Andy Larson, farm outreach specialist with the Food Finance Institute in Wisconsin, says the first question to ask is “What do you want this enterprise to do for you and your farm?”
“If you don’t identify this, you will never accomplish your goal,” Larson says.
Larson says a first step is to set “smart goals.” Keep the goals specific and simple, measurable, attainable, relevant and time-bound, what he described as “a dream with a deadline.” He used the example of adding pasture-raised pork to his own operation, which would add a productive purpose to an underutilized part of his farm. “I wanted to increase my farm profit by 25 percent while increasing labor by 10 percent within one to two years,” he says.
Larson says to always remember time is your most valuable commodity when trying to figure out if a new farm enterprise can work for your operation, your market and your wallet.
When considering if a new enterprise can work on your operation, take inventory of what skills and advantages you may have. Larson uses an online rubric. For each of the following, assess if your potential endeavor needs this particular skill and if you or your farm team has this knowledge:
- Business management
- Labor management
- Crop management
- Livestock management
Larson says this step can be as simple as giving each skill a thumbs up or thumbs down for what the enterprise will need and what skills are needed that your farm team doesn’t have. “You will need to contemplate if you can afford to hire someone to cover the skills you are lacking,” he says.
The next operational consideration is if you have enough time to take on something new. He suggests making a list of how long it takes to do your daily chores, weekly chores and seasonal/annual chores. Once again, if you or your farm team don’t have the time, can you hire someone?
The type of production system for this endeavor also needs to be reviewed. Do you have enough of the right type of ground? Is the new endeavor suited to your climate and the lay of the land? Can it fit into your existing rotation? Larson says using the free web soil survey maps on the NRCS website can be a great tool to answer these questions.
In addition to the land, the equipment and facilities needed for your enterprise need to be considered. Larson says financing is typically easy for equipment right now, but availability for both equipment and building construction is low. He also points out that if constructing a building, such as for processing or storage, is needed, it may have a higher value off-farm.
After examining the feasibility of the potential enterprise on your operation, Larson recommends looking at marketing. Two websites he recommends for researching the marketability of your idea are Claritas 360, which has demographic information available for free that can help with the simple “go or no-go” of exploring a new enterprise, and the Bureau of Labor and Statistics whose Consumer Expenditure Surveys have data that can be very helpful for learning about your potential customers. If you are looking for more consumer trend information, Larson suggests digging into data from the USDA, either the Agricultural Marketing Service (AMS) or Economics of Food, Farming, Natural Resources and Rural America (ERS).
Larson says by using these data websites, you can look up the demographics of your target market, including household size, income and food expenditures. In Larson’s example of pasture-raised pork, he wanted to sell locally. His closest town has about 2,200 people. Using statistics from the internet, he was able to calculate how many people have households big enough and have enough income to purchase a whole or half hog and what percentage of the people in his area might be willing to pay more for meat that is ethically raised.
“The big question, then, is: Are those consumers willing to pay what you need to charge for your products?” says Larson.
The final piece to look at is the financial feasibility. Larson says the enterprise budget should include fuel/oil, labor, custom hire, rent, processing, supplies, cost of sales and interest. If you are considering a livestock enterprise, it should also include youngstock, feed, bedding and veterinarian costs. If considering crops, include seed, fertility, chemicals and crop insurance.
Larson says the cost of sales is something important for those in production to know – not just for things you are pondering but what you are already doing on your operation. “So many people pay attention to what it will cost them to produce, but very few people consider, for example, the time and expense to sell at farmers’ markets, or the expense of trucking and logistics, or the fees that come with selling online. If there are other people in your value chain, you have to consider their cut in the pricing of your end product,” he says.
A financial feasibility review should look at month-by-month cash flow. It’s essential to know if you will have enough cash flow to cover loan payments until your livestock or crop is ready to sell.
Larson says when considering your long-term goals and how you hope to build wealth, ask yourself: If you instead put the money you are considering investing in this enterprise into a money market, would that earn you more in the long run?
There are many templates available online for analyzing cash flow. Larson uses the free cash flow template available online through Compeer Financial.
To fully appraise a potential enterprise on your operation, the main areas to contemplate are:
- Core competencies
- Labor availability
- Production system
- Buildings, equipment
- Customer segments
- Customer base
- Sales channels
- Enterprise budget
- Cash flows
- Internal rate of return
- Debt service capacity
A quick and easy way to get an overall idea is to rate each of these areas on what you think your enterprise’s chances of success are on a scale of 1 to 4 (4 being excellent, 3 good, 2 fair and 1 poor). Total those scores and divide by 12. If your average is a 3 or 4, it might be a good fit for you, your farm team and your operation. If your average is a 1 or 2, it might be best to invest your money elsewhere.
Kelli Boylen is a freelancer based in northeast Iowa.