analyze debt and walk through steps to getting a loan approved.

“Poor expense management, poor marketing and taking on too much debt too fast can all kill a business,” she says. “But the big one is growing too fast.”

Big is better trap

Young operators who take over mom and dad’s operation and rush to double acreage find out quickly if their management skills are up to speed.

“If you have a small problem in a small farm then expand, that small problem becomes a big problem,” says Arrington. “This is the ‘big is better’ dilemma and the lesson is easy: expansion won’t save a badly managed operation. If you’re mismanaging your expenses and not astutely following your marketing plan, a $50,000 problem on 500 acres becomes a $150,000 problem on 1,500 acres.

“You need to change your ways before you expand,” she says. “You put a band-aid on a problem, expansion doesn’t fix anything.”

Arrington says the farmer-clients who come to her to discuss expansion fall into two categories. One wants her to review financials to justify their farm size because “God forbid they would have to pay taxes if they sold land,” she says. “They have underlying problems in not paying attention to their financials. They want me to tell them how to stay big. But you still have land that’s not working for them. Would you rather work at an optimal level at 10,000 acres, or sub-optimal at 30,000?”

Many farmers have seen a return to profitability over the past three years. But will good prices continue forever?

“Before expanding it is crucial to know if you are in a financial position to sustain your profitability, and if your balance sheet is strong enough to withstand some price volatility,” says Arrington. “We must not forget what we learned when times were tight.”

Expand in layers

Her best advice, especially for young operators: Master the farm you have now before you add more scope.

“Their dad farmed 1,500 acres his whole life and now the son or daughter is at 5,000 acres their second year in, trying to manage it all,’ she says. “Their number one problem is they grew too big too fast, and second, they didn’t learn how to manage it.”

“You’re not the best just because you farm 30,000 acres. Start at 1,500 and learn how to operate that at an optimum level, running lean on expenses and figured out everything you can cut to get down exactly to what it takes to run it, then you’re ready for the next, layered expansion.”

“You need to master each small expansion before you expand again.”

Read more from Arrington’s blog, NextGen Business Insights.