Is Your Farm a Hobby or a Business?
Farms originate out of many different scenarios. Maybe you inherited the farm or come from a long line of farmers. Perhaps you made a conscious decision to start a farm or acquire an existing one.
According to agupdate.com’s Farm & Ranch guide, most farms start out small with a few chickens or a few beds, and sell the excess to neighbors or a local market. Before long, and with no strategy to speak of, they just keep doing what they have from the beginning—just more of it—assuming there will always be plenty of buyers. But agupdate.com warns this is a big mistake. The reality is, if you want your farm to produce income, you must treat it as a business, not a hobby.
The difference between a business and a hobby
Today’s ag industry changes rapidly, so you can’t afford to treat it like a hobby. So how do you know if your operation is a business or a hobby?
The primary distinction between a hobby and a business is the intention to make a profit:
A business is operated with the consistent goal of generating earnings and maintains complete and accurate records
A hobby is pursued for personal pleasure, sport, or recreation, even if it occasionally generates some income, is typically done on one’s own time, and keeps minimal (if any) records
According to irs.gov, the Internal Revenue Service uses a range of factors to determine if an entity qualifies as a business or a hobby. Scale of the operation isn’t necessarily a consideration, and no one determines the decision in favor of one versus the other. These factors include:
Businesslike manner: Does the entity keep complete and accurate records and operate like a business (e.g., marketing, separate bank accounts)?
Personal motive: Does the entity have personal motives in carrying on the activities?
Time and effort: Does the entity put in significant time and effort that indicates an intent to make a profit?
Dependence on income: Do the owners rely on the income from this activity for their livelihood?
History of profit/loss: Has the entity made a profit in some years, and how much? Normal startup phase losses and losses due to circumstances beyond the owner’s control (like a natural disaster) are treated differently than ongoing, consistent losses.
Changes in operation: Does the entity change methods to improve profitability if the activity isn't making money?
Expertise & knowledge: Does the entity or its advisors have the necessary knowledge and expertise to run a successful business?
Profit Motive Safe Harbor: The IRS presumes it is a business if it makes a profit in three out of five consecutive years.
Asset appreciation: Does the entity expect to make a future profit from the appreciation of the assets used?
The importance of adopting a ‘farming as a business’ mindset
The ag industry has evolved quickly over the past few decades. If farming is your livelihood, and possibly your legacy, approaching it as a business is essential for growth.
In a cibc.com article, Randy Johner, a grain farmer in southern Saskatchewan, sums it up nicely when he shares, “Back in the 1980s, it was okay to know a little about a lot of different things and then figure the rest out. Today, with a business of our scope that involves a number of employees, you need to know where you should apply your energy and resources, and decide what you can do and what you can’t.” He goes on to add, “As farms continue to expand in scale and complexity, the need for professional management has never been clearer. Embracing a business-oriented mindset, investing in governance, and seeking expert advice are essential steps to unlocking new opportunities and ensuring smooth transitions across generations.”
According to Johner, adopting a CEO mentality can go a long way toward boosting a modern farm’s performance. And it sure worked for him. “When I started working with my dad, we had 1,000 acres; but I wanted to expand. So, the mentality that farming is a lifestyle had to change.”
Johner Farms now spans 41,000 acres. “We’ve had to professionalize. You can’t run it as a way of life. It has to be run as a business.”
The benefits of operating your farm as a business
The benefits of operating your farm as a business
Applying effective businesses serves a multitude of goals, including:
Outpacing inflation with growth that exceeds 3 - 5%
Improved profitability and sustainability
More intentional actions that align with your goals
Increased resilience to adapt to market fluctuations and uncertainties
Enabling smoother succession planning
Putting you in a favorable position to sell the business in the future
Mitigating risk
Whatever your motivation, adopting a business mindset can make a significant impact on your success.
Making the mindset shift
Hayley Grosser, a farmer and business coach, shares on nextgentagri.com, “We are conditioned as a society in farming to work harder … if working harder was the answer everyone would be a billionaire because they're the most hardworking people on the planet.” According to Grosser, most farmers know they need to track budget versus actual and forecast, but few do because they don’t have the mindset that drives them to take action.
So, how do you make the shift? For starters, putting simple things in place, such as a business checking account and basic recordkeeping, as well as starting to look at decisions and priorities more strategically, and looking at obstacles as opportunities, can put you on the right path.
10 core business principles that can drive sustained growth
Here are 10 fundamental principles every farm or ag business should implement to maximize their chance of success.
1. Set clear goals
Take the time to identify what success means to you. What do you want to accomplish, both personally and professionally? Clearly defined goals—whether profitability, sustainability, more time with family—provide the compass for every priority and decision.
Kristjan Hebert earned an accounting degree from the University of Saskatchewan in 2004, then completed his CPA certification. After realizing the business he was really interested in was the family farm, he’s now managing partner of Hebert Grain Ventures (HGV).
Hebert uses an entrepreneurial operating system (EOS) to manage his business, and says it’s a framework that can benefit all farmers, regardless of size. It consists of setting a 10-year goal, then breaking it down into 3-year, 1-year, trimester, monthly, and weekly goals. He advises to include both personal and business goals. “Using a system like this lets your people actually know the most important thing they’re working on today, this week, this month, and this year,” he said. “We have a weekly scorecard that both the management team and the ops team look at, right down to what our repairs are trending at compared to budget.” The results? When Hebert came home, the farm consisted of 300 acres; today, it’s around 41,000.
2. Create a business plan
What’s that old saying about ‘if you don’t know where you’re going, how can you get there’ certainly applies to running a business. Shockingly, according to the Texas A&M Executive Program for Agriculture Producers, 66% of operations don’t have a strategic plan, and even less have done long-term goal setting.
A comprehensive business plan provides a roadmap for your farm or ag business and should include:
An executive summary
A detailed market analysis
Your products and services
Your marketing strategy
Financial projections
3. Build a go-to-market plan
A solid marketing plan ensures you have a clear understanding of who your customers are, what they want, the value you deliver, and how you stand out from your competitors.
A good marketing plan should include:
Your company mission, vision, and core values
Your brand story (what you stand for, why you do what you do)
Products and pricing
Who you sell to (your target customer segments, such as grocery chains, wholesalers, farmers markets, restaurants)
Your value proposition for each segment
Core marketing messages for each segment
How you’ll reach each segment (distribution channels)
Key marketing strategies
A competitive analysis
Your unique value and differentiators (how you’re better than alternatives)
4. Manage your finances
According to agupdate.com’s Farm & Ranch guide, knowing the difference between profit margins and cash flow is critical. Decent profit margins don’t mean you’re immune from going out of business or filing for bankruptcy. Having sufficient cash to service your debt is imperative, and being proactive helps ensure you catch potential problems early.
Follow these smart tips from farmercoach.ca:
Create a budget
Perform monthly budget-to-actual reviews
Control costs
Track income and expenses
Regularly analyze costs, cash flow, and performance to see where you’re overspending and where you could increase profits
Plan for capital needs
Control your growth
Avoid debt
5. Effectively manage your assets
Good asset management is essential for profitability. Key assets to manage include:
Land—Accounting for nearly 82% of total farm assets in the U.S., this is a big one. Management includes optimizing land use and maintaining good soil health, but also extends to things like implementing conservation and environmental initiatives, grain storage, barns, fencing, and irrigation systems.
Machinery and equipment—Maintaining tractors, harvesters, planters, and vehicles is key, as is investing wisely when it’s time for upgrades or replacements
Inventories—These include tracking and managing crops and livestock, as well as things like seed, feed, and fertilizer
Financial capital—This involves tracking and managing your cash, savings, accounts receivable, and investments
People—This includes effectively managing both the expenses and skills for family, employees, and workers
6. Proactively manage risk
Ag businesses involve a fair amount of risk—financial, production, legal, everyday, even natural disasters. It’s important to protect your personal assets by forming an LLC or some other corporate entity. An insurance policy on your farm is also essential to protect you in the event of loss of equipment, infrastructure, harvests, and livestock.
7. Keep a watchful eye on efficiency
Standard operating procedures are a must for a farm or ag business. Having the right equipment, technology, and skilled workers can make a huge difference.
According to greenduchess.com, refusing to accept inefficiencies is key. They offer these recommendations:
Make sure you’ve clearly defined roles and responsibilities
Think about every task that gets done on your farm—from planting to harvesting
Ask how you could make it faster and/or easier—whether that’s modifying crop rotation plans, improving watering systems, or leveraging the H-2A Program to hire skilled workers
Focus on both production efficiency (e.g., crop yields) and cost efficiency (e.g., input costs)
Look for ways to innovate. This doesn’t have to involve high-tech tools or automation. It could be simply finding ways to save time in your daily operations.
8. Create a system for accurate recordkeeping
Accurate data is vital to being able to make informed decisions that fuel farm growth. Start by maintaining a balance sheet, income statement, and cash flow statement but don't stop there. Measure everything that impacts your profitability. Good recordkeeping allows you to understand business performance, measure progress, stay compliant, and make better decisions.
9. Prepare for uncertainty
Farmers and ag businesses deal with more uncertainty than most. While you can’t control the weather or a failed crop, you can take steps to prepare contingency plans.
Danny Klinefelter, a professor and economist with Texas AgriLife Extension at Texas A&M University, and president of his family’s farm in Illinois, suggests playing ‘What if?’. He advises farmers not to play it safe but, rather, plan for the worst. He suggests starting with the four Ds—someone dies, there’s a divorce, someone becomes disabled, or a key player departs. Think through what would be required, the impact, and how to recover in the event you lost skilled labor, a major supplier went out of business, or other possible worst-case scenarios.
10. Lean on experts
Let’s face it, we all have strengths and weaknesses. Identifying what you don’t know and where you could use some expert advice can be a lifesaver. At a minimum, you should seek out an accountant and legal advisor. But there are other partners that can be equally important, such as a compliance expert or an H-2A agency.
5 ways the H-2A Program supports a business mindset
Farming is an extremely labor-intensive business. So, it stands to reason that having reliable, skilled farm labor is a critical success factor. The H-2A Program provides a lifeline to farmers and ag businesses by filling a growing labor shortage gap with legal, quality farm labor. Participation in the H-2A Program has more than tripled over the past 14 years.
Here are 5 reasons why the H-2A Program should be an integral part of your business plan::
1. Improve predictability
The H-2A Program provides a structured way to hire legal, skilled farm labor to help ensure you can keep up with seasonal demands. The process requires that you anticipate and plan for your labor needs. And a significant percentage of workers come back year after year. USA Farm Labor can assist you with verified, skilled farm labor during both your peak and off seasons.
2. Reduce risk, loss, and waste
Participating in the H-2A Program provides the farm labor you need to ensure you complete your harvest on time, avoiding lost crops and revenue. Maintaining compliance is critical, which is why USA Farm Labor’s proprietary database and resource hub gives you a centralized place to create and maintain all H-2A Program-related documents.
3. Control costs and save money
The H-2A Program can actually save you money over time by eliminating the need for you to constantly recruit and train new workers. USA Farm Labor partners with USA Truck Labor to equip foreign workers with essential skills around operating farm equipment. And our global network of recruiters verifies worker skills for you. H-2A employers aren’t required to pay social security, Medicare, or unemployment taxes. And some of our clients, like the Schillings have been able to bring some tasks in-house instead of paying for outsourcing.
4. Improve efficiency and competitiveness
The H-2A Program process requires you to assess and forecast worker roles, responsibilities, and tasks. For example, how much time will they spend building fences, driving tractors, or spraying fertilizer. And having farm labor with the right skills directly impacts efficiency.
USA Farm Labor has 22-plus years of experience with the H-2A Program and applies best practices to streamline the process and make it as hassle-free and efficient as possible. You can lean on our team of experts for help with your paperwork, housing, visa petitioning, worker recruitment, and more.
5. Expand and grow
Having sufficient skilled farm labor frees up time for you to work on your business instead of in your business. Knowing you have the right workers gives you the freedom to finally go after new opportunities or expand into new markets.
