Georgia farmers must deal with a number of questions as they seek to diversify their farm businesses. Farmers often ask, "What can I produce to sustain or improve profits on my farm?" Policy makers and farmers are often seeking a miracle crop or livestock enterprise that will bring immediate prosperity. The search for "what" to produce has led many farmers to experiment with new and different crop and livestock opportunities with varying degrees of success. Success or failure often depends on how well issues beyond the "what" are dealt with. Perhaps the major emphasis should not be on the "What to produce." but on the process of "How to select the right enterprise for my farm".

New or expanded enterprises are likely to have a different set of financial, marketing, management, and policy options than growers have experienced with traditional enterprises. Focusing on "How to select the right enterprise." instead of the "What to produce." will allow you to thoroughly evaluate a wide range of options instead of concentrating on a few "pie in the sky" alternatives that might work for a few producers and fail for many.

Some basic questions about you, your resources, your preferences, and your potential are a necessary, and often overlooked, basis for beginning a more formalized analysis. Answer the following set of questions. Each member of the family who will be affected by a new enterprise should also answer the questions. Compare your results. Look for areas of agreement. Beware of potential conflicts.
 

Does this enterprise offer good profit potential?

Is this enterprise adaptable to my area?

Do I have experience with this enterprise?

Do I have, or can I get, the resources to produce this product?

Can I start this enterprise without having to borrow a lot of money?

Do I have the "know how" to produce and sell this product?

If I don't "know how", do I know who to ask?

Am I willing and able to approach different people for advice?

Does market research and development appeal to me?

Am I willing to spend as much effort in marketing as in production?

"Selling" a new product is something I'm comfortable with?

Having people "drop in" at the farm is something I can tolerate?

Is this something I will enjoy doing?

Can I set realistic goals for enterprise in terms of profit & growth?

Am I in a position to take few risks to make more money?

If the new enterprise fails, am I willing to try another?

If you answered more Yes's than No's or Maybe's, then you are a good candidate to pursue your options in a more formalized and detailed analysis.
 

The PRIMER Method

As a more formalized framework to evaluate the "How to select the right enterprise." question, consider the PRIMER method. School kids used to learn to read from a Primer, a thin book that laid the foundation to a lifetime of reading. Similarly, an agricultural PRIMER can lay the foundation to evaluate a wide range of farming options.

The letters in PRIMER represent the basic factors to consider when making a decision about new or expanded enterprises for the farm. P stands for profitability, R stands for resources, I represents information, M represents marketing, E stands for enthusiasm and the final R stands for risk. These six factors: profitability, resources, information, marketing, enthusiasm, and risk are the basic elements which should drive any decision to adopt any new enterprise on the farm.
 

Profitability

The first of the PRIMER factors is Profitability. Clearly any new or expanded enterprise must add to the overall profitability of the farm. New enterprises should be budgeted closely with estimates of costs and returns. Many proponents of new or unique enterprises tend to be overly optimistic about potential returns. The kind of questions to ask about a budget include: "What if prices are 25% below these estimates?", "What if some disease or weather factor cuts my yield by a third?", "What if it takes twice as much labor as I've anticipated?" This type of sensitivity question can help evaluate both the relative profitability and riskiness of the enterprise.

Profitability can be identified by deducting various kinds of expenses from total estimated revenue. The profitability worksheet begins with estimating a total revenue amount as the total yield times the expected price. This can be estimated on a per acre basis or on a whole farm basis. The total revenue amount, of course, can vary widely, and will need to be revisited when we come to the marketing and risk worksheets. Still, an estimate of total revenue needs to be made using the best information available on what can be expected for yield and price to the farmer.

The profitability worksheet provides a first estimate of the level of profitability by subtracting cash costs from the total revenue. It is generally helpful to organize these cash costs by category, such as enterprise supplies and utilities required to produce the yield estimated, as well as necessary hired labor and marketing costs. It is helpful to compare returns over these cash crops when considering several different possible enterprises. This only provides us with part of the picture, however. There are additional costs that are very real, including loan payments, the use of equipment, buildings, and other long term assets, family labor, management, and risk taking. Enterprises can vary widely relative to these additional costs. More rigorous estimates of profitability will take these costs into account.

Other profitability factors to consider are length of run and comparative advantage. A new enterprise with a payoff in five years may look good strictly from a profitability standpoint but may not pay the bills between now and then. Some agricultural enterprises have short productions cycles while others may require months or years to achieve profitability. Fruit crops, Christmas trees, specialty timber, and other similar enterprises, can involve significant cash outlays in the initial establishment phase. Intensive management may be required during the early development phase. Cash revenue from future harvests may not be returned to the investment for years.

The income needs and debt loads of the farm figure heavily into the choice of enterprises. Alternatives for which a farm or a region has some relative advantage in production or lower costs is more likely to be successful. Identifying some geographic, climate, or cost advantage will help identify good alternatives or weed out bad alternatives.
 

Resources

The second PRIMER factor is Resources. New or expanded enterprises often require new or expanded resources. These resources may be new investment in machinery, buildings, or land. Labor and management requirements may be different for new enterprises. Farmers already producing labor intensive crops often look toward other labor intensive enterprises as supplements or alternatives. New enterprises whose labor requirements complement rather than conflict with the labor peaks of current farm enterprises may fit well to keep laborers more fully employed. The best resource situation for new or expanded enterprises is when existing resources can be used or adapted. Large investments in capital resources for untried or risky alternatives may not be well received at the lender's desk, especially if they are highly specialized. If current resources of land, labor, and capital can be used, then the risk of entering into a new enterprise is reduced.

The resources worksheet provides a framework for organizing an inventory of current and needed resources for a potential new enterprise. Land buildings, machinery, start-up capital, and labor are each listed as resources to consider. Additional resources may need to be considered in this worksheet, as well. Long-term inventory, such as seedlings, may be required. Construction of certain structures, such as ponds, trellises, fencing, etc., may need to take place to create a suitable production environment. The inventory of resources that need to be purchased should include, to the extent possible, an identification of the source of the resource and an estimate of the cost.

Labor is often one of the most constraining resources when examining the feasibility of a new enterprise. The resources worksheet provides a way to compare labor needs with current resources and to plan for any additional hired labor that may be necessary on a month-by-month basis.

The worksheet begins with an estimate of available family and hired labor. Each full time hired worker can be expected to provide between 160-200 hours per month. Labor requirements for current farm enterprises should then be deducted from the total labor available each month. This provides an estimate of the labor available for new or additional enterprises. The next row in the worksheet calls for an estimate of the labor demands anticipated for the new enterprise. Subtracting the new labor required from the current labor available should provide an estimate of the amount of additional hired labor that will be required and the period during which it will need to be available.
 

Information

The I in PRIMER is for Information. Quality information is critical for making good decisions in any enterprise. Good information about unusual or exotic alternatives may be scarce and expensive. In fact, an alternative enterprise for some producers is providing information, for a fee, to other interested parties. The more unusual the enterprise the less likely that conventional sources will be able to meet the need for technical or economic information. Farmers have benefitted from several generations of high quality, research based information delivered through the Cooperative Extension Service into every county in the state. Georgia agriculture and home economics agents are good, but they shouldn't be expected to be experts on every one of hundreds of agricultural alternatives. Private or trade organizations may be alternative sources of information, but membership or consulting fees should be anticipated.

An inventory of useful information sources for a particular enterprise can become a valuable resource in its own right, and can greatly aid in on-going management decisions. The information worksheet provides a means for organizing key information sources by subject matter area; production resources, financial resources, and marketing resources. There are several sources that can provide a wealth of information on each of these areas. The worksheet allows for the farmer to compile a listing of key people with special knowledge of the enterprise, including other farmers, agents and specialists, and others. Trade shows and associations can also provide valuable information, and may be offered on a state, regional or national level. Computer web sites and Internet communications are increasingly more affordable to access, and can provide specialized information from around the world. While this information may need to be altered to adapt to current growing and resource conditions, it can also be used to access a wide range of expertise.

Maintaining good and current information, including detailed record keeping systems, should be considered a cost of taking on a new enterprise. It usually takes some time to develop the management expertise required to bring the enterprise near its profit potential. Good information management, which includes knowing how to efficiently sift through the mountain of potentially useful information, can speed the farmer toward better decisions with respect to enterprise development.
 

Marketing

The M in PRIMER is for Marketing. Many farm products have typically been sold as commodities rather than marketed with a view toward developing greater value delivery and profit opportunities. A commodity marketing strategy may be difficult to sustain for certain alternative enterprises, especially those that may involve specialized market channels. Many alternative enterprises have limited sales potential, emphasizing small, niche markets that may be quickly oversupplied if too many producers enter the market. These are called "thin markets" and thin markets are susceptible to wide price swings accompanying over and underproduction. Often the most successful niche marketers are those who zealously develop and guard their market outlets. Skill in marketing will often be the most important success factor in the sustain ability of an alternative enterprise.

Sales and communication skills, good customer relationships, cooperation with other producers, and a determination to successfully develop an enterprise are all resources good marketing people depend on. These resources can be developed, but may require some time and patience. Truly different and innovative enterprises will likely involve a commitment to product and market development; working with customers to communicate the features and benefits of the product.

Another key factor in marketing products includes product differentiation. Manufacturers of most consumer goods recognize the importance of setting their product apart from all others by the use of brand names, advertising, quality differences, and other distinctive features of their product that consumers especially value. Similar opportunities exist to differentiate many agricultural products. Careful research on customer/consumer preferences can reveal some of the more promising unique product features that can be developed. Continuous product improvement, building the marketing effort around valued product features, and having a well defined market plan may be the difference between the enterprises ultimate success or failure.

Value added is a general concept that involves developing a product beyond the commodity stage. Product differentiation can be related to this. Many additional opportunities often exist to add value to a particular product. Processing, storing, packaging, delivery and other services, offering a range of product qualities, and bundling with other products are each examples of ways farmers can create a greater value to certain kinds of products. Customers value additional features that are added to the basic product. In many cases the farmer is in a good position to add value to a product, and can do so profitably.

Not all marketing channels are the same or offer opportunities equally consistent with the goals the farmer may have for an enterprise. Wholesale, retail, coops, contracts, and direct sales (on- or off-farm) are just some of the outlets that may be available. There are unique benefits and costs associated with each channel, and each channel must be evaluated for its current marketing suitability and profit potential.

The marketing worksheets allows the farmer to first examine opportunity, suitability, and cost difference across a variety of marketing channels. The second worksheet helps explore product development needs, market development needs, and value-adding opportunities..

The worksheet allows for comparison of several different markets. Wholesale markets, larger volume distribution and sales to firms that resell and redistribute the product to retailers, are quite different from direct farmer-to-consumer or on-farm kinds of markets. Many different marketing channels exist, each with distinctive product and service needs, opportunities, and challenges. Specific wholesale markets can include selling through brokers, marketing cooperatives, or other individual firms that deal with a variety of retailers. Direct markets can include farmer-to-retailer, institutional markets, such as restaurants, hotels, hospitals, schools, and businesses, and farmer-to-consumer, such as farm markets or subscription delivery. There are additional innovative ways to market product right on the farm, including pick-your-own and entertainment farming.

The first worksheet should help assess the advantages and disadvantages of various marketing channels. Each channel will have various features commending it, but will also have certain limitations. It should also be mentioned that different marketing channels may be more suitable for different stages of the long-term enterprise development process. The proximity of the farm to a market, the reputation of key firms or persons involved, and the degree of farmer-customer interaction can each be key features toward evaluating the relative attractiveness of the different channels.

There are typically a variety of fees that correspond to the different channels. One should gain full knowledge of these fees while developing a marketing strategy.

Prices received by the grower often vary widely across marketing channels. Research on historical prices, trends, and reasonable estimates of upper and lower bounds should be included here. It may be difficult to get good price information for truly unique products that have little market history. Still, dialogue with prospective customers in selected markets should provide means for making an estimate. A reasonable assessment of the sales volume that could be moved through different channels will help to identify a total revenue estimate. The total revenue potential from on-farm sales of a particular product may be quite limited compared to the potential through a marketing cooperative, assuming it would handle the product, despite the probably higher price that would be found through on-farm sales.

Partners should be chosen carefully for any business venture. Many new enterprises are inherently risky. Finding firms or partners with a history of successful marketing experience can minimize some of the marketing risk. Growth potential within a particular marketing channel should also be considered and compared to the growth objectives and goal the farmer has for the enterprise in general.

Different marketing channels offer different degrees of value-adding opportunity for the farmer. This may be an important consideration in which marketing channel to choose. Long-term goals for the product may eventually include additional processing, packaging, developing additional related products or moving into related but different market channels. Both marketing worksheets include sections for identifying promising value-adding opportunities comparing these across different marketing channels.

The second marketing worksheet includes a series of questions designed to help the farmer consider approaches to product and market development.

A good marketing program will feed knowledge about key consumer preferences back into a product improvement program. Quality improvements through new variety research, new production or processing techniques, or better post-harvest handling can translate into a strong market development program. Product development, including value-adding initiatives, that is responsive to customer needs builds in a competitive advantage for the enterprise. Partners that can assist in the on-going product development process need to be identified.

The creation of new market opportunities may require partnership with other producers. Certain market channels may require larger volumes or longer season deliveries than can be provided from an individual operation. Steady markets that pay well can be developed in many cases when needed delivery volume, timing, and quality can be worked out. This may involve joint marketing efforts through newly formed coops or associations. The development of these markets can be critical when smaller direct farmer-to-consumer markets become saturated.
 

Enthusiasm

The E in PRIMER stands for enthusiasm. It perhaps could also stand for emotion or entrepreneurial ability. Few endeavors in life or in business are going to be successful if enthusiasm is missing from the equation. Liking what you do is a key to being good at it. On the Enthusiasm worksheet list three good reasons for starting up your new enterprise. You may have more than three, but you should have at least three good reasons.

In the optimism of planning a new enterprise, it may be difficult to think of reasons for getting out of business; however, now is the time to set some benchmarks that would help you know when it's time call it quits. Weeks, months, or even years into a business endeavor your judgement may be clouded by the investment of time, dollars, and emotion that has gone into your enterprise. Sunk costs never provide a very good basis for decision making, but sunk costs along with a strong dose of pride and tradition have kept many farmers in business long after the economic conditions have suggested otherwise. Therefore, on the Enthusiasm worksheet list three good reasons for getting out of this enterprise. During the evaluation stage you are likely to be as objective as you will ever be. Give serious thought to these reasons and keep them in mind should the enterprise not turn out to be quite as good as expected. Remember that while enthusiasm and strong emotions can be beneficial as motivational factors, strong emotional ties to an enterprise can also cloud the objective judgement of the best managers.

The final component of the Enthusiasm worksheet is a listing of goals for the new enterprise. While the goal exercise is found near the end of the PRIMER worksheets, it is really suggests one of the first questions that should be asked of any new endeavor, "Why do I want to do this?" A good set of specific, measurable, and attainable goals will help answer this question. There should be short, intermediate, and long run goals for the enterprise and these goals should be reviewed at least annually to assess progress or to allow for revision.

Enthusiasm and progress toward goals can sometimes be difficult to observe or measure. However, successful managers almost always have a clear picture of where they are headed, they enjoy what they do and, they work hard at it.
 

Risk

The final R in PRIMER is for Risk. Many new enterprises or modifications to conventional enterprises are often referred to as alternative enterprises. Alternative enterprises differ from traditional, or conventional, enterprises in that they are usually subject to more production and market risk. These risks also translate into financial risk as lenders view nontraditional enterprises as greater credit risks. In addition, few alternative enterprises have the risk dampening effects of government programs to offset wide swings in production and price. Riskier enterprises require different risk management strategies. Diversification, irrigation, insurance, marketing plans, contracts, credit reserves, and low debt loads are only a few strategies that should be considered in evaluating and adopting new enterprises. Keep in mind that the more unusual or obscure the enterprise, the riskier it will be. The risk worksheet suggests some production, market, and financial risks that should be considered. Some strategy should be in place to deal with each of the risks that are associated with the new enterprise.
 

Conclusion

Successful farmers have always identified the enterprises that offer them the best combination of profit, stability, and satisfaction for the resources available on their farm. Successful farmers will continue to seek and find the next best alternative available to them. It may be an established enterprise with improved management practices or it may be a completely new enterprise with new information requirements, new marketing skills, new risks, and new management practices.

The PRIMER evaluation method is a tool to help farmers select the right enterprises for their farms. However, an understanding of these factors will also assist educators, lenders, policy makers, and agribusinesses as they support or participate with the farmers in new endeavors. Not only farmers will be affected by new farming alternatives. Extension and vocational educators will be called on for information about new and different enterprises. Lenders will be asked for investment capital for enterprises about which they have little knowledge of the production or marketing risks involved. Policy makers will need to understand the implications of new farm products with little or no history in the public policy arena and a limited base of support. Farm input suppliers and purchasers of products will likely be faced with broader inventories and a more diverse clientele with a wider range of needs and desires than ever before. Information demands from all these groups will increase as Georgia agriculture becomes even more diverse.

Whatever the future holds, not only farmers but also educators, lenders, agribusiness, and policy makers will be required to evaluate the new production, market, and policy implications of a changing Georgia agriculture. The PRIMER method is one tool to aid that evaluation.

1. Agricultural Economics Department, University of Kentucky Extension Service

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