Choosing Enterprises for Your Farm

One of the most basic and important decisions a farmer must make is to choose the best combination of products or enterprises. This decision is one of the key factors that determine the farm's profitability, and whether the goals and objectives of the farm family will be met.

Perhaps a way to conceptualize the enterprise selection process is to think of developing a series of transparent overlays with each overlay as a component of the process. The first overlay would contain objectives; the next an inventory of resources including markets; a third, the relationships among enterprises; and the next would match the resources available with resource requirements of alternative enterprises. These overlays, one on top of the other, define the possibilities that are physically feasible and that accomplish desired objectives.

Beginning with the first overlay or step, define the goals, personal and financial, that you want to accomplish with an agricultural enterprise. It is important to make these goals as specific as possible. For example, your goals may include providing a certain amount of work for family members, earning a particular net income, and maintaining stewardship of the land. (See Part II, Chapter 2 for more information on setting goals.)

Once goals are established, the next step is to determine whether they are feasible.

Personal Preferences

Personal preferences can help to narrow the field of alternative enterprises. Not all farmers want to raise hogs, dairy cattle, or vegetables. Decisions are also influenced by the length of planning horizons. The length of time between start-up and harvest ranges from about 40 days for radishes to over 40 years for Douglas fir trees. The desired period between the initial investment and needed return is influenced by the farmer's age and financial position. Financial position also helps determine ability to bear risk and whether capital-intensive enterprises with high up-front costs are feasible.

Past experience with similar enterprises may influence choice. Any new enterprise will require an educational investment. How extensive this will be depends on past experience and the technological complexity of the enterprise. A related concern is the management level required for success. An honest self-appraisal of management ability and willingness to learn new skills through self-study or formal training is important.

Location, Climate, Labor

Factors such as location, climate, available labor, and capital can be used to narrow the range of possibilities.

It is no accident that the Midwest is noted for corn and that citrus crops are grown in the Deep South. Comparative advantage provides a partial explanation of why some commodities are produced where they are. Climatic conditions such as rainfall, temperature, and growing-season length influence feasible crop alternatives. Some of these factors can be controlled or altered but there is a cost. Irrigation may be used to supplement rainfall in and regions or used to reduce the risk of crop failure where growing-season rainfall is variable.

Other factors to consider include soil, topography, and distance to markets. The interaction of these factors influences production possibilities and production costs.

Viewed collectively, these factors will provide answers to a few key questions related to technical feasibility. What commodities can be produced given the soil, climate, and the presence or absence of certain pests?

Resource Inventory

Because resource requirements vary widely among enterprises, the availability of resources will limit enterprise choice and scale. Resources are traditionally thought of as land, labor, and capital, but add to this list markets, management, and a physical asset inventory including equipment and buildings. Market availability is important, but it is often neglected or assigned a lesser role in assessing the feasibility of an enterprise.

Market. A market assessment will help determine what products can be sold and at what price. In most cases, individual producers cannot develop markets for their products and must work within the framework of existing markets. An exception to this might involve direct marketing to consumers through pick-your-own operations, roadside stands, or other self-marketing enterprises.

Land. An assessment of land might start with a soils map that is overlaid with field sizes, roads, drainage systems, access to irrigation water, and other important features. A study of soils will help determine the most suitable enterprises row crops, field crops, forestry, or forage crops for livestock production (see table 1).

Labor. Inventory labor resources by starting with the farm family: How many hours are available from family members and how is their time distributed throughout the year. This is especially important because hired labor is becoming a limiting resource. Low rates of unemployment nationally suggest a highly competitive labor market, and it is expected to stay competitive for the foreseeable future. The availability of labor is only one aspect to be considered; skill and experience levels of potential employees are also important (see table 2).

Capital. Capital represents the pool of dollars available for investment in machinery, equipment, or livestock required for a new enterprise. Capital also is required to purchase seed, fertilizer, feed, and hired labor. Sources of capital include the farmer's personal net worth, equity capital from off-farm investors, income from off-farm employment, and available credit. Together, these sources represent the upper limit of available capital (see table 3).

Management. Management is the resource necessary to combine all the other required resources to achieve desired results. The level of management required varies with the complexity of the enterprises. Some enterprises require a high degree of technical skill and specialized knowledge. Others are less demanding. An inventory of past management experiences, the willingness to learn new skills, and the opportunities to acquire new information are components of a management assessment.

Relationships among Enterprises

It is important to consider the relationships among enterprises. Some new enterprises may compete with existing enterprises, while others may actually increase the production of existing enterprises.

Enterprises that compete for resources are those that require the same resources at the same time. An increased use of resources in one enterprise would require a reduction in another. Supplementary enterprises are those that require the same resources but at different times of the year. For example, adding a livestock enterprise to a crop enterprise would take advantage of underutilized winter labor and, perhaps, use byproduct feed from crop production.

Enterprises are considered complementary if one enterprise contributes directly to another. For example, crop rotations involving legumes and grains can result in more grain being produced than if land were used for continuous grain production.