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Financial Planning for a Compact Farm

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Every farm is different when it comes to financial planning and budgeting.
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"Compact Farms" by Josh Volk looks at a variety of successful farms with less than 5 acres of production and provides materials and advice for readers to plan their own.

Compact Farms: 15 Proven Plans for Market Farms on 5 Acres or Less (Storey Publishing, 2017), by Josh Volk provides tips and resources to help readers get started planning their own compact farm. The book takes a look at 15 different farm profiles on five acres of land or less, and offers a planning section, financial section, and appendixes with additional resources. The following excerpt is from Part 3, “Nuts and Bolts.”

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Making It Work Financially

Farming is fairly universally considered to be a low-paid profession. This is especially true of farming on a small scale, but the big guys don’t necessarily make a lot either. Most folks know this when they get into it; they are in the farming profession for a love of the work more than for the paycheck. Even though no one is raking in millions by starting a compact farm, many people operating them live comfortable, happy lives.

Money, specifically personal or private business finance, is not a topic many people feel comfortable discussing. When I first became interested in farming, I looked for books and reports that would give me some sense of the actual numbers behind a farm business. I didn’t find any. Over the years, as I’ve worked for a number of farms and seen some of the financial numbers, I’ve realized it is difficult to put a single number on how much a farm will make per acre, or what the one best crop will be for a particular farm, or even how to set prices high enough to make a living and low enough that people will still buy the produce. I asked the farmers profiled in this book about their financials and a few were willing to share some numbers with me, but most did not want to make those numbers public. I will address the subject in a general way to give you, the reader, a jumping-off point as you imagine what is possible for your own compact farm. In this chapter, I define some basic business vocabulary and offer a framework for achieving a better understanding of those terms and the numbers.

A few compact farm operators (myself included) have put out actual numbers from their farms, so I’ll refer to those. There are two excellent books on the business side of small farms that have been published in the past few years and I recommend them for anyone wanting to learn more.

The Organic Farmer’s Business Handbook by Richard Wiswall takes a look at Wiswall’s own small farm in Vermont, with details on how he runs the business side of his operation. The Midwest Organic and Sustainable Education Service (MOSES) put out Fearless Farm Finances, an overview with profiles of different kinds of farms.

You can also find crop enterprise budgets from the land-grant universities around the country. The problem I’ve had with using these budgets is that they are typically set up for growing crops on large acreages, in the realm of at least 10 acres but more likely hundreds or even thousands; they are written for single crops with the expectation that the person reading them is already farming and just looking for a crop to switch to and improve profits. These budgets might provide a starting point for looking at individual crops, but every farm is different.

Gross Per Acre

Gross is the total amount of income generated; on farms it’s typically presented in terms of gross per acre. This is an easy place to start when planning.

There’s a huge range of gross-per-acre numbers. Big farms growing commodity crops gross hundreds or even thousands of dollars per acre — obviously too little to be able to make a living on a small acreage, even if you didn’t have any expenses. But those farms also have expenses in the hundreds to thousands of dollars per acre, so they don’t profit much per acre; they rely on farming at that scale to make their money.

Making a living on a compact farm is possible because growing mixed vegetables and other specialty crops, especially with direct marketing, has the potential for a high gross per acre. In the areas where I’ve worked, I’ve seen farms in the 10-plus-acre range commonly grossing between $15,000 and $25,000 per acre. On my compact farm, I had a target of $100,000 per acre, a number Jean-Martin Fortier cites as the high end for a “smoothly running market garden with good sales outlets.” My actual gross per acre in my first four years hung around $65,000; Fortier tells me he is grossing about $75,000 per acre at Les Jardins de la Grelinette, although there is variation from year to year due to many factors. Stephen Cook was very open with his numbers, and he too is in the $55,000 to $65,000 range of gross per acre at Cook’s Garden. I have heard of compact farms grossing more than $200,000 per acre, which is close to the top end of expectations.

To provide some perspective, consider these factors that have an impact on the gross per acre:

Crop selection. Choose a crop or crop assortment that has both a relatively high price in the market and a good yield. You have some control here, but you can’t turn a typically low-yielding, low-priced crop into one that will make you a lot of money per acre.

Fertility and growing conditions. Fertility and growing conditions (weather, pests, diseases) play a role in determining the potential gross from a crop. Yields can vary tremendously from location to location. As a grower, you have some control over this, but only so much, so keep in mind that your production methods can affect your profitability both positively and negatively.

Markets. To get a good gross per acre, you need good sales outlets and to put energy into selling what you grow. Even if your yields are high, if you can’t sell nearly all of what you harvest you’ll have trouble getting a high gross per acre.

Length of season. Climate makes a big difference in your potential gross per acre because that number is the sum of annual income. If you live in the far north, your typical growing season might only be a few months, allowing only one or two crops on the same piece of ground in a year. If you have a 12-month growing season, you might be able to grow three or four or, with some plants, even a dozen crops a year on the same ground. The yield on any one of those crops might not be huge, but when you add them all up the gross can be very impressive.

Expenses

Out of your gross income, you’ll need to pay all of your expenses. Expenses are typically divided into two types: variable expenses and fixed expenses. Variable expenses include seeds and harvest labor, costs that are easily and directly linked to the quantity of produce you are growing. Fixed expenses usually include insurance and leases or mortgages; these fixed expenses aren’t always static, but they don’t change significantly unless you drastically change your operation. By separating your expenses into categories (e.g., seed, harvest labor, insurance, lease) and separating those into variable expenses and fixed expenses, you will find it easier to see how changing your crop mix, or the size of your production space, or any other variable on the farm will impact your bottom line.

Expenses on small farms commonly run between 20 and 60 percent of gross income, not including labor costs. That’s a huge range and speaks to the uniqueness of each operation. Obviously, you want to keep your non-labor expenses low in order to leave as much gross income as possible to pay yourself and any other labor on the farm. It would also be nice to have some left over to reinvest in the business or to save for a rainy day. Many of the farmers profiled in this book credit their success to frugality and keeping their expenses very low. At Slow Hand Farm, I managed to keep my expenses at less than 20 percent of gross income, which I felt was very good, but whether it was sustainable is questionable, considering that the farm no longer exists in its previous form.

It is possible to keep your expenses too low. Avoiding an expense just because it is an expense does not always make sense. Some expenses will help increase your gross income enough over time to make up the cost. This is what is called an investment, and it may be a labor-saving tool, buying added fertility that increases yield, spending more on seed for a more productive variety, or even increasing a particularly effective employee’s pay to keep her or him on staff.

Cash Flow and Credit

People who have never run a business often overlook the importance of cash flow and misunderstand the utility of credit. Usually, when people crunch numbers for a business, they look at how much money they think a business can bring in each year (gross income) and how much they will spend in that year (expenses). The problem in farming (and in most business) is that the gross income often arrives long after the expenses are due; businesses need a way to pay the expenses before they actually sell anything, and farms are no different. This is cash flow. These days, with credit card use and monthly billing, cash flow issues are often easier thought through on a month-to-month basis.

When planning out your business, make sure to do a cash flow budget estimate — calculate for each month of the year how much money the farm is expected to bring in and how much it expects to spend. This estimate can show you how much money you’ll need to cover expenses in months where you don’t have enough income or savings (cash flow) to pay for everything.

In months where expenses exceed income, many businesses turn to short-term credit or an operating loan. There are other creative ways to make up the gaps, sometimes as simple as delaying the purchase of supplies that won’t be used until later in the season. One of the great things about farming on a very small scale is that these gaps are often small enough that personal savings and extreme frugality can go a long way toward closing them. One of the oft-cited benefits of the community-­supported agriculture model is its ability to involve the consumers in eliminating cash flow issues, allowing the farmer to concentrate on growing crops instead of looking for lines of credit and paying interest.

Longer-term credit can also be useful when making investments in equipment and infrastructure that will generate income in the future. For example, buying a hoophouse to extend the season or increase yields of summer crops may help you make enough extra income that you will be able to pay off the investment in a few years and then start making more money for the farm.


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Excerpted from Compact Farms, © by Josh Volk, used with permission from Storey Publishing.

Published on Jan 9, 2018

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