Possibly the most important thing you can do for your farm business

So you’ve started a farming business. Now what?

The first (and arguably the most important) thing you need to do is think like you’re in business.

Stop thinking that this is a hobby or that it’s just for fun, or that you don’t care if it doesn’t make money (try not to ever think like that); no business will be successful if its owners aren’t thinking correctly.

What do I mean?

One of the most important ways you can do this is to think on the margin. In short, this means you have to think about the next step you take, and the benefits and costs associated with just that one step. This is something that all rational people do all the time but may not realize it.

For instance, if you are sitting in a hammock on a hot summer day you may want to drink a glass of water. Your rational mind thinks of the benefits you will receive if you drink a glass of water (you’ll quench your thirst), but it also thinks of the potential costs involved (if I drink that glass of water now I might have to get up and go to the bathroom in a few minutes, and I really don’t want to do that because I am super comfortable right now). Without even realizing it your brain compares the marginal pros and cons and makes the appropriate decision.

If you’re in business for yourself you cannot afford to not be doing this.

For example, if you own a farm business and you’re trying to decide whether or not to raise more pigs, you need to compare the marginal profit of raising one more pig vs the marginal cost of raising one more pig. Let’s say that raising one more pig means you can sell it for $1,000 – that’s great!

But what if your pig pen is at maximum capacity right now and raising one more pig means a new pig pen, at a cost of $1,400? Yikes, you’re already in the red. Plus you then add the cost of feeding and caring for this one pig (let’s say that’s $400 over its lifetime) – now you’re even more in the red.

Does this mean you don’t add any more pigs? Not necessarily. Let’s say the new pig pen can house 5 pigs, how do your numbers look if you filled it with pigs? Let’s figure it out:

5 pigs can sell for $5,000

cost of new pig pen: $1,400

cost to raise each pig: $400 ($2,000 total for 5 pigs)

Now your numbers look a lot better. If you raised and sold 5 additional pigs you’re looking at a profit of $1,600, or $320/pig. That’s a lot better than the $800 you were going to lose if you raised just one additional pig.

Of course, I’m simplifying here and, because the pig pen isn’t used up by the first 5 pigs, you should amortize it’s cost in your calculations (more on that later), but you get the point, right? Before you do anything you need to think about whether that one single action is going to help or hurt your business, and then decide accordingly.

It’s not hard, just think on the margin.

-MH

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