The Business Model – Agriculture Business
How Do You Make Money?
The business of agriculture is centuries old. Fundamentally crops were raised to feed the family or to feed livestock who either produced milk, eggs or meat. As the farmer produced more than the family needed, some was sold or bartered to a neighbor for something the other had to exchange. As the enterprises got larger and more specialized the farm family eventually raised enough to feed several other families. The concentration of people into centers of commerce meant that the farmer and the consumer were farther apart.
Today agriculture is a global marketplace. A roadside stand (in Florida) features oranges grown in South Africa! In addition not only has it gotten to be a global market, but the level of specialization has increased dramatically. The backyard chicken coup has been replaced by heated and air conditioned buildings holding thousands of birds.
So, it is still important to the reader that you articulate the basic premise of “making money”. You can grow a beautiful field of tomatoes, but if a thousand other growers have them ready at the same time, and you have no way to harvest them or get them to market, they are still just a pretty field. The business model today is getting the product to the consumer when it is ready, when the customer wants to buy, and at a price that is competitive with the world market.
Of course, while the whole business of agriculture is about production, the services that gather, move, process, and sell the products are just as important. As Ag enterprises get larger and more specialized, the services that support them also become more specialized.
Agriculture Enterprises Face Unique Challenges:
Agriculture is Seasonal
One of the biggest challenges to Ag enterprises is that nearly every operation has seasonality. It’s difficult to schedule production so that a consistent supply is available all year long. This seasonality creates difficultly in hiring full-time, part-time and seasonal workers. Shipping, processing and storage all become much more difficult to control when all the production happens within a few days. Specialization adds to this scheduling headache because many operations only raise or process one type of crop or livestock at one time.
As if scheduling wasn’t bad enough, prices fluctuate with worldwide supply and demand. Reporting services do a very good job of letting you know what the current production and prices are, but fall dynamically short six to twelve months into the future. Influences of weather, transportation costs and alternative supplies can change the commodity prices in the course of a week.
Ag Products are Perishable and Susceptible to Disease and Damage
Most Agriculture products degrade with age rapidly. Many products, such as vegetables are hard to store for any length of time in the “fresh picked” condition. Transportation then becomes very difficult for products that are best consumed when fully ripened.
Presenting a Clear Understanding of the Business Model
Agriculture producers are famous for adapting, changing and modifying production goals as things influence the outlook. An Iowa farmer may plan on planting several thousand acres of corn, but bad weather can push that back and they decide to plant soybeans instead. That decision coupled with a number of farmers doing the same and the price of corn can shoot up and the price of soybeans can drop. In addition, everyone down the pipeline that was waiting for the corn may have to modify their schedules to accommodate the shortage.
Remember that a well-conceived business plan tries to convey to the reader that the enterprise has a handle on the risks associated with Ag enterprises. Knowing that agriculture is a seasonal business, with fluctuating prices, and uncertain demand does little to alleviate the potential risk of the business. However, knowing that these challenges are ever present helps the reader accept that frequent fluctuations are the nature of the industry.
Production agriculture or Ag business enterprises can reduce some of the inherent risk within the venture by taking steps to minimize the impact of fluctuating prices and uneven production output.
Reduce Specialized Equipment
Specialized equipment for planting, harvesting, grading, sorting or processing may make the task easier, but the money tied up in that specialized equipment can wreak havoc on cash flow. Try to rent specialized equipment if available. This may not be a viable option for some because most specialized equipment isn’t available, but you can possibly find another farmer or business that has the equipment but isn’t using it at the same time.
Custom operators can often till, plant or harvest crops with state-of-the-art equipment at a lower price per acre than you can own a comparable piece equipment yourself. If you operate a value-added business is possible that you can utilize a production facility in their off season. This could work well for cleaning, trimming and freezing of produce if another plant had this equipment but were in a slow period.
Reduce Production Costs
a) Fuel has become the major expense in most agriculture business enterprises. Production operations burn hundreds of gallons of fuel tilling, planting, and harvesting crops. Additional fuel is used to move, store and process products after harvest. More fuel is then used to move completed products for retail sale and use. Analyze each step to see if there are options to reduce the cost of fuel. Consolidating operations can help, reducing some steps is another option, and moving certain operations closer together is still another viable possibility.
b) Labor – everything in the agribusiness industry takes labor, and often lots of it. Can some of the labor intensive operations be automated? Can you find ways to reduce labor by changing the way things are done? Manufacturing companies have spent millions to reduce labor costs, yet agriculture hasn’t employed many of these labor saving advances.
c) Inputs: Can some of the production costs such as seed, fertilizer and chemical be trimmed? Processing costs such as waste, packaging and storage are common in almost every enterprise. Are there way to reduce shipping costs and handling? Can processing be made more efficient with standard sizes, reclaiming processed waste, or reduced spoilage?
Ag businesses often concentrate on their area of specialization, but sometimes it pays to diversify and modify operations to seek other revenue areas. If you view the operation as an investment it is often a wise strategy to have a balanced portfolio. Spreading risk often lowers the overall risk of the investment because it is unlikely that every segment will be down at the same time.