Identifying New Enterprises A Checklist of Factors to Consider by Larry Lev Article Revised 2/96 Keywords: comparative analysis, decision-making, risk

In response to rapidly changing input markets, consumer preferences and government programs and regulations, successful producers must be constantly open to new ways of doing business. This may involve finding better methods of producing and selling traditional products. In many instances, however, it also requires seeking out new enterprises and new markets. This article will outline a series of factors to consider before adopting a new enterprise.

There are a great many advantages to farming on paper as a first step before committing resources to new activities. The process of budgeting allows you to do this by estimating the resources required and the returns earned. Enterprise budgets are the basic building blocks for many other types of budgets. They seek to include the relevant costs and benefits associated with a single unit (an acre or one head) of an enterprise. Budgets for a wide variety of agricultural enterprises are available from state extension offices. You should always personalize these budgets to better reflect your farm situation. For enterprises without published budgets, you will want to estimate costs and returns on your own.

Even personalized enterprise budgets are incomplete because they will not include all the factors you wish to consider before producing and marketing something new. Therefore, after identifying promising new activities through budgeting, you should proceed to consider the following additional factors.

The enterprise budget provides costs and returns for a representative way of producing a particular enterprise, but provides few details on actual production practices. A variety of extension publications is available to help in understanding the specific agronomic requirements and practices of many alternative enterprises.

In accepting the challenge of growing a new crop or adopting a new production approach, you should recognize that the learning process will not be instantaneous. Both the quantity and quality of the output may be below average for the first few years. The amount of learning required will probably be related to how new and different the operation is for you.

Will someone buy what you produce? Is the market that you have targeted appropriate for the timing, quality, and quantity you will deliver? Where will they buy it and who is responsible for the transportation and handling charges? Is storage required? Where, for how long and at whose expense? Is production from this enterprise ordinarily contracted? If so, what are the terms and implications of these contracts?

Although enterprise budgets focus on the profitability of alternative enterprises, they generally do not consider in any detail the cash flow implications or business liquidity implications of these alternatives. Within the course of a year, it is important to know when costs are incurred and returns are earned. Of potentially even greater concern are enterprises that are income-users for a lengthy (several-year) establishment period. An enterprise that provides an inflow of cash at the right time may defer the need for additional financing. This enterprise may have an advantage over a seemingly more profitable enterprise that requires cash when resources are tight.

Timing often has a significant effect on the use of non-financial inputs as well. Because there are often scheduling problems for labor, management and machinery during busy periods, you may find it inappropriate to charge off units of these resources at equal costs throughout the year. Non-peak resource use may cost you less.

If a new enterprise requires the use of new machinery, you must consider the costs of purchasing new equipment or custom-hiring the services. As an example, a row crop producer considering the production of raspberries should recognize the need to own or custom-hire a caneberry harvester. In contrast, a grain producer considering the production of canola would only have to worry about scheduling the use of existing equipment.

A field crop producer who seeks to diversify by producing labor-intensive fruits or vegetables should recognize the management requirements of finding and maintaining a labor force. Often in areas where there is a heavy dependence on hired labor, the timing of labor needs may be of critical importance in selecting among enterprises. To avoid disruptions, many producers prefer to maintain a stable labor force over the course of the year. Therefore new enterprises are selected in large part based on their compatibility to the labor calendar of the entire farm operation.

Some enterprise budgets are presented within the context of an explicit crop rotation. Although others are not, it is important to recognize how a given crop will fit into a longer time scheme. As an example, although a specific crop may not in and of itself appear profitable, it may provide advantages in terms of soil fertility, disease incidence and weed load of a specific parcel. Consider all of these factors before selecting a new enterprise for a given field.

The length and terms of lease arrangements will have a profound influence on the attractiveness of a particular enterprise. Without an appropriate lease it would be foolish to plant a perennial crop, a long-term rotation sequence or initiate an innovation such as organic production.

The government at various levels often has a major impact on production decisions. Federal commodity programs have locked acreage into specific crops so that producers have an interest in maintaining base acres and hence the right to future government deficiency payments. Under the provisions of the 1990 Farm Bill, only certain crops are permitted on flex acres. The availability of other subsidized programs, such as Federal Crop Insurance, also may influence your evaluation of a new enterprise. Production districts and zoning regulations may limit specific agricultural activities.

Producers select enterprises based upon many factors other than a simple bottom line figure. Some enterprises or production practices are continued purely on the basis of tradition. Others are adopted or maintained to permit a preferred lifestyle. Therefore, before adopting a new enterprise, consider how this change will affect your family's life and whether it will help you to accomplish long-term goals.

Enterprise budgets provide representative returns and, in some instances, a consideration of different price and yield scenarios. Although it would be ideal to find a new enterprise that is always profitable, that is unlikely for agricultural commodities. Before incorporating a new enterprise into a farm plan, you should consider in greater detail whether this new enterprise will make your overall business more or less risky.

We have all heard the expression "You shouldn't put all your eggs in one basket." Adding another basket (a new enterprise) would, at first glance, seem to be a positive step towards diversification. First, however, consider whether you will lose any advantages of specialization. Second, recognize that the extent that diversification stabilizes your income will depend on whether the returns from the new enterprise move up an down in the same pattern as the returns from your other farm enterprises. Generally, your goal should be to select new enterprises that are likely to be profitable when the rest of your enterprises are doing poorly. Because similar enterprises (i.e., different livestock enterprises or different vegetable enterprises) often follow similar cycles, this may imply incorporating dissimilar enterprises. Although this approach should help stabilize your income over time, it will probably place increased demands on your management skills.

Although you should always be examining the possibility of adding new enterprises to your farm plan, it is important to recognize all of their implications. Look before you leap.

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