Best agricultural business to start

best place to start an organic farm and farm improvement grants
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PatrickWood,United Kingdom,Researcher
Published Date:16-07-2017
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NEW FARM START-UP A Guide to Starting and Growing A Small or Medium Sized Farm Business in British Columbia INTRODUCTION Welcome to the farm community and congratulations on choosing farming for your new business enterprise. Agriculture provides many opportunities to start and grow a farming enterprise that meets your needs and interest. Many of the medium and large scale farming operations, supporting several families today, started small and grew over time as skills developed, markets were refined and demand for their product increased. And farming is a good small business. Farms tend to stay in business longer than other small businesses and farms tend to be transferred to the next generation more frequently than other small businesses. 1 Agriculture has been referred to as the most essential job in the world : In order to succeed in farming you have to know when to sow, how to grow, when to harvest and how to sell. And, you have to do it while keeping one eye on an unpredictable mother nature and the other on capricious and unforgiving markets. It isn’t easy. Growing food is not only the basis of human survival and therefore the most essential job in the world, but it is one of the most complex. To provide the best opportunity for success in your farm business, it is important to identify the type of farm enterprise that best fits your passion, your interest, your family situation and the resources you have available. This guide is designed to help you ask the appropriate questions, in an orderly way, that will help you develop a farm business enterprise with the highest potential for success. The guide begins by exploring the passion, interest, skills and resources you bring to your farm enterprise. You may be keen to jump right to the section on ‗developing a farm enterprise plan‘ but are encouraged to take the time to first assess your passions related to farming and what assets you bring to the farm business. Farming provides many ancillary benefits but as one farmer noted: Farming as a business is a wonderful lifestyle, farming as a lifestyle is a horrible business. The ancillary benefits come from a successful farm business. Business structure, planning and analysis are important parts of your farm business enterprise. The business questions have been placed up front in the guide because they should be considered early in your farm development process. You will note that the section on ‗what can you sell?‘ comes before ‗what can you produce?‘ Producing a product, before identifying a market, usually results in you selling your product at the ‗commodity‘ (lowest) price. As a small or medium sized start up farm, it is unlikely you can produce as efficiently as existing large scale farms. One of the critical factors for success will be identifying and developing your specific market before and during production. There is a lot of information on the internet related to farm business planning. Internet references are imbedded in the document and summarized in the appendix. This guide supplements the general business planning guides by adding the B.C. perspective as well as hints and insights into how to best develop your farm enterprise plan. The more you are involved in developing and personalizing the information that goes into the plan, the better prepared you will be to start your farm enterprise. 1 From A Century of Achievement , A History of the Ministry of Agriculture, Fisheries and Food. 1996 i WHAT DO I BRING TO THE FARM BUSINESS? 1 At the end of Section 1 you should be able to answer the following questions:  What type of farming am I passionate about?  What skills and resources do I bring to the farm?  What skills and resources will I need to access off-farm? Operating a business requires many different skills. Most people are better at some skills than others. For example some people may be very mechanically inclined, others may be very good with numbers while others may like working with people and gravitate to the sales and marketing end of the business. No matter how great your product or how good your location, it is unlikely you will optimize your success if you do not utilize the skills and abilities of your farm team and match their skills with the work required. If there are jobs that need to be done that don‘t match the skill sets on the farm team, consider hiring that skill set or partnering with someone that has the skill set. This section helps you evaluate what skills and resources you bring to the farm enterprise. It poses the following questions, how much time can you dedicate to the farm operations and what are your personal interests – what work do you prefer to do? 1.1 PERSONAL INTERESTS It is important to reflect on what you want to get out of the farm. What do you like to do and where do you see the farm operation in 5 years or 10 years? What proportion of your income do you expect from the farm business? How much time do you have to commit to the farm operation? Some people prefer raising livestock, others prefer growing crops. Livestock tends to require less work per day but over a longer period. Growing crops requires shorter periods of intensive work. Are there other social goals you wish to achieve in conjunction with your farm enterprise? 1.2 TASKS ASSOCIATED WITH FARMING Farming is a very diverse business requiring many different skills. The following captures some of the broad categories of skills that may be needed in your farm business: Raising crops Raising Livestock Marketing Obtaining finance Equipment repair Building repair Accounting Managing Labour Building management Communications Working with Government Agencies Business Performance and Review 1 1.3 ASSESSING SKILLS AND KNOWLEDGE The New England Small Farm Initiative (NESFI) has an extensive farming and business skills assessment worksheet. If you wish to do a more detailed analysis go to: www.smallfarm.org/main/for_service_providers/tools_and_resources_for_working_with_new_farmers/nesfi_tools_ and_resources/dacum_occupational_profile/ At a minimum, you are strongly encouraged to list the types of jobs and skills that will be needed in your farm operation and include who will be responsible for them. You should keep this in mind while doing the farm enterprise plan so you can build your list of skills needed as you plan your farm operation. When the list of jobs is complete you may wish to sit down with your farm team and discuss with them how to best allocate the jobs and which ones may need outside expertise. Job/Skill Lead Person Outside Help Farm business planning Equipment repair Baljeet Crop production Jane Marketing Accounting & Analysis ABC Accounting 1.4 FIVE TRAITS OF SUCCESSFUL FARMERS Several traits have emerged that are evident in most of the successful farm startups. The following, very unscientific list, is offered for your interest and consideration: 1.4.1 PASSION Farming can be a very rewarding business. But it is not easy. A passion for the product one produces helps carry you through the tough times and enables you to celebrate the good times. Produce a product that you love. If you do it only for the money you will likely be less successful. If you do it for love you will be successful where others have failed. 1.4.2 MARKETING If you build a better mouse trap and wait for people to beat a path to your door you may be successful or you may be very lonely. Small and medium sized farms, by the nature of their business, must sell a differentiated product. So you will need a strong, focused (and continually re-focused) marketing effort. Technology has made connecting with people - and thus marketing – much easier for small businesses. 1.4.3 INGENUITY, CREATIVITY AND ADAPTABILITY Farming is not a franchise. There is no rule book. Successful farmers have used their ingenuity to adapt their farm operations to market needs and adopted new technologies and systems to produce their product more efficiently. 1.4.4 PERSEVERANCE Mother nature will throw you a curve ball Things will happen that the best planning cannot avoid. Successful farmers are able to accept this and persevere. 2 1.4.5 CONTINUING EDUCATION AND NETWORKING Successful farmers seek out new production methods, new marketing approaches and new technologies. Your fellow farmers face many of the challenges you are facing. They often come up with creative solutions. Talk to them – they are a valuable resource. For more information on the Best Management Practices of Leading Farmers go to: http://www.farmcentre.com/Resources/Detail.aspx?id=331d539f-fbfa-49a2-85ed-5d559db0f701 1.5 CAPITAL RESOURCES – LAND, EQUIPMENT, FINANCIAL RESOURCES The previous section explored the human resources you and your farm team bring to the farm operation. This section looks at the financial and physical resources you have available to you for your farm start-up. 1.5.1 ACCESS TO LAND An essential element to a farming operation is access to farmland. There are a variety of ways to access land and they do not all require a large investment. If you already own a home, the incremental costs of buying a similar home in the farming area may not be that much. The incremental cost of farmland over the value of the residential component, on a specific property, tends to reflect the agriculture value of that land. If you do not own a home or farmland then there are a variety of ways to access farmland through leases, crop shares and other arrangements. The challenge is that there is no simple way of finding these arrangements. They often evolve through working in the farming area or other relationships built up in the area. 1.5.1.1 Already Own or Are Planning to Purchase If you already own a piece of land then there may be some existing limitations on what type of farming operation will be suited to your land. In general field crops need relatively level, well drained land. Hilly or 2. less well drained land is better suited to livestock production or non-soil based crop production In some cases land can be leveled to better accommodate field crops but will add to your start-up costs. Soil conditions may favour one crop over another. Soil conditions can be improved by additions of organic matter (often manure) or non-organic material, however, this can be very expensive. If you are planning to purchase farmland, then work through the section on ‗what can I sell‘ before selecting a farmland parcel that best suits producing that product. If you are purchasing you should do a soil test prior to purchase to ensure the land is suitable for the crop you plan to grow. 3 In some areas, when looking for farmland, one must consider whether to purchase land within the ALR or land outside the ALR. Land outside the ALR does not have the limitations imposed by the ALC Act, however, land inside the ALR provides farmers with more protection of normal farm practices under the Farm Practices Protection (Right to Farm) Act http://www.alc.gov.bc.ca/alr/fppa.htm 2 Non-soil based crops include potted nursery, greenhouses. 3 In B.C. the Agriculture Land Reserve is an area where farming is the primary land use and other uses are limited. 3 1.5.1.2 Accessing Farmland Through Leases and Other Arrangement Leases of Private Farm Land – Short Term Approximately 40% of farmland in B.C. is leased. Some of this land is used primarily as rural residential by the owner and the balance of the farmland is leased to neighbouring farms for annual cropping or forage production. This is an excellent way for farmers to expand production and for start-up farmers to get access to land if they can find a workable situation. 4 While leases over 3 years can be registered on title , few private landowners are willing to have leases registered as it limits their flexibility. Some farmers entering longer leases, that are not registered on 5 the property, are including comprehensive ‗exit clauses‘ so they can recover their investment and lost earnings if the landowner decides to suddenly terminate the lease. This may happen if the owner sells the property. If you enter into a lease for farmland – which most likely will not be registered on title – make certain you give careful consideration to the exit clause. Lease of Public Farm Lands or Land Trusts 6 Many local governments in the farming areas own farmland that they are holding . They often will lease the land on a short term lease. Land trusts also hold land for specific uses. Land trusts will entertain leases and may also be willing to register a long term lease. For a more detailed discussion of farmland leases go to: ffcf.bc.ca/programs/farm/CFPdocs/Farmland%20Access%20Ag%20Guide%202009.pdf Farm Mentor / Transfer Arrangements There is a growing interest in the broad agriculture community with connecting older farmers, with no heirs that wish to take over the farm, with new young farmers trying to build equity in a farm. New England Small Farm Initiative has funded several programs that try and connect retiring farmers with new young farmer. They have had some success. www.smallfarm.org/main/for_on_farm_mentors/ 4 When a lease is registered on title it stays with the land. If the property is sold the new owner must honour the lease. 5 Exit clauses define what happens when a lease is terminated by either the landlord or the tenant. They include the length of notice and any compensation required. 6 To find out if there is publically owned farmland contact your local government office and ask for the person responsible for managing the land owned by the local government. 4 1.5.2 ACCESS TO FARM EQUIPMENT Driving a shiny new tractor may feel good but it may not be the best business decision for your farm. Farming is an asset intensive business. After obtaining access to land you must also access farm equipment to work the land. This is especially challenging for smaller start-up farms because the equipment cost must be justified over a smaller revenue base. The first step in considering farm equipment is to reflect on your mechanical skills or the mechanical skills of someone on your farm team. Also consider whether the local equipment can be easily repaired by your local 7 equipment repair shop . This will help determine the best approach for your situation. Considerations in obtaining farm equipment or farm equipment services include: 8 1.5.2.1 Buying Used Equipment Used equipment costs less but also may need more frequent maintenance and repair. If you or someone on your farm team enjoys working on farm machinery this may be a good option. Unfortunately in some areas, where there has been strong growth in small and medium sized farms, the demand for used equipment is high and the supply low. This has driven the price of some used equipment above its value relative to new equipment. The other challenge with used equipment is finding a used piece of equipment that fits your specific farm needs. 1.5.2.2 Buying New Equipment As your farm grows and develops, the time will come when it is appropriate to buy equipment new. That time may come sooner if your farm team does not have an individual that is good at equipment maintenance and repair or you find you have a specific need for which there is no used equipment available. With growth, it is important for your compliment of farm equipment to grow to meet the higher demands both in time of use and specific capabilities. 1.5.2.3 Leasing Depending on your financial situation and the availability of other options you may consider leasing equipment. Leasing will generally cost more in the long term than outright purchase but in certain circumstances it is an attractive option. For more on leasing go to: www.omafra.gov.on.ca/english/busdev/facts/09-035.htm 7 Some older tractors may be out of production and replacement parts very difficult to obtain. 8 You can find used equipment through internet sales sites (i.e. craigslist), at local equipment auctions and through industry publications. 5 1.5.2.4 Borrowing / Bartering for Equipment If there are times when cash flow cannot support a new piece of equipment, or more commonly when you only need the equipment for a few short periods during the year, it may be more cost effective to borrow equipment from the neighbor. Or, better yet, barter services for some of your products. Some examples of this are:  If you only plough your land once a year, and your neighbor has a nice tractor and plough, consider approaching them to plough your field when they do their field. This is both cost effective relative to the plough but may also enable you to buy a smaller more agile tractor for your other farm work.  If you only use a front end loader twice a year to move your manure pile, consider asking your neighbor with the fancy new front end loader to do it for you. 1.5.2.5 Contract Farm / Tractor Work In most areas there are farmers (or farmers children that like farm equipment more than farming) that will do farm work on a fee for service basis. It is important to remember in this situation that your neighbor‘s farm work will come first. So if the work you wish to contract out is time or weather dependent, you may not get the work done in a timely manner. 1.5.3 FINANCIAL RESOURCES The financial resources needed depend on the size of the farm operation you wish to start and the type of agriculture production you choose. The three broad sources of financing are:  Personal/family cash or equity  Loans/lines of credit from financial institutions  Operating credit from suppliers For small farm start-ups some people can fund the operation out of personal savings, personal lines of credit and cash flow. For larger operations, and those requiring more buildings and machinery, a loan may be needed to supplement your personal financial resources available. Many suppliers will give short term credit over the growing period. Co-operatives often provide supplies to members and offset the costs against revenues from the crop. When these opportunities arise they can reduce farm cash flow needs. Section 5 on Developing a Farm Enterprise Plan will help you determine how much working capital you will require for your farm enterprise. 6 MARKETING OPPORTUNITIES – WHAT CAN I SELL? 2 By the end of Section 2 you should be able to answer the following questions:  What are several products I am best positioned to sell?  What marketing channel best suits my product and my skill set?  In what way do I have a competitive advantage over similar products? 2.1 GENERAL APPROACHES TO SELLING FARM PRODUCTS – MARKETING CHANNELS 2.1.1 FORMAL MARKETING SCHEMES The B.C. Natural Products Marketing Act provides the legislative authority for a variety of commodities to set up marketing arrangements. It details a range of rights and responsibilities on the marketing of specific agriculture commodities. Formalized marketing schemes may involve the whole province (e.g. dairy or eggs) or just specific regions (tree fruits). Some commodities that are currently under marketing schemes include: LIVESTOCK Dairy http://bcmilkmarketing.worldsecuresystems.com Broilers (chicken) www.bcchicken.ca www.bcegg.com Eggs Turkeys www.bcturkey.com Broiler hatching eggs www.bcbhec.com FRUITS and VEGETABLES ( check by region ) www.bcveg.com Vegetables (field) Cranberries www.bccranberries.com Marketing Schemes under the Natural Products Marketing Act can take various forms based on the level of control over price and supply. 2.1.1.1 Supply Managed Commodities Marketing boards control the production and marketing of certain products (dairy, eggs, turkeys, broilers and broiler hatching eggs). They issue rights to ship (quota) and establish/negotiate the price the processor pays the grower for the raw product. Processors then sell unregulated into the wholesale and retail markets. The ability to purchase quota and the issuance of new quota varies from commodity to commodity. Supply-managed commodities are characterized by higher-than-average capital cost to enter, lower risk and lower-than-average return on assets. Marketing outside of the board is prohibited, however some poultry marketing boards have set maximum flock sizes that can operate legally outside the marketing scheme by purchasing a permit. 7 All of the supply managed commodities have established ‗new entrant‘ programs or mechanisms for small producers to operate within the regulated marketing system but be able to market directly to retailers or consumers. The requirements change over time so if you are interested in producing a product that is under a supply managed marketing scheme check with them to find out the current requirements. 2.1.1.2 Central Selling Desks Central selling desk style marketing schemes require producers to sell their product through a central marketing agency. There are no controls on supply so if you wish to produce one of these products you just need to register with the agency involved. Examples include: Hog Commission www.bcpork.ca B.C. Vegetable Marketing Commission www.bcveg.com 2.1.2 CONTRACTUAL ARRANGEMENT WITH MARKETING AGENCIES, CO-OPERATIVES OR ON-FARM PRODUCER / PROCESSORS With some commodities, producers have recognized the value of pooling their HELPFUL HINT product and selling as a larger group. These associations or co-ops operate under a variety of structures with the general purpose of getting the best price for the When dealing with a producers. They have no authority under the Natural Products Marketing Act. marketing cooperative, always check on their Examples include: reputation and financial stability before United Flower Growers www.ufgca.com committing to ship your Abbotsford Growers Co-op www.abbotsfordgrowers.com (raspberries/strawberries) product to them. B.C. Tree Fruits www.bctree.com 2.1.3 AUCTIONS – PARTICULARLY LIVESTOCK Auctions remain the main way of selling commodity livestock that is not under a marketing scheme - i.e. beef, sheep, etc. Auctions provide the producer with the prevailing ‗commodity‘ price. Many small scale beef and sheep producers arrange for slaughter and butchering and sell direct to the consumer. 9 The United Flower Growers Co-op in Vancouver uses a dutch style reverse auction for selling cut and perennial flowering plants. 9 A dutch style auction starts at a high price and declines until an individual bids. 8 2.1.4 DIRECT MARKETING Farm direct marketing has become popular with small and medium sized farms, primarily because it enables the farm to capture the full value of the competitive advantage they have in their product. The approaches to direct marketing are varied. The best method for you is the one that fits your unique farm enterprise. Approaches to direct farm marketing can be broadly grouped as direct to retailers (wholesale) or direct to consumers (retail). 2.1.4.1 Direct to Retailers (Wholesale) Small Meat Markets Many local butcher/meat markets have survived the trend to food superstores. Local meat markets often prefer to feature local farmers and generally focus on premium meat products. Local Farm Market Stores 10 It is challenging for small to medium size farms to meet the needs of large retailers . Large retailers are looking for a scale and consistency of supply that small and medium sized farms have difficulty providing. There has been growth in medium sized ‗farm markets‘ that focus on selling local produce when available. These stores, which can be on-farm markets that have grown or smaller markets in the urban area, usually welcome produce from local farms. Restaurants An increasing number of restaurants in the province are seeking locally grown products. It is important to be very clear on the type, size, quantity and timing of products the restaurant needs before committing to supply. 2.1.4.2 Direct to Consumers (Retail) Road Side Stand or On-Farm Store Many of us remember buying produce at a road stand. It could have been corn in Chilliwack or apples in the Okanagan. This approach has been successful for as long as farmers have farmed near urban centers. The one key element for this approach is location. The potential sales, at least in the early years before your reputation grows, depends largely on the volume of traffic by your stand, the speed limit on your road and the population within a reasonable driving distance. Different municipalities may have different rules regarding signage and roadside stands, so it is important to check with your municipal office before designing your roadside stand. 10 Some retailers have made an effort to include local farm produce. 9 Farmer’s Markets Farmer‘s markets are experiencing a revival across North America. This enables farmers to congregate in a place that is convenient for shoppers. While farmer‘s markets are very successful for some farms, they do not fit all farm products or farmer‘s needs. And they do require a significant commitment of time from the farmer - on specific days over a period of time. For more info on farmer‘s markets go to: www.bcfarmersmarket.org 11 Community Supported Agriculture (CSA’s) A CSA is a pre-arranged agreement between a farmer and a specific number of people to purchase a box/bag of produce from the farm on a set schedule. The customer essentially pre-purchases a ‗share‘ of the harvest. For some CSAs the farm delivers the box to the customer, for others the customers come to the farm to pick up their box. Sometimes work shares are available through which people can work on the farm in exchange for their product. CSAs can be designed to fit your needs and your farm enterprise. A big difference between CSAs and other direct marketing methods is that the customers pay for a season of produce at the beginning of the season. While this provides guaranteed cash-flow it also puts pressure on you as a farm enterprise to deliver the farm products in a timely manner. For more information on CSAs go to: http://csafarms.ca/CSA%20farmer%20resources.htm Farm Direct Sales – Without Roadside Stand There are a variety of approaches to farm direct sales beyond the road side stand. The approach must meet the characteristics of your product and your personal needs. Some approaches include:  U-pick  Requirements to pre-order and then pick-up on specific days. U Pick  Requiring pre arranged times for sales (by appointment)  Limited opening hours (i.e. Saturday only)  Mail-order HELPFUL HINT If you are not loc ated on or near a major road consider using direction signs, specific pick-up days or limited opening hours when direct marketing 11 An additional part of the CSA is the philosophy that the customer recognizes that in buying a share in the harvest they are taking on some of the risk of the farm – in a sense reducing the risk of the farmer. 10 2.1.5 UTILIZING WEB-BASED TOOLS Web-based tools are critical to the success of farmers today. No matter what type of marketing you engage in, it is important for your business to have a presence online. This could be through a formal website or just a blog that helps customers stay up-to-date with activities on the farm. The cost of utilizing web-based tools is very low and the ability to easily communicate with a large customer base provides significant benefits. Tools you might consider using include:  A website - permanent, can tell your story or just provide basic information  A blog - allows you to easily share stories and pictures about activities on the farm  A profile on a social network such as Facebook - allows you to share stories and pictures about activities on the farm with contacts that you make  You Tube - allows you to post videos to share information about the farm  Twitter - allows you to send short messages updating people about activities on the farm 2.1.6 ADDITIONAL REGULATIONS CONNECTED TO DIRECT MARKETING If you are selling food products directly to the public, you may require approval from the local Health Authority. Dairy products and meat products have specific legislation that regulate their sale – the Milk Products Act and the Meat Inspection Act. With other products, the requirements are up to the discretion of the local health officer. Generally the more a food product is processed, and the more susceptible it is to spoilage, the more concerned the health officer will be. For example, if you were selling apples in a box the health officer may not be concerned. However, if you were to sell apple pies, the health officer would likely need to approve your cooking and holding facilities. Check with your local health office for more information. Go to http://www.health.gov.bc.ca/socsec/ to find your local health office. There are also regulations surrounding which types of foods can be sold and how certain foods must be sold at farmers markets. If you are considering marketing through a farmers market, check with your local market on any specific requirements for your product. More information on food safety best practices can be found at www.al.gov.bc.ca/foodsafety/index.htm and www.foodsafe.ca/marketsafe . 2.2 PRODUCT DIFFERENTIATION AND COMPETITIVE ADVANTAGE 2.2.1 PRODUCT DIFFERENTIATION AND COMPETITIVE ADVANTAGE Generally, there are only two ways to compete in the market – being different or having the lowest price. Only one supplier can have the lowest price, and it is usually the one that is biggest and has the least expensive source of supply. Few farms in B.C. are in this situation. Most small and medium sized farms in B.C. must compete by providing a product that is different in a way that the consumer values and, as a consequence, will pay a higher price. This difference (product differentiation) can be very small. The simple fact of knowing where a product is grown or knowing the farmer may be of 11 great value to some customers. Different varieties, different production techniques, location, ambiance, etc. can differentiate your product from others. This difference creates a competitive advantage for which you can charge a premium over the price of your closest competitor. If you plan to direct market some or all of your product, the next section on identifying a marketing opportunity and determining if the marketing opportunity is a business opportunity will be helpful. Your land is likely capable of growing a wide variety of products; however, if you cannot sell these products at a profitable price, the farm enterprise will not be as successful. 2.2.2 IDENTIFYING DIRECT MARKET OPPORTUNITIES HELPFUL HINT Your competitive advantage can be large (you are the only supplier of vine Identifying your ripened tomatoes in your small community), or very small, (you can deliver competitive advantage, enhancing it and promoting your vine-ripened tomatoes daily compared to your competitor that delivers it is the key to success for every other day). By definition, a competitive advantage is something you have most small and medium or can do that others don‘t have or can‘t do. This can come from your specific sized agriculture enterprises in B.C. skill set, some specific characteristic of your farm or a specific characteristic of your community. 2.2.2.1 Skills and Resources – What skills and resources do I have that may give me a competitive advantage? When you walk down the main commercial street of your community, look at the different small shops. What makes them successful? Often it is the specific skills of the shop operator. The retail space is similar but the stores are all different. Why is a clothing store, a Deli or a beauty salon successful in a specific location? Usually it relates to the passion and skills of the small business operator. What do you do better than the other farm enterprises in your area? 2.2.2.2 Farm – What types of products might be uniquely suited to be produced on my farm property? There will be some similarities between your farm and the ones around you but also some differences. These differences may provide some market opportunities. Consider:  Location  Direct marketing (busy street vs a quiet street)  Water sources  Drainage  Frost-free days / early warming soils  Slope - relative to light intensity  History of production 12 2.2.2.3 Community – What types of products and services might be in demand in my community? Direct and niche-market opportunities often exist in your community. All communities are different, so to identify a real market opportunity will require work and thought on your part. The best market opportunity will likely not be on the list in a book, or publication below, but one you identify through your own research. Community characteristics to keep in mind are demographics (characteristics of the residents), geography, culture, location relative to significant landmarks or activities and tourist attractions. As a final way of ‗ground proofing‘ your competitive advantage, you should be able to clearly and confidently answer the following question: Why would a consumer reject what they are currently buying, and choose what I have to offer ? 2.3 EVALUATING THE MARKET OPPORTUNITY AS A BUSINESS OPPORTUNITY In this section you will better define your competitive advantage, evaluate how secure it is and estimate the market size. 2.3.1 HOW SECURE IS YOUR COMPETITIVE POSITION? It is not enough to know what your competitive advantage is but also how secure it is. There are four main aspects in evaluating the security of your competitive position:  Are there close substitutes to your product and how stable are their prices?  If your competitive advantage is technology-based, how secure is that technology and what is the life expectancy of the technology?  Is it easy for competitors to copy you (ease of entry)?  Is the resale value of your capital investment low – preventing you from changing to another product if the market changes (ease of exit)? 2.3.1.1 Substitutes Most agriculture products have close substitutes. When you walk down the produce isle of your supermarket or the farmers market you make choices between two similar products based on your choice of quality, price and other criteria. Your market opportunity is very sensitive to the activity of its closest substitute. If your closest substitute has a rigid price and a standard quality, your competitive position is stronger. If your competitor has a flexible price and level of quality, it may be easy for them to shift their product to compete directly with you. 2.3.1.2 Technology If your competitive advantage is technology-based, say, the rights to a new tomato that grows bigger and tastes better, then your competitive advantage only lasts as long as the technology - until the next new variety comes out. 13 2.3.1.3 Ease of Entry The easier it is to get into producing your product the faster other competitors will compete with you and drive the price down. Christmas trees and hedging cedars are a good example of this. If the market price is good, others will enter, increasing supply and creating downward pressure on prices. If other competitors can easily change to produce your product you should consider how you can differentiate your product. Some Christmas-tree farms have differentiated by offering extra services like sleigh rides and hot chocolate or focusing on specific varieties that command a premium price. 2.3.1.4 Ease of Exit If your competitive position is lost in some way you couldn‘t anticipate, you may wish to change to another product. If the capital investment in producing your product is high, and has a low resale value, it is very expensive to change. You may be locked into operating at a much lower profit level than you planned. 2.3.2 DEFINING THE CHARACTERISTICS OF THE MARKET FOR YOUR PRODUCT? This is a very important question and must be answered without the emotion that is often attached to a specific product. Be objective To estimate the potential size of the market for your product you need to answer some key questions:  How big is the target market in the area I wish to serve?  What portion of that market can I capture?  What price can I sell my product for?  Is the market opportunity a business opportunity? 2.3.2.1 How Big is the Target Market? Photo: Simon Feiertag Determining the size of the target market can be easy in some cases or very difficult in others. If you plan to sell a highly differentiated product, the market may be as big as you can make it. For a traditional commodity — suppose you wish to know the market for gourmet tomatoes in a community of 10,000 people — you may start by identifying the per capita consumption of tomatoes in your area. If, for example, it is 5 lb/yr then the total market for tomatoes is 50,000 lbs/yr (10,000 people X 5 lbs/yr). To estimate the breakdown between traditional and gourmet tomatoes you can go to your local supermarket Source: www.ethno botanik.org and compare the shelf space allocated to the different types of tomatoes. If 10% of the tomato space is allocated to gourmet tomatoes, this provides a rough estimate of the breakdown. In this case, the market for gourmet tomatoes in the community would be approximately 5,000 lbs/yr. Your resulting market size would depend on what portion of the 5,000 lbs/yr you could capture. 14 If you were to become the only local supplier and were able to give better service and fresher product you may capture it all. If a small operator had been supplying the market for 10 years and also supplied the local supermarkets with gourmet cucumbers and peppers you may not be able to capture any of the market, no matter what your price. For another example, suppose you were interested in supplying grain-finished lamb to the local market through direct order. In this case, per capita consumption figures are of little value as few households would buy more than one lamb per year. You need to estimate the number of households that would consider buying lamb directly and, given your planned capacity, could you sell your product? This calls for some market research. It could be as simple as asking your HELPFUL HINT neighbours and friends if they would be interested. If you work off the farm then inquire at your workplace. You could also place an ad in the local newspaper Keep in mind that and check the response. expressions of interest and actual sales can be very Another example: You live on a fairly busy street and are thinking of growing different. pumpkins for the Halloween market and selling them at a road side stand. How many could you sell? You may wish to make a rough estimate by multiplying the number of households that purchase pumpkins times the estimated number of cars driving by your home. This would give you an estimate of the pumpkin market driving by your home. Your quality and price would determine what share of that market you might be able to capture. Statistics Canada is a good source for per capita consumption and also production levels of traditional agriculture products. Go to: www.statcan.gc.ca/ads-annonces/23f0001x/hl-fs-eng.htm 2.3.2.2 What Portion Can You Capture? It is relatively easy to estimate the market size for existing commodities. The most common error in projecting your potential sales is overestimating what share of that market you can capture. It is often a good idea to establish a best-case and worse-case scenario. If everything goes well what is the maximum I can sell? If everything that can go wrong does go wrong, what would I sell? 2.3.2.3 What Price Will You Charge for Your Product? This is a difficult question as it relates to the competition and the budget aspects of the business. If you drop the price you may sell more but have lower margins. On the other hand, your competitor may drop the price to meet yours and you will sell the same and still have low margins. There are three general approaches to pricing: 1. If you are competing on price you must have the lowest price for a given grade or quality. There are few, if any, commodities produced in B.C. that can compete on price alone. 2. If you are selling a totally unique product you can charge what the market will pay to consume all that you produce. 15 3. If you have a differentiated product, you need to price the product at slightly less than what the market values the difference between your product and your competitor‘s product so customers will move from their existing supplier to you. HELPFUL HINT For example, in the gourmet tomato case, if you were to be the only local If you have extra products, supplier and your quality was similar to the out-of-town supplier you may give it away as samples be able to sell for slightly less than the out-of-town supplier because of the rather than discount the price. You will strengthen savings in transport cost. If, on the other hand, your product was also better, the relationship with the you may be able to capture the market by pricing at the same price or even customers you want and not slightly higher. attract customers you do not want in the long run. 2.3.3 IS THE MARKET OPPORTUNITY A BUSINESS OPPORTUNITY? A very rough approach to evaluating the quality of the business opportunity is defined by the ―rule of 5‖; that is, the operating profit should be 1/5 of gross sales and the operating profit should be able to pay off the capital expenditures in five years. This is just a rule of thumb. It should only be used to trigger a more in depth analysis of your project to ensure the risk is reasonable for the potential returns. Rule of 5 16 WHAT CAN I PRODUCE? 3 By the end of Section 3 you will be able to answer the question: What product(s) can I sell and produce on my land? HELPFUL HINT Section 2 helped you identify several products you feel you have a competitive advantage in selling. In this section you will evaluate whether If you are growing indoors you can produce them competitively on your land. In essence, you will or producing plants in pots match your land capability with your wish list of potential products. This or greenhouses, then soil / land capability is involves four key steps: less important. 1. Assessing Your Land Capability 2. Matching Land Characteristics to Production Requirements 3. Identifying any Regulatory Restrictions 4. Collecting Commodity Specific Production Information. 3.1 ASSESSING YOUR LAND CAPABILITY Assessing your land‘s capability to produce agricultural products involves:  Identifying what soil type or types exist,  Determining the climatic characteristics of your area,  Identifying any drainage or irrigation (water) needs,  Determining topographical limitations (hills or flat?), and  Identifying any regulatory limitations. 3.1.1 SOIL CAPABILITY The three key characteristics you need to consider in doing a preliminary analysis of your soil are: 1. Texture (from gravel to clay) 2. pH – or acidity/alkalinity 3. organic matter content If your soil is gravelly and coarse then it is likely that it is short of the nutrients needed and low on its ability to hold moisture. Often these soils drain well (a good thing) however effort (expenses) will be need to add sufficient organic matter and nutrients for optimum growth of many plants. If your soils are heavy (clay) soils they will likely not drain well and will be late drying out in the spring. It is very difficult (expensive) to modify heavy clay soils to achieve optimum growth of many plants. Different plants prefer different soil pH. Soil pH can be determined through a soil test and can be relatively easy to modify with the use of lime or sulphur. 17 Organic matter is important in the soil for providing key nutrients, holding moisture in the soil and adding to general soil health. Organic matter can be increased by adding manures, preferably composted manures, over time. Canada Land Inventory (CLI) provides soil maps for the agriculture areas in the province. Unfortunately they have not been digitized. Some district offices of the Ministry of Agriculture have hard copies. Soil capability mapping will tell you the types of crops suitable for the specific area and provide guidance on the soil-management practices that will maximize the production of the crop you are considering. For example, some sandy soils are well suited to raspberries and can be modified to produce a wide range of crops. Valley bottom soils, subject to high water tables or flooding, are suitable for other crops. Detailed soil analysis, done at an independent laboratory, provide more specific information on the available levels of key nutrients required by the crop you wish to grow. Contact numbers for some independent labs in the province as of 2011 are: SOIL LABORATORIES IN BRITISH COLUMBIA Exova JR Laboratories 104 – 19575 55A Avenue 12 – 3871 North Fraser Way Surrey, BC V3S 8P8 Burnaby, BC V5J 5G6 (604) 514-3322 (604) 432-9311 www.exova.com M&B Research & Development P.O. Box 2103 Sydney, B.C. V8L 3S6 (250) 656-1334 www.mblabs.com 3.1.2 WATER – TOO MUCH TOO LITTLE OR JUST RIGHT? Almost all areas of B.C. require some additional water during the growing season for optimum growth of field crops. Forages, hay and grain, can be grown in many areas without summer irrigation. The quantity of water needed may vary depending on the type of irrigation system used. For more information on irrigation systems go to: www.al.gov.bc.ca/resmgmt/publist/Water.htm Poorly drained soils reduce the productivity of many crops. Surface drainage generally improves with an even gradual slope. Subsurface drainage depends on the soil structure under the top-soil. Drainage can contribute to a site‘s suitability to specific crops. If your soils are poorly drained (have wet spots in the winter and take a long time to dry out after a heavy rain), you may need to install some drainage to maximize your production. The Ministry of Agriculture‘s Drainage Manual is a good resource if you need to add drainage to your farm. Please see: http://www.agf.gov.bc.ca/resmgmt/publist/500Series/525500-1.pdf 18

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