SB Farms: analyzing growth strategies for a row crop farming operation in Iowa

Abstract

SB Farms is a row crop farming operation located near Belmond, IA that focuses on corn and soybeans. The farming operation has two owner-decision makers. The brothers are fourth generation farmers who have been farming together since 2016. The father of SB Farms helps on the operation and provides some of the equipment at a custom rate. Currently, SB Farms consists of 1,500 acres of planted corn and soybean in rotation on a yearly basis. The trend of consolidation in the farming industry has occurred over the years. As the total number of farming operations has decreased, the size of operations has increased. As margins have become thinner on a per acre basis, equipment and technology advancements have made farming on a larger scale more practical. SB Farms recognize that for the operation to be sustainable for future years, it must expand in size. When it comes to acquiring more acres of farmland, there are two ways that this can happen; the first is to rent ground from a landlord through crop share agreements or various cash rent leases, the second is to acquire more ground by purchasing land. The purchase of farmland takes significantly more capital up front and ties up funds that could be used to meet other needs such as equipment purchases. Owning land increases equity that has wealth-building benefits that renting land does not. The objective of this thesis is to use financial and risk analysis to determine the avenue of growth that provides a more favorable long-term growth strategy for SB Farms. More specifically, an analysis was completed on a parcel of ground purchased by the operation with borrowed capital, and how it affects the operation’s financial performance in the long-term and short-term when compared to rented land. The analysis showed strong evidence that SB Farms’ land purchase was a good decision on behalf of the operation. However, there were key tradeoffs to be considered in regard to purchases in the future.