Economies of scale: go big or go homestead
This blog may come as a shock to some readers. It’s the realities of farming and I’m laying it all on the line. I hope you come away with a better understanding of the economic reality of farming in our country. I’m not trying to be cynical, though it’s hard not to be. This is our story and it may not be the same for other farms.
In the modern farming or ranching business you either go big or go homestead. We learned this lesson the hard way over the past ten years at Parker Creek Ranch. Mandy and I started with the intent of homesteading and selling extra produce on the side. We were diversified producing beef, pork, chicken, turkey, eggs, fresh cut herbs and potted plants. We didn’t produce a lot of anything, but we had a great selection of products to offer our customers. We were virtually a one-stop shop. Problem was that we didn’t have the gross revenue, much less net enough to make a living from the farm. At most we were putting a couple grand in our pocket from time to time. Mandy and I both worked off-farm for years. Mandy worked full-time for the Audobon Society and later The Nueces River Authority. I worked part-time as a crop insurance adjuster, often traveling hundreds of miles each day. At some point we decided that we could make a go at farming full-time. We felt like the only way forward was to go big or stay a homestead. I quit my adjuster job and several years later Mandy quit her full-time job. I was farming full-time and loving every minute of it. To make ends meet we grew more livestock (we live in a low rainfall region where the land is better suited for livestock production versus crops/vegetables), thus increasing our gross income substantially. In order to achieve that bump in production we had to lease more land for the cattle enterprise and purchase more infrastructure for the poultry enterprises. Cash flow was often constrained due to capital expenditures. We eventually received a line of credit from the bank and that made the business function a little smoother. We gradually increased our gross income to $150,000 and last year in 2018 we grossed around $400,000, but basically broke even. From 2015 and on is like a blur. I worked tirelessly day and often night processing chickens, waking up at 3 AM to make sure the meat birds survived the thunderstorm, 14 hour days of delivering product to San Antonio and endless hours of cleaning eggs. As we chased the dollar our quality of life deteriorated and burn out ensued. We were working our tail off, no longer enjoying the farm and making a meager salary. It wasn’t the vision we had for our future so many years ago.
The reality is that we needed to be at the $2 million dollar mark to be financially sustainable. This would be enough to pay ourselves an above poverty wage as full-time farmers, take care of our employees and have enough left over to reinvest in infrastructure and expansion. I came up with this number independently and I have heard other farmers determine the same approximation. The problem for our farm is we simply don’t have the capital or the sales to get there for another ten years or more. For me personally that just won’t work. It’s not that I’m inpatient, but I have a family to take care of and thirty thousand only goes so far. Some people can certainly live on that and as I say” to each their own.” I can already imagine some of you thinking why don’t we seek capital investors or other capital? That avenue just isn’t for us.
Did we create a successful business? Yes, if you measure success by the dollar. We made a profit year after year and paid ourselves a barely living wage. No, if you measure success by other factors such as quality of life. The biggest lesson I learned through all of this (write this one down): build the farm around your life, not vice versa your life around the farm. In other words decide what lifestyle you want to live and make sure the decisions you make with your farm fit into that lifestyle. Decide from day one what your holistic goal is. It’s not just about the farm business, but it’s more importantly about you and your family. Don’t get caught up with the idea that to be a “real” farmer you have to do it full-time. There are a lot of popular figures in the local, regenerative farming scene that preach full-time farming is the only way to a brighter farming future and they couldn’t be further from the truth. Simply put do what is best for you and your family. The farm business comes second.
How could we have predicted all of this? How could we have prevented it? The only conclusion I have come to is that we should have followed our holistic goal every step of the way. We should have created the time (though there unfortunately wasn’t much time) to review the business more often. Going forward our plans will be more thorough. We will use the holistic decision making process and ultimately monitor and control our plans in such a way that keeps management proactive.
For those of you who like numbers here is some farm size and income data from the USDA census in 2010. According to a USDA pulication released in February 2011 titled Farms, Land in Farms, and Livestock Operations Summary 2010 there is a stark contrast between the smallest farms and the largest. The numbers alone will convince you that there is very little opportunity for folks in the middle. Let’s put it all into context. There were 2.2 million farms in 2010 with a total of 920 million acres. The average size was 418 acres, but don’t let that fool you. Of those 2.2 million farms, 1.23 million of them had a reported income of less than $10,000. They averages acreage for these low income farms was about 100 acres. There is no farmer in the United States that can make a living on less than ten grand. These folks are homesteading and most of their income is likely from off-farm jobs. 126,720 farms reported a gross income of $500,000 or more, that 1.6% of all farms. The average acreage for these farms was 2250 acres.
A simple evaluation of these numbers tells me that the large majority of farmers in the United States aren’t making a living from their farm. In fact, according to this data only 1.6% of all farmers have a chance of making a living wage solely from their farms. Notice there aren’t a lot of mid size farms in the picture. In fact there is only about 200,000 farms in the $100,000 to $499,999 income range. The next largest number, of farms (about 600,000) is in the $10,000 to $99,999 income range. Once again these farmers aren’t making a living either. Remember these dollars are gross income, not net. The numbers tell me that the only farms really making it work financially are the big acreage, high revenue farms.
As I said earlier that according to my rough numbers a farmer really needs to be grossing in the $2 million range before they are financially sustainable. In some parts of the country where rainfall is more abundant that can be done on smaller acreage. Here in the Southwestern part of the country it certainly takes more acreage to gross the same amount of money as one could on the East coast. The reality is the more acreage the more expenses (mainly overhead) you will incur. In our case as we produced more we had to find alternative markets. Remember we are a direct-market farm doing our own marketing and distribution. Ideally most of our product would be sold retail to the end consumer. As we produced more we had to seek wholesale markets such as restaurants and grocery stores that pay significantly less (often 20 to 30% off retail price) than retail. It was double edge sword situation. Our costs increased significantly because we were operating on a greater scale and our income received per unit was dropping because we had to seek alternative, lower paying markets. My theory is that at some point around the $2 million dollar mark this starts to even out and the farm simply nets a higher dollar amount (not necessarily a better gross margin) because it has achieved a certain economy of scale. This theory is specifically for folks in the livestock business. Vegetable or specialty market margins are significantly different.
Our decision for 2019 and onward is to scale the farm back. We will change up our marketing and distribution strategy over the coming years as well. We will continue to produce beef and eggs for the time being. We might even add on some sheep. I am really passionate about the grass-fed beef business and the benefits that ecologically sound grazing can have on the land. Eventually poultry will be phased out completely and we will have a small flock of hens just for the homestead. Pending some partnerships and other factors we will see where the beef business goes. In the meantime, while we dwindle down the size of our operation, Mandy and I are seeking off-farm income to create a better life balance. We are still passionate, entrepreneurial spirits. At this point we are reviewing the past to take a look at what worked and what we enjoyed the most. We will put those into a plan for the coming days, months and years.
Lessons learned the hard way can teach you a lot about what to do and what not to do. At this point we have chosen to seek a lifestyle of simplification. We will simplify things so that Mandy and I can run it on a day to day basis, we can take a vacation, spend time with our two boys, share our knowledge and once again enjoy the farm.
