will your new aquaculture business be profitable? putting together a business plan steeve pomerleau...

WILL YOUR NEW AQUACULTURE BUSINESS

BE PROFITABLE?Putting together a business plan

WILL YOUR NEW AQUACULTURE BUSINESS

BE PROFITABLE?Putting together a business plan

Steeve PomerleauResearch Associate

Steeve PomerleauResearch Associate

ObjectivesObjectives

• Help potential producers by:

– Outlining critical questions

– Describing components of a business plan

– Estimating the level of capital investment

• Help potential producers by:

– Outlining critical questions

– Describing components of a business plan

– Estimating the level of capital investment

Critical QuestionsCritical Questions

• Which species to produce?

– Do you have a clear understanding of the

species constraints and benefits

(biological and economic)?

• Which species to produce?

– Do you have a clear understanding of the

species constraints and benefits

(biological and economic)?

TilapiaTilapia

Biological and Economical Constraints

• Tropical fish that dies in the winter in most parts of the U.S.

• Must be overwintered indoors, raising costs.

• Good market in U.S. for fillets, but imported fillets from tropics have lower costs.

• Live fish sales difficult, but possible.

• Limited market for live fish sales.

Biological and Economical Constraints

• Tropical fish that dies in the winter in most parts of the U.S.

• Must be overwintered indoors, raising costs.

• Good market in U.S. for fillets, but imported fillets from tropics have lower costs.

• Live fish sales difficult, but possible.

• Limited market for live fish sales.

BaitfishBaitfish

Biological and Economical Constraints

• Low production costs

• Low yields

• Live product that requires extensive distribution system

• Sales tied to fishing conditions nationwide on holidays = market risk

• Market flat

Biological and Economical Constraints

• Low production costs

• Low yields

• Live product that requires extensive distribution system

• Sales tied to fishing conditions nationwide on holidays = market risk

• Market flat

BaitfishBaitfish

Biological and Economical Constraints

• Difficult to break into market.

• Wholesaling difficult.

• Could sell baitfish on retail basis, but sales volumes will be very low.

• Even in prime fishing areas, profits from bait sales are low.

• Potential would exist in selling to larger baitfish wholesaler who has established distribution network.

Biological and Economical Constraints

• Difficult to break into market.

• Wholesaling difficult.

• Could sell baitfish on retail basis, but sales volumes will be very low.

• Even in prime fishing areas, profits from bait sales are low.

• Potential would exist in selling to larger baitfish wholesaler who has established distribution network.

Freshwater PrawnsFreshwater Prawns

Biological and Economical Constraints

• Tropical animals.

• All production will need to be marketed at the same time in the fall before prawns die as temperatures go down.

• Thus, the market will be highly seasonal and prawns will be sold when their price is lowest.

• Insecticide will kill prawns!

Biological and Economical Constraints

• Tropical animals.

• All production will need to be marketed at the same time in the fall before prawns die as temperatures go down.

• Thus, the market will be highly seasonal and prawns will be sold when their price is lowest.

• Insecticide will kill prawns!

Freshwater PrawnsFreshwater Prawns

Biological and Economical Constraints

• Market not developed. Individual grower will need to develop the market.

• Production risks high. Severe losses possible.

• Seed supply unreliable and scarce.

• Production costs not well known.

• Harvesting requires draining.

Biological and Economical Constraints

• Market not developed. Individual grower will need to develop the market.

• Production risks high. Severe losses possible.

• Seed supply unreliable and scarce.

• Production costs not well known.

• Harvesting requires draining.

What about…What about…

• Eels?

• Bullfrogs?

• Eels?

• Bullfrogs?

• Turtles?

• Alligators?

• Turtles?

• Alligators?

What about…What about…

• Eels?

• Bullfrogs?

• Eels?

• Bullfrogs?

Biologically possible but often questionable economically

Highly specialized industries that may be profitable regionally

If something is not being raised, there is likely to be a reason.

Biologically possible but often questionable economically

Highly specialized industries that may be profitable regionally

If something is not being raised, there is likely to be a reason.

• Turtles?

• Alligators?

• Turtles?

• Alligators?

Critical QuestionsCritical Questions

• Are you aware of the risks involved?– low dissolved oxygen

– diseases

– bird depredation

– Off flavor

– Market fluctuations

FISH FARMERS BEAR ALL THE RISK

NO GOVERNMENT PROGRAMS TO HELP!!

• Are you aware of the risks involved?– low dissolved oxygen

– diseases

– bird depredation

– Off flavor

– Market fluctuations

FISH FARMERS BEAR ALL THE RISK

NO GOVERNMENT PROGRAMS TO HELP!!

Critical QuestionsCritical Questions

• What will it cost you to produce this

species in the production system

selected?

• Can this species be raised and sold for

a profit?

• What will it cost you to produce this

species in the production system

selected?

• Can this species be raised and sold for

a profit?

Tilapia Production CostsTilapia Production Costs

Production costs $/lbTropical ponds 0.74Tropical raceways 0.75Subtropical greenhouse 1.12Ponds, south. U.S. 1.03Temperate indoor tanks 1.62

Catfish Production CostsCatfish Production Costs

• Assume feed costs @ $275/ton, and an

average yield of 5,000 lb/acre. For top

10-15% of farms. Average yield is less.

• Budgets $0.63 - $0.69/lb

• Assume feed costs @ $275/ton, and an

average yield of 5,000 lb/acre. For top

10-15% of farms. Average yield is less.

• Budgets $0.63 - $0.69/lb

Critical QuestionsCritical Questions

• Aquaculture is management intensive.

• You must ask yourself if you have the

skills, management ability, and time to

run a fish farm. If not, you will have to

hire a manager.

• Do you like to get a full night’s sleep

most nights?

• Aquaculture is management intensive.

• You must ask yourself if you have the

skills, management ability, and time to

run a fish farm. If not, you will have to

hire a manager.

• Do you like to get a full night’s sleep

most nights?

Critical QuestionsCritical Questions

• It is critical to spend as much time studying markets– Are markets accessible? – What have market prices been over the

last 5 years? – Are they higher during certain months than

others? – Is the most common market price high

enough to cover all your production costs?

• It is critical to spend as much time studying markets– Are markets accessible? – What have market prices been over the

last 5 years? – Are they higher during certain months than

others? – Is the most common market price high

enough to cover all your production costs?

Business PlanBusiness Plan

• Organized and structured document that…

– analyzes the market potential

– Explain the production technologies

– Estimate the financial performance of the business

• Necessary to…

– Evaluate feasibility

– Estimate capital investments & operating capital

– Secure adequate financing

• Organized and structured document that…

– analyzes the market potential

– Explain the production technologies

– Estimate the financial performance of the business

• Necessary to…

– Evaluate feasibility

– Estimate capital investments & operating capital

– Secure adequate financing

Business PlanBusiness Plan

• It is the future of the business

on paper.

• A way to test dreams against

expected challenges and

opportunities.

• It is the future of the business

on paper.

• A way to test dreams against

expected challenges and

opportunities.

Why is a Business Plan Important?

Why is a Business Plan Important?

• Many prospective and existing fish farmers

have difficulty obtaining financing.

• Lenders may not be familiar with aquaculture

• Adequate planning for the business may help

avoid mistakes.

• Proper planning for the business can also

minimize risks associated with the market,

production and financing.

• Many prospective and existing fish farmers

have difficulty obtaining financing.

• Lenders may not be familiar with aquaculture

• Adequate planning for the business may help

avoid mistakes.

• Proper planning for the business can also

minimize risks associated with the market,

production and financing.

How long does it take to develop a complete business plan?

How long does it take to develop a complete business plan?

• A good business plan take months to

develop.

• A thorough plan cannot be developed

in an hour, a day, or even a week.

• The plan is only as good as the effort

and thought that goes into it.

• A good business plan take months to

develop.

• A thorough plan cannot be developed

in an hour, a day, or even a week.

• The plan is only as good as the effort

and thought that goes into it.

Fundamental questions addressed with a business plan

Fundamental questions addressed with a business plan

• How will you produce the product?

Production System

• Who will buy the product?

Marketing Plan

• Is the proposed business economically

and financially feasible?

Economic and Financial Analysis

• How will you produce the product?

Production System

• Who will buy the product?

Marketing Plan

• Is the proposed business economically

and financially feasible?

Economic and Financial Analysis

Components of a Business PlanComponents of a Business Plan

1. Description of the proposed site and

production system

2. Marketing plan

3. Financial analysis

4. Brief resume of borrower

1. Description of the proposed site and

production system

2. Marketing plan

3. Financial analysis

4. Brief resume of borrower

Description of the siteDescription of the site

• Suitability of the site in terms of soil characteristics, environmental conditions, and water supply.

• The proximity to processing facilities, feed mills, aquaculture supply firms, equipment repair services, disease and diagnostics laboratories, and the Extension office.

• This demonstrates to the lender both the distance the farm will be from these services and that the individual knows where to find these services.

• Information on specific permits that will be required.

• Suitability of the site in terms of soil characteristics, environmental conditions, and water supply.

• The proximity to processing facilities, feed mills, aquaculture supply firms, equipment repair services, disease and diagnostics laboratories, and the Extension office.

• This demonstrates to the lender both the distance the farm will be from these services and that the individual knows where to find these services.

• Information on specific permits that will be required.

Description of Production SystemDescription of Production System

• Thorough discussion of the proposed

production system

• Possible production problems (off flavor, etc)

• This demonstrates to the lender

awareness of the problem and warns the

lender of potential cash flow or debt

repayment problems.

• Thorough discussion of the proposed

production system

• Possible production problems (off flavor, etc)

• This demonstrates to the lender

awareness of the problem and warns the

lender of potential cash flow or debt

repayment problems.

Marketing PlanMarketing Plan

• The most successful aquaculture business:– are market-oriented

– have diverse markets

– are committed to their customers

• Decisions on species, harvest size, and volume should be based on a market analysis.

• Profits are made by selling fish, not producing them.

• The most successful aquaculture business:– are market-oriented

– have diverse markets

– are committed to their customers

• Decisions on species, harvest size, and volume should be based on a market analysis.

• Profits are made by selling fish, not producing them.

Marketing PlanMarketing Plan

• If you’re in an area without a history of

aquaculture, it is useful to present

information on:

– the size of the industry

– current trends

– overall growth potential

• If you’re in an area without a history of

aquaculture, it is useful to present

information on:

– the size of the industry

– current trends

– overall growth potential

How to begin to Analyze the MarketHow to begin to Analyze the Market

• Talk to local retail operations that sell fish.

• Even if you intend to sell strictly to a

processing plant.

• It is important to understand the product

qualities and characteristics expected by the

retail operators and end consumers.

• Talk to local retail operations that sell fish.

• Even if you intend to sell strictly to a

processing plant.

• It is important to understand the product

qualities and characteristics expected by the

retail operators and end consumers.

How to begin to Analyze the MarketHow to begin to Analyze the Market

Talk to as many different potential buyers as possible to determine their needs.– Retail markets– Processors– wholesalers– Distributors, brokers– Restaurants– Seafood stores– Supermarkets– Consumers buying directly

Talk to as many different potential buyers as possible to determine their needs.– Retail markets– Processors– wholesalers– Distributors, brokers– Restaurants– Seafood stores– Supermarkets– Consumers buying directly

How to begin to Analyze the MarketHow to begin to Analyze the Market

Each buyer has its own buying patterns.– Historical prices paid

– Product form

– Dockage rates

– Transportation charges

– Payment frequency

– Seasonality issues

Each buyer has its own buying patterns.– Historical prices paid

– Product form

– Dockage rates

– Transportation charges

– Payment frequency

– Seasonality issues

– Delivery volume requirements

– Quality standards

– Procedures

– Contracts

– Other buyers preferences

– Delivery volume requirements

– Quality standards

– Procedures

– Contracts

– Other buyers preferences

Enough potential buyers to support your business?Enough potential buyers to support your business?

Marketing PlanMarketing Plan

• Any documentation from the plants or a

letter stating that they will purchase

fish from you will strengthen the

business loan proposal

• Any documentation from the plants or a

letter stating that they will purchase

fish from you will strengthen the

business loan proposal

Financial Analysis Financial Analysis

1. Estimated Annual Costs & Returns

2. Estimate of Required Financing

3. Farm Appraisal

4. Balance Sheet

5. Income Statement

6. Cash Flow Budget

7. Personal Financial Statement

1. Estimated Annual Costs & Returns

2. Estimate of Required Financing

3. Farm Appraisal

4. Balance Sheet

5. Income Statement

6. Cash Flow Budget

7. Personal Financial Statement

Enterprise BudgetEnterprise Budget

• Estimate of average costs and revenues in a

typical year after the business is established.

• Indicates generally whether the proposed

production system is profitable.

• Indicates general level of expected profit.

• Indicates breakeven costs.

• Indicates breakeven yields

• Estimate of average costs and revenues in a

typical year after the business is established.

• Indicates generally whether the proposed

production system is profitable.

• Indicates general level of expected profit.

• Indicates breakeven costs.

• Indicates breakeven yields

Estimate of required financing Estimate of required financing

• Aquaculture is capital intensive.

• Some lenders still require as much as

50-65% owner equity.

• Aquaculture is capital intensive.

• Some lenders still require as much as

50-65% owner equity.

Investment CostInvestment Cost

Catfish farm: $4,900 - $5,500/acre

• Land -- 23 - 26%

• Pond construction -- 33 - 35%

• Water supply -- 11 - 14%

• Equipment, feed bins -- 28 - 30%

• If you already own the land: investment is $3,600 - $4,200/acre

Catfish farm: $4,900 - $5,500/acre

• Land -- 23 - 26%

• Pond construction -- 33 - 35%

• Water supply -- 11 - 14%

• Equipment, feed bins -- 28 - 30%

• If you already own the land: investment is $3,600 - $4,200/acre

Balance SheetBalance Sheet

• Lists what assets and liabilities would be for

the new aquaculture business.

• Used to calculate net worth (owner equity)

• Used to determine solvency and liquidity

(financial strength & position of the

business)

• Lenders prefer owner equity of 60-65% for

aquaculture loans.

• Lists what assets and liabilities would be for

the new aquaculture business.

• Used to calculate net worth (owner equity)

• Used to determine solvency and liquidity

(financial strength & position of the

business)

• Lenders prefer owner equity of 60-65% for

aquaculture loans.

Income StatementIncome Statement

• Itemizes farm income and expenses

• Called profit and loss statement

• Calculates

– net farm income

– return to capital

– Return to labor & management

– return to equity

• Itemizes farm income and expenses

• Called profit and loss statement

• Calculates

– net farm income

– return to capital

– Return to labor & management

– return to equity

Cash Flow BudgetCash Flow Budget

• What is it?– It is a summary of the cash inflows and

outflows over a given period of time.

– It is an important forward planning tool.

• Purpose :– Estimate future borrowing needs

– Estimates the loan repayment capacity

– Schedule payments and harvests

• What is it?– It is a summary of the cash inflows and

outflows over a given period of time.

– It is an important forward planning tool.

• Purpose :– Estimate future borrowing needs

– Estimates the loan repayment capacity

– Schedule payments and harvests

Cash Flow BudgetCash Flow Budget

• Shows cash receipts and cash expenses by month, quarter, or year

• Includes only cash expenses

• Indicates when cash is available for loan repayment

• Indicates when cash is needed to keep business going

• Should include family living expenses

• Shows cash receipts and cash expenses by month, quarter, or year

• Includes only cash expenses

• Indicates when cash is available for loan repayment

• Indicates when cash is needed to keep business going

• Should include family living expenses

Cash Flow BudgetCash Flow Budget

• Indicates when additional cash is needed in

the business.

• Can be used to plan operating lines of credit.

• Can be used to schedule purchases of new

equipment or major repairs.

• Can be used to plan stocking and harvesting

schedules to meet financial obligations.

• Indicates when additional cash is needed in

the business.

• Can be used to plan operating lines of credit.

• Can be used to schedule purchases of new

equipment or major repairs.

• Can be used to plan stocking and harvesting

schedules to meet financial obligations.

ConclusionConclusion

• Fish farming is a

great way of life but

requires a great deal

of preparation and

planning

• Fish farming is a

great way of life but

requires a great deal

of preparation and

planning

Components of a Business PlanComponents of a Business Plan

1. Description of the proposed site and production system

2. Marketing plan

3. Financial analysis

• Annual Costs & Returns

• Required Financing

• Farm Appraisal

• Balance Sheet

4. Brief resume of borrower

1. Description of the proposed site and production system

2. Marketing plan

3. Financial analysis

• Annual Costs & Returns

• Required Financing

• Farm Appraisal

• Balance Sheet

4. Brief resume of borrower

• Income Statement

• Cash Flow Budget

• Personal Financial Statement

• Income Statement

• Cash Flow Budget

• Personal Financial Statement

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