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Q+Q=P for smaller operations
Quality + Quantity = Profitability (Q+Q=P) is a farm management approach that I have discussed in several recent columns. The point of the equation is that to earn a profit in today's competition marketplace, growers not only have to produce a top quality product but also in a great volume. There are a number of growers who are doing well in this area and have understood that in order to change you must change the way you look at things.
The example of GRT Aqua Technologies in my last column demonstrates a successful application of that management approach, despite the environmental conditions that cause operational or biological challenges.
However, a question that has been raised, "How can a smaller grower who doesn't have ready access to capital and wants to grow his farm slowly, do it?"
This is a good point; the GRT farms are large and well financed and can be intimidating to some growers just starting out.
There are a number of answers to this question and they all work together to provide the result.
It does however come down to business planning and working your plan.
1. Identify who the buyer of your product will be and what price they are currently paying for their product. Will it be a processor, a broker, local restaurant or food stores? Find out how much they are currently selling per week or month and that if you helped them with marketing through packaging, branding and information transfer, could they increase their sales and by how much?
I have found that the few growers that have done this have gotten quite a bit more than the current market commodity price that had been set by the wild harvest. By the way don't let possible rejection stop you at the first four or five people you talk to. Keep focused on the value of what you are doing.
2. Once you have potential sales numbers and price figures, build in safety margin of at least 20% less in case of unforeseen challenges relating to market pricing and harvest fluctuations. When you plan this way, profitability is greatly improved if the production or price stays the same or goes up.
3. Analyze your site / lease for production to see if you can produce more in the same area. If you are doing oyster's intertidally check to see if you can expand you lease to include both subtidal and deep-water applications, for example. If you are a mussel farmer can you increase the length of your socks or make them semicontinuous or even deploy more? Look at the different husbandry methods and equipment available. At this point, think only of production outputs to meet the sales numbers that you have set as a production target.
4. Next look at capital equipment costs. Those goods include both accessible equipment such as boats, graders, trays, rafts, etc. as well as deployed equipment such as anchors, buoys, longlines, etc. Knowing how to cost out the price you pay for equipment over its useful life is essential in order to determine if your operation is making a profit.
The rule of thumb when looking at equipment is that you first ask what will it produce over the harvest cycle, and how long will it last so you can establish how many harvest cycles you can amortize it over. How much labour will it take for each harvest cycle and can it add to the output of the lease?
Armed with this information you can figure out the return on equipment capital investment. In typical business applications capital equipment is normally depreciated over 3 to 5 years. However, depending on tax laws, items such as building or vehicles could be amortized over a longer period.
To increase the quantity of product you produce may not require as great an increase in capital expenditure as you might think, since some of the equipment is needed whether you maintain your current status or expand by a certain percentage. For example, a boat is depreciated over 10 years no matter how many days of the year it is being used to tend a mussel lease.
What you are looking to do here is come up with the equipment cost per harvest cycle. For example if an oyster tray sells for $12 and has a 10-year life expectancy the yearly cost would be $1.20 per year or 10 cents per month. If the basket / tray will hold 10 dozen oysters worth $48 that need 14 months to grow in the basket / tray then the tray cost per grow out cycle will be $1.40. Of course you will have to add your cost on longlines and anchors as well as seed and labour however the direct cost of capital investment is very low compared to traditional business practices.
It always is interesting to hear people comment to me at shows on product costing. I know as consumers we are trained to go after the best price however the old adage "you get what you pay for" certainly holds true with aquaculture equipment. Look at how much money you can make before you spend your money. A few dollars extra spent now is well worth it in the long run.
5. Finally, look at your labour cost. Increasing production will generally increase the cost of labour. The questions to ask include how much labour will it take for each harvest cycle and can it add to the output of the lease? As well if as a smaller grower you only use part time workers sometimes they may not be there when you need them.
It still amazes me at how so few individuals pay attention to this detail and how if you look at their year end business statements it is one of the largest costs. Don't be fooled however into thinking that your labour cost is low if you are not paying yourself a salary, even if it is part time work. Your time is the most valuable commodity you have!
Remember to look at your production in terms of quality + quantity with the lowest labour cost to maximize profitability.
So far with all this we haven't spent any money. We have just laid out the basics of how any size grower can move forward. The next step is for you to define how much income you want to make either part or full time as the grower / owner and over what period of time you want to do it.
At this point you can decide to increase slowly and reinvest profits into equipment or you can take the information to your banker or lender, factor in the interest cost and make a calculated decision on how soon you can supply your expanded market potential.
Feel cautious but act aggressive. The market is there, and if you don't fill it - no matter what size your operation is - somebody else will.
Contact Don Bishop at:
Fukui North America
PO Box 669
110-B Bonnechere St.W.
Eganville, Ontario K0J 1T0
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