November 29, 2021

Frye: How to evaluate new opportunities

One of the biggest jobs the farm leader has is the need to size up different opportunities that arise for the operation. It’s no secret that the number of opportunities or different types of side businesses that the farm could get involved with is basically endless.

Think about different specialty crops, growing crops on contract, owning a seed or fertilizer dealership, getting into agronomic services or precision ag, doing livestock contracting of some sort — not to mention the “original” new opportunity for farms: growth in number of acres!

It’s the job of the farm leader to ultimately answer the question: What should we invest in, and what should we turn away from? With so many different possibilities surrounding the operation, how can the farm’s leadership go about understanding what to invest time and money in, and what to leave by the wayside?

Can It Stand?

One of the biggest pitfalls for farm operations when it comes to new opportunities is that farms can often be pulled into things that the leader or people on the farm enjoy doing most. This becomes an issue if that side business isn’t profitable, which is the whole point of being in business!

For farm leaders to determine whether their operation is supporting side businesses that aren’t profitable by themselves, each side business should have a separate profit-and-loss statement and balance sheet that’s not mixed with the production side of the farm.

Doing this helps keep from muddying the waters around which aspects of the farm are profitable and whether there’s a side business that’s not standing on its own. Each needs to be able to operate financially as a stand-alone business.

Ask Questions First

Here are a few questions to ask yourself and your leadership team to help size up new opportunities.

• What’s the need in the market that this is meeting, and what is the size of that need? Any business must solve a problem or meet a need out there in the marketplace. Otherwise, you wouldn’t have any customers! Be sure to take time to do a “business study” about the market that you’re entering. Who is already offering something similar to what you’re offering — in your local geographical area, if that’s where you’ll be mainly doing business? What’s the current need for this service like? Is there even a need? If you find that there is a need, try to quantify it.

• Are we already partly set up to do this or not? Think in terms of equipment, personnel, current expertise level, and so on. What would the cost to initially invest in any necessary equipment, training or additional employees be? The closer you already are in terms of current knowledge held within the operation, equipment and so forth, the better.

• Will this opportunity be financially feasible? Make sure to do some serious number crunching, perhaps with the help of your financial adviser or lender, including projections. How soon will the side business begin generating profit on its own, the pay-back period? Will additional loans be required for start-up costs? Along the way, watch out for any red flags, including the possibility that maybe this is something you should just do for fun, if it’s not feasible to turn it into a profitable business. If the opportunity involves expanding acres, here are two questions we have our farmer clients ask themselves:

1. Will you still have greater than 50% equity after the expansion?

2. Will your working capital be greater than 33% after the expansion?

Watch For Market Opportunity

Another key area where the farm leader is responsible for watching for opportunity is in the grain and livestock markets. Many farmers say it can be helpful to work with a market adviser who partners with them on marketing plans and decision-making and provides third-party perspective and insight into the markets.

It’s also true that some of the biggest anxiety-inducing decisions on the farm tend to be around marketing plans and decisions. Our market advisers partner with farm leaders to help with creating plans and with executing decisions. This is especially key during a busy season like harvest because the market doesn’t stop moving just because it’s harvest time!

Get a free two-week trial of our marketing information service, MarketView Basic. Your trial includes regular audio and video updates, technical analysis, recommendations and more.

Or, learn more about our market adviser programs and offerings at www.waterstreetconsulting.com.

Darren Frye

Darren Frye

Darren Frye is president and CEO of Water Street Solutions.