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This document was published by the Tuskegee University Cooperative Extension Program. Tuskegee University offers educational programs and materials without regard to race, color, national origin, religion, sex, age, veteran status or disability. It is also an Equal Opportunity Employer.
What are Agricultural Ventures?
A venture is a risky undertaking involving uncertain outcomes. It is a business enterprise or speculation in which something is risked in the hope of profit. Thus, agricultural ventures refer to agricultural-related enterprises or businesses that have uncertain outcomes. Typical examples include ventures involving innovations, niche marketing, or ventures that add value to the product, i.e., value-added agricultural ventures such as bio fuel enterprises that transform raw products into fuels like biodiesel and biogas. Ventures involving value-added agriculture are drastically transforming production agriculture and rural America.
By definition, value-added agriculture entails capturing or creating value. Adding value is the process by which a producer captures a larger portion of the existing value or creates additional value in a product. Regardless of whether you capture value or create value, you get paid for providing value. If your agricultural business venture does not provide value to the system, there is no reason to expect a return.
So, the process of creating a successful business involves the search for providing value. Providing value can be in the form of marketing a unique product, filling a market niche, simplifying the supply chain, providing a service, lowering costs, or many other ways. The more value you provide the more return you can extract from the marketplace. The commercial potential of value-added agricultural ventures and innovations is not obvious, often is not realized, and may frequently be over-estimated (Coltrain, Barton and Borland, 2000; and Gray, Boehlje, Amanor-Boadu and Fulton, 2004). A systemized process for venture assessment and planning is needed to structure the often haphazard development associated with such ventures if they are to be successful. An important question that aspiring producers or entrepreneurs must ask themselves early in the venture planning process is whether they should write a formal business plan. A business plan and a strategic plan are always good ideas for beginning a new business. Your local community college, economic development office or Cooperative Extension system, may have a small business center or small farm center to help you with these plans on a one-on-one confidential basis, and free of charge.
There are a number of reasons to develop a business plan. First, a business plan provides direction by encouraging a producer to evaluate where he or she wants to take the venture and define what they want out of it. Second,a business plan provides structure to a producer’s thinking by making sure he or she has considered the most important determinants of success. Third, a business plan may help a producer to think about the future. For instance, a business plan can serve as a blueprint as a producer implements his or her goals and objectives, or faces adversity.
Finally, a business plan helps to communicate the essentials of the business venture, not only to bankers or financers, but also to current and potential employees, suppliers, and customers. Thus, deciding whether to participate in an investment opportunity requires careful thinking and planning.
The Guide for Assessing Agricultural Ventures is designed for entrepreneurs, value-added agricultural producers, and small business owners who are interested in starting a small agricultural business or desire to make changes to their business to make it more profitable. This publication will help the reader work through the challenges and opportunities associated with new business development. Should I invest in agricultural start-up business ventures?
For many years, agricultural entrepreneurs have had the opportunity to invest in a variety of agriculturally-based business start-up ventures. Many of these have focused on business ventures just past the farm gate such as the processing of fruits and vegetables, field crops and livestock. Some of these ventures have focused on the production input side of agriculture. In the Midwest, for example, the most common investment opportunities have been biofuel businesses such as ethanol and biodiesel. In the South, businesses involving fruits and vegetables are common. Across much of the South and Midwest, the investment opportunities have ranged from meat packing facilities to fruits and vegetables to poultry and livestock production to egg-laying facilities to ammonia fertilizer production.
Deciding whether to participate in these investment opportunities has become an important decision for most farmers and ranchers.
The points listed below can help you make the decision for your situation:
1. How much can you afford to lose?
• Don’t invest more than you can afford to lose.
• Determine the amount the impact and the loss would have on your farm business.
• Never use an investment to try to make up for a financial shortage in your farm business.
• Set aside a certain amount of funds each year as “risk funds” to be invested in outside business ventures.
• If these “risk funds” succeed, the rewards are like “found money” that can be invested in the farm business or reinvested in an outside business venture.
2. Can you estimate the growth of the business venture?
• Evaluate the potential for business success that comes in the form of a presentation at a meeting or workshop.
• Take notes and write down questions about the business investment
• Seek a telephone number that is related to the venture and call to ask questions for more insight.
• Attend another meeting that can improve your knowledge and understanding of the business and the investment.
3. Should you invest in an outside business or your farm business?
• Evaluate whether your finances will be greater by investing in an outside business venture rather than investing in your own business.
• Evaluate the needs of your farm business before considering an outside investment.
4. Will the investment impact your farm business?
• The investment may impact your farm business by creating new markets or better markets for the products from your farm
• Investing in outside business ventures is a way of having more than one source of income, while continuing to use your and management on your primary business.
5. What is the business risk or reward profile?
• All start-up business ventures have the potential for rewards but hold the risk of failure.
• Evaluate the risks and returns of the venture; they play an important role in your investment decision.
6. Does the proposed business model fit your needs?
• Is the business model designed to provide an income into the future?
• Such a model is often used for business ventures past the farm gate such as commodity processing. Good examples in recent times include corn ethanol.
• The business model is designed to build the business as quickly as possible by investing the profits back into the business.
Assessing Agricultural Investment Opportunities
When considering an investment in an agricultural processing business, focus your thoughts on the following six areas.
These are some of the major topics to investigate when considering a business investment. This should improve your odds of making a wise investment decision
1. Investigation and Planning
• Has the business concept been observed and fully planned?
• Has a detailed business plan been prepared?
• Are the project leaders capable of creating a successful business?
• Do they have the skills necessary to grow the business?
3. Economic and Business
• Will the business succeed?
• Are there budgets of per unit costs and revenues?
• Do these budgets use realistic assumptions and project adequate profit margins?
• Are risk mitigation programs in place to provide protection from an unexpected incident?
• Is management capable of successfully operating the business?
• Will the leaders search for the most qualified candidate and pay the person the wage needed to attract him/her to this business?
• Do the managers have experience starting and running a business?
• Will people or companies buy the product?
• Have the industries and markets been analyzed relative to the opportunities for this business venture?
• Are contracts in place with buyers topurchase the product?
• Are contracts in place with sellers of raw materials, ingredients, and other inputs?
• Have potential competitors been identified?
• Can the business venture beat the competition?
• Will the process work?
• Are all permits in place and regulations met?
• Will the product meet market requirements? Financial
• Are there funds in place for start-up and operations?
• Are there sufficient funds to cover an unexpected industry downturn?
• Is there sufficient equity planned?
• Are lenders in place to provide sufficient debt financing?
• Are the lending terms reasonable?
• Do the financial projections appear reasonable?
• Do the projections show adequate debt repayment ability?
• Are profitability and cash flow projected under various price and production levels (sensitivity analysis)?
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SOURCE: Horticulture International by Alabama Cooperative Extension System