Growing is risky for a farm

Growing is risky for a farm... actually, it's risky for most businesses, but I'm going talk about a recent situation I've run across.

So imagine you're selling chicks, baby chickens, and business is good, and one of your regular customers comes up and asks you to supply a larger number of chickens than usual, and finished chickens - older, mature chickens.    So instead of selling chicks, you'll be supplying the market-ready birds.  This customer wants a quantity, and the increase in sales would be a nice addition to the overall farm sales.

On the face of it it seems like a no-brainer -- more sales?  Sure!  But think about what this really means.  Lets say that he wants you to produce 20 finished chickens a month, and that chickens take 3 months to get to the weight the customer wants, from hatch.

That means you'll have, at minimum, 60 chickens (3 batches of 20) at various ages.  And when you send one off to market, you'll replace 20, to keep the supply continuous.

So what this customer is really asking you to do is finance their operation, because you'll have money and resources (labor, facilities) tied up with these three batches of chickens.  With pigs and a grow out of 8 months (birth to slaughter) you'd have 160 pigs (8 batches of 20) around.

So to continue with the chicken example, the first thing I'd do is consider that you could sell the chicks at hatch like you normally do -- and so, for a cost basis, it's fair to figure the retail price of your chick as a starting point.  then the amount of feed you'll need to bring it to weight.  Usually it's about 4lbs of feed per pound of chicken, and chickens go to market at 4lbs or so.  So you'll need 16lbs of feed per chicken.  And then you need to figure in the labor and facilities.  Lets say each batch of chicken costs you 10 minutes of labor (70 minutes a week, 280 minutes a month-) and at $15/hour (because who wants to work at minimum wage?) that's about $70/month/batch * 3 months, or $210 in labor costs.

So to summarize it:
Chick cost at $3/each * 20 = $60
labor cost at 70/month = $210
feed cost at .20/lb * 16lbs = 3.20 *20 = $64
Water, bedding, barn repairs...$10 per batch?

So each batch "costs" you $334 = $16.7/chicken

you're going to need to charge $5 or $6/lb to make a profit on these birds, but I'm using this as an example.

Basically you'll need to front the costs for feed, chicks and labor before you get any sales income.  So this customer is really asking you to finance them for 90 days at $334 a batch.  If you did this on your visa card visa would charge you some rate.  lets say 12% (lots of people pay 29% or higher) and that means that the interest on this money could be from $10 to $24, and if you're lending money, well, that's money you should be getting, too.

There are three things you can do to reduce the risk to your farm or business:

1) have the customer pay some portion of your hard costs up front, in the form of a deposit.  if they flake out that helps cover the loss as you scramble to find another market.  In this case I'd consider having the customer pay for the chicks up front, and for the feed costs, so a $124 deposit, at least.

2) Have the customer finance the entire order.  This is harder to ask for, but the risk shifts from your business to theirs, or sometimes you have to do this if you just don't have the capital yourself to make this work.

3) Assume all the risk and finance this yourself.

So in my case, I'm going to go back to the customer with a propose that looks a lot like #1 here - I'm going to propose that they buy the animals and pre-pay the feed costs.  I still have a risk that they won't complete their order, but I have less risk (and less capital need - read: less money I need to borrow or supply myself) than #3.

Anytime you get a larger order, particularly something that will be produced in the future, always consider that there's a cost to growth, and make sure that you understand how much that growth will cost, and where the money will come from.

There are times when it is the prudent thing to decline new sales, or scale them back so that the growth is more gradual - less risky.