The basics of enterprise selection to maximize your farming returns

Selection of the right enterprises to maximize returns from farming is one of the most important exercises any farmer can undertake. What do I mean by enterprise? An enterprise is simply a basic commercial production unit for a specific agricultural commodity, usually measured by size (area, or unit output). For example a crop enterprise could be 1 hectare of yellow maize or sugar beans and a livestock or poultry enterprise could be 5,000 broiler chickens.

Fig.1 - Soybean enterprise of 20ha - Matatiele, Eastern Cape (taken February 2021)

Profit generated at an enterprise level, referred to as 'gross margin' is considered the most important factor in selecting an enterprise. The gross margin is thus the basic building block of overall farm profitability as a number of enterprises make up a farming unit (i.e. a farmer can produce a mix of field crops, poultry and cattle/sheep on a single farming unit.

Mathematically, gross margin is reflected as:

Total enterprise revenue (yield x price) - variable costs (e.g. seed, chemicals, casual labour) = gross margin

Fixed or overhead costs like salaries and wages, land rental, accounting are not typically included at enterprise level as these costs are not enterprise specific and are only considered when ones looks at farm-level profitability or net farm income.

To develop an enterprise gross margin requires a lot of information. A farmer would need to know his/her expected market price and yield for the commodity to be produced and also determine what level of inputs to apply to achieve the desired yield. On the input side, there are always multiple options available and will ultimately be determined by agro-ecological suitability and land capability (i.e. the natural resource strengths the land possesses).

While the concept of the enterprise gross margin is important, it is often not the only factor to consider when selecting enterprises that can maximize returns on-farm. From my experience and works with farmers, one needs to consider things more broadly before getting to the detail of costing an accurate enterprise gross margin.

When looking at a new farm or newly opened piece of land that presents many possibilities my approach is to 'cast the net' quite wide at first and consider a range of enterprises that may work. How does one get information to build up the 'long-list' of enterprises to consider? Several possible ways exist:

  • Starting from the important principle of 'if you can't sell it, don't produce it', - one could do a brief market analysis and identify the top 20 agricultural commodities that show good market potential. For example, maize and beans being staple crops always have a market. Of course entering the market as a 'new entrant' is where the challenge lies; and

  • One could speak to neighbors, other farmers, agricultural extension officers or agricultural advisors to find out which commodities are doing well from their current information and knowledge.

How do you then shorten the long-list of options? You can apply a simple set of criteria to exclude commodities. These criteria could be things like agro-ecological suitability, profitability (estimated) and whether a market for the commodity exists. Agro-ecological suitability refers to the suitability of a particular commodity to a given production environment and this, in my view, is one of the most important exclusion criteria when selecting farm enterprises. Competitiveness based on cost is critically important for the sustainability of any farm business in the long-term so it is imperative that as a farmer one understands the agricultural potential of each part of their farm. How is this done? Regular soil sampling is imperative as this will provide detail on the major soil types that exist, their features and restrictions and often soil analyses results will provide guidance on the level of input required to achieve a particular yield.

So which factors are important in guiding choice of farm enterprises? In my experience the following factors should be used as selection criteria to apply to a short-list of commodities for the purposes of enterprise selection:

  1. Market size - the commodity needs to have an end market. The bigger, the greater the opportunity there is for a farmer to supply the market. This can be measured simply in tonnes of a particular commodity sold per month/per year or using a monetary value figure;

  2. Time to first harvest - the quicker a production cycle can be completed, the quicker the returns to the farmer will come. For example, a lettuce production cycle is shorter than a cabbage production cycle

  3. Enterprise profitability - the importance of this factor goes without saying. More profitable = better. Be sure to compare apples with apples as the saying goes as lettuce may be less profitable than tomatoes per cycle but lettuce can be produced multiple times and more quickly which is something to consider;

  4. Agro-ecological suitability - the greater the suitability, the lower the level of inputs that need to be applied and the lower the unit cost of production; and

  5. Ease of production - is the commodity difficult or easy to produce? What level of management is required? More management in many cases means more cost. This is something a farmer needs to keep in balance with other factors as commodities that are technical and difficult to produce are often more profitable.

Fig. 2 - Vegetable enterprises can be very profitable but require high levels of management and focus on crop rotation for sustainability

There may be other factors that can be considered as well but what I have listed above are for me the most important factors that apply to any farm really. How can a farmer do this exercise practically?

  • Set out the short-list of commodities that need to be evaluated on a piece of paper or in a simple spreadsheet (MS Excel);

  • Write out the name of each commodity in columns across the page and the criteria to be applied in rows going down the page;

  • Apply a simple scoring system using a range of 1-5 or 1-10 and score each commodity based on what information you have for each;

  • Add up the scores and rank the commodities from highest to lowest score achieved.

The process can be as simple or as complicated as needs dictate. I often find similar outcomes whether using limited or extensive information. It comes down to the quality of the information ones has easy access to and how this information is used.

Once enterprises have been selected, further planning can take place around the how and when to produce to maximize profit.

7 views0 comments