In hindsight, sitting on working capital after 2022 was a better strategy than adding debt.
Some farms have seen massive growth in recent years, but how much can your operation grow before you find yourself in trouble? How do you assess growth opportunities and measure them? Are you bullish or bearish for farm growth opportunities?
In the 2025 Global Agricultural Productivity (GAP) Report, Virginia Tech calculates that the agricultural total factor productivity growth (TFP) is currently lagging what’s needed to sustainably and profitably meet the demands of the food system. The TFP growth formula considers extensification (adding land), input intensification, efficiency optimization and systems integration.
Meanwhile, the sustainable growth rate (SGR) formula measures how fast a company can grow its net worth without adding additional debt or equity financing. In a farm context, Michael Langemeier and Michael Boehlje from Purdue University define the formula as SGR = (net income – owner’s withdrawals)/net worth.
For example, let’s assume your farm’s net worth is $5 million, your net income last year was $350,000 and you withdrew an additional $100,000 from the farm business for personal use. Your SGR calculation is (350,000 – 100,000)/5,000,000) = five per cent. What this tells us is your farm’s net worth will grow at five per cent per year without any additional debt or equity financing.
But there are a couple of problems with applying this formula in a farm context. First, it doesn’t account for annual land appreciation, which has been a tremendous net worth driver for farmers.
Second, many in agriculture would scoff at the idea of growing without adding debt. Many see debt as something to be managed and not avoided.
I think we should step back and identify the question we’re actually trying to answer: how fast can I grow and how much debt can I take on before I find myself in trouble?
In my experience, sustainable farm growth can be achieved when good opportunities and timing meet a strong management team and financial balance sheet.
Opportunities and timing
Luck is what happens when preparation meets opportunity. But we can’t discount the role timing and opportunity have in agriculture. Starting your farm in the early 1980s was different than growing in the commodity boom years of the 2000s. Expanding in a dry weather cycle versus a wet one will likewise yield different results.
All business or growth opportunities shouldn’t be an automatic “yes.” Separate the wheat from the chaff and the good opportunities from the weaker ones. Investors perform due diligence on investment opportunities. Have you done your homework on the capital investment you are considering?
Land buyers are now paying closer attention to land quality. Have you done a SWOT analysis, considered the risks and mitigation factors or completed scenario planning?
Yet moving too slowly sometimes turns into analysis paralysis and missing out on an opportunity. Jeff Bezos, the founder of Amazon, who is no stranger to growth, advocates for making decisions when you have 70 per cent of the data needed.
Economies of scale by adding productive units (e.g., acres or livestock) and reducing fixed costs are not a given. Everything becomes more difficult to manage with increased scale. Technology helps but new growth issues will emerge, which is why strong management will be required.
Strong management
Strong management includes surrounding yourself with the right team. Do you have the team built for the growth opportunities in front of you? With a strong team around you, growing pains will be reduced. Sometimes we can’t afford to hire the ideal team. This is when fractional professionals, consultants, networks and peer groups should be leaned on.
The bank rates you on your management level, which ultimately becomes part of your credit score. Your management acumen must continue to grow if you want to scale your business. Strong management and opportunity can improve a farm balance sheet. Likewise, weak management and poor timing can weaken a farm balance sheet.
Strong balance sheet
A strong balance sheet shows equity in the farm operation and room for error and uncertainty.
A strong balance sheet includes a healthy amount of working capital to finance your growth. Growth will be a drain on your working capital. Growth requires more people, investment, debt payments and, generally, cash withdrawals from the business. Pursuing growth without sufficient working capital leaves little room for error.
Having equity and working capital in your operation is akin to having gunpowder and a war chest built up ready to advance on the next business opportunity.
Farms in Canada have been consolidating since the time of Confederation. Most operators understand that if they’re not growing and reinvesting in their operation, they will fall behind.
The GAP report states, “sustained growth does not come from a single technology or practice but from co-ordinated advances across multiple domains.”
Identifying your target growth rate and how you define it will be important. Producers should also consider their working capital, net worth, ability to service debt and quality of life.
Craig Macfie, CPA, PAg, provides fractional CFO services to growing farms and agribusinesses.
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