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  1. 1. WILL YOUR NEW AQUACULTURE BUSINESS BE PROFITABLE? Putting together a business plan Steeve Pomerleau Research Associate
  2. 2. Objectives <ul><li>Help potential producers by: </li></ul><ul><ul><li>Outlining critical questions </li></ul></ul><ul><ul><li>Describing components of a business plan </li></ul></ul><ul><ul><li>Estimating the level of capital investment </li></ul></ul>
  3. 3. Critical Questions <ul><li>Which species to produce? </li></ul><ul><ul><li>Do you have a clear understanding of the species constraints and benefits (biological and economic)? </li></ul></ul>
  4. 4. Tilapia <ul><li>Biological and Economical Constraints </li></ul><ul><li>Tropical fish that dies in the winter in most parts of the U.S. </li></ul><ul><li>Must be overwintered indoors, raising costs. </li></ul><ul><li>Good market in U.S. for fillets, but imported fillets from tropics have lower costs. </li></ul><ul><li>Live fish sales difficult, but possible. </li></ul><ul><li>Limited market for live fish sales. </li></ul>
  5. 5. Baitfish <ul><li>Biological and Economical Constraints </li></ul><ul><li>Low production costs </li></ul><ul><li>Low yields </li></ul><ul><li>Live product that requires extensive distribution system </li></ul><ul><li>Sales tied to fishing conditions nationwide on holidays = market risk </li></ul><ul><li>Market flat </li></ul>
  6. 6. Baitfish <ul><li>Biological and Economical Constraints </li></ul><ul><li>Difficult to break into market. </li></ul><ul><li>Wholesaling difficult. </li></ul><ul><li>Could sell baitfish on retail basis, but sales volumes will be very low. </li></ul><ul><li>Even in prime fishing areas, profits from bait sales are low. </li></ul><ul><li>Potential would exist in selling to larger baitfish wholesaler who has established distribution network. </li></ul>
  7. 7. Freshwater Prawns <ul><li>Biological and Economical Constraints </li></ul><ul><li>Tropical animals. </li></ul><ul><li>All production will need to be marketed at the same time in the fall before prawns die as temperatures go down. </li></ul><ul><li>Thus, the market will be highly seasonal and prawns will be sold when their price is lowest. </li></ul><ul><li>Insecticide will kill prawns! </li></ul>
  8. 8. Freshwater Prawns <ul><li>Biological and Economical Constraints </li></ul><ul><li>Market not developed. Individual grower will need to develop the market. </li></ul><ul><li>Production risks high. Severe losses possible. </li></ul><ul><li>Seed supply unreliable and scarce. </li></ul><ul><li>Production costs not well known. </li></ul><ul><li>Harvesting requires draining. </li></ul>
  9. 9. What about… <ul><li>Eels? </li></ul><ul><li>Bullfrogs? </li></ul><ul><li>Turtles? </li></ul><ul><li>Alligators? </li></ul>
  10. 10. What about… <ul><li>Eels? </li></ul><ul><li>Bullfrogs? </li></ul>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. <ul><li>Turtles? </li></ul><ul><li>Alligators? </li></ul>
  11. 11. Critical Questions <ul><li>Are you aware of the risks involved? </li></ul><ul><ul><li>low dissolved oxygen </li></ul></ul><ul><ul><li>diseases </li></ul></ul><ul><ul><li>bird depredation </li></ul></ul><ul><ul><li>Off flavor </li></ul></ul><ul><ul><li>Market fluctuations </li></ul></ul><ul><ul><li>FISH FARMERS BEAR ALL THE RISK </li></ul></ul><ul><ul><li>NO GOVERNMENT PROGRAMS TO HELP!! </li></ul></ul>
  12. 12. Critical Questions <ul><li>What will it cost you to produce this species in the production system selected? </li></ul><ul><li>Can this species be raised and sold for a profit? </li></ul>
  13. 13. Tilapia Production Costs Production costs $/ lb Tropical ponds 0.74 Tropical raceways 0.75 Subtropical greenhouse 1.12 Ponds, south. U.S. 1.03 Temperate indoor tanks 1.62
  14. 14. Catfish Production Costs <ul><li>Assume feed costs @ $275/ton, and an average yield of 5,000 lb/acre. For top 10-15% of farms. Average yield is less. </li></ul><ul><li>Budgets $0.63 - $0.69/lb </li></ul>
  15. 15. Critical Questions <ul><li>Aquaculture is management intensive. </li></ul><ul><li>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. </li></ul><ul><li>Do you like to get a full night’s sleep most nights? </li></ul>
  16. 16. Critical Questions <ul><li>It is critical to spend as much time studying markets </li></ul><ul><ul><li>Are markets accessible? </li></ul></ul><ul><ul><li>What have market prices been over the last 5 years? </li></ul></ul><ul><ul><li>Are they higher during certain months than others? </li></ul></ul><ul><ul><li>Is the most common market price high enough to cover all your production costs? </li></ul></ul>
  17. 17. Business Plan <ul><li>Organized and structured document that… </li></ul><ul><ul><li>analyzes the market potential </li></ul></ul><ul><ul><li>Explain the production technologies </li></ul></ul><ul><ul><li>Estimate the financial performance of the business </li></ul></ul><ul><li>Necessary to… </li></ul><ul><ul><li>Evaluate feasibility </li></ul></ul><ul><ul><li>Estimate capital investments & operating capital </li></ul></ul><ul><ul><li>Secure adequate financing </li></ul></ul>
  18. 18. Business Plan <ul><li>It is the future of the business on paper. </li></ul><ul><li>A way to test dreams against expected challenges and opportunities. </li></ul>
  19. 19. Why is a Business Plan Important? <ul><li>Many prospective and existing fish farmers have difficulty obtaining financing. </li></ul><ul><li>Lenders may not be familiar with aquaculture </li></ul><ul><li>Adequate planning for the business may help avoid mistakes. </li></ul><ul><li>Proper planning for the business can also minimize risks associated with the market, production and financing. </li></ul>
  20. 20. How long does it take to develop a complete business plan? <ul><li>A good business plan take months to develop. </li></ul><ul><li>A thorough plan cannot be developed in an hour, a day, or even a week. </li></ul><ul><li>The plan is only as good as the effort and thought that goes into it. </li></ul>
  21. 21. Fundamental questions addressed with a business plan <ul><li>How will you produce the product? </li></ul><ul><ul><li>Production System </li></ul></ul><ul><li>Who will buy the product? </li></ul><ul><ul><li>Marketing Plan </li></ul></ul><ul><li>Is the proposed business economically and financially feasible? </li></ul><ul><ul><li>Economic and Financial Analysis </li></ul></ul>
  22. 22. Components of a Business Plan <ul><li>Description of the proposed site and production system </li></ul><ul><li>Marketing plan </li></ul><ul><li>Financial analysis </li></ul><ul><li>Brief resume of borrower </li></ul>
  23. 23. Description of the site <ul><li>Suitability of the site in terms of soil characteristics, environmental conditions, and water supply. </li></ul><ul><li>The proximity to processing facilities, feed mills, aquaculture supply firms, equipment repair services, disease and diagnostics laboratories, and the Extension office. </li></ul><ul><li>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. </li></ul><ul><li>Information on specific permits that will be required. </li></ul>
  24. 24. Description of Production System <ul><li>Thorough discussion of the proposed production system </li></ul><ul><li>Possible production problems (off flavor, etc) </li></ul><ul><li>This demonstrates to the lender awareness of the problem and warns the lender of potential cash flow or debt repayment problems. </li></ul>
  25. 25. Marketing Plan <ul><li>The most successful aquaculture business: </li></ul><ul><ul><li>are market-oriented </li></ul></ul><ul><ul><li>have diverse markets </li></ul></ul><ul><ul><li>are committed to their customers </li></ul></ul><ul><li>Decisions on species, harvest size, and volume should be based on a market analysis. </li></ul><ul><li>Profits are made by selling fish, not producing them. </li></ul>
  26. 26. Marketing Plan <ul><li>If you’re in an area without a history of aquaculture, it is useful to present information on: </li></ul><ul><ul><li>the size of the industry </li></ul></ul><ul><ul><li>current trends </li></ul></ul><ul><ul><li>overall growth potential </li></ul></ul>
  27. 27. How to begin to Analyze the Market <ul><li>Talk to local retail operations that sell fish. </li></ul><ul><li>Even if you intend to sell strictly to a processing plant. </li></ul><ul><li>It is important to understand the product qualities and characteristics expected by the retail operators and end consumers. </li></ul>
  28. 28. How to begin to Analyze the Market <ul><li>Talk to as many different potential buyers as possible to determine their needs. </li></ul><ul><ul><li>Retail markets </li></ul></ul><ul><ul><li>Processors </li></ul></ul><ul><ul><li>wholesalers </li></ul></ul><ul><ul><li>Distributors, brokers </li></ul></ul><ul><ul><li>Restaurants </li></ul></ul><ul><ul><li>Seafood stores </li></ul></ul><ul><ul><li>Supermarkets </li></ul></ul><ul><ul><li>Consumers buying directly </li></ul></ul>
  29. 29. How to begin to Analyze the Market <ul><li>Each buyer has its own buying patterns. </li></ul><ul><ul><li>Historical prices paid </li></ul></ul><ul><ul><li>Product form </li></ul></ul><ul><ul><li>Dockage rates </li></ul></ul><ul><ul><li>Transportation charges </li></ul></ul><ul><ul><li>Payment frequency </li></ul></ul><ul><ul><li>Seasonality issues </li></ul></ul><ul><ul><li>Delivery volume requirements </li></ul></ul><ul><ul><li>Quality standards </li></ul></ul><ul><ul><li>Procedures </li></ul></ul><ul><ul><li>Contracts </li></ul></ul><ul><ul><li>Other buyers preferences </li></ul></ul>Enough potential buyers to support your business?
  30. 30. Marketing Plan <ul><li>Any documentation from the plants or a letter stating that they will purchase fish from you will strengthen the business loan proposal </li></ul>
  31. 31. Financial Analysis <ul><li>Estimated Annual Costs & Returns </li></ul><ul><li>Estimate of Required Financing </li></ul><ul><li>Farm Appraisal </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Income Statement </li></ul><ul><li>Cash Flow Budget </li></ul><ul><li>Personal Financial Statement </li></ul>
  32. 32. Enterprise Budget <ul><li>Estimate of average costs and revenues in a typical year after the business is established. </li></ul><ul><li>Indicates generally whether the proposed production system is profitable. </li></ul><ul><li>Indicates general level of expected profit. </li></ul><ul><li>Indicates breakeven costs. </li></ul><ul><li>Indicates breakeven yields </li></ul>
  33. 34. Estimate of required financing <ul><li>Aquaculture is capital intensive. </li></ul><ul><li>Some lenders still require as much as 50-65% owner equity. </li></ul>
  34. 35. Investment Cost <ul><li>Catfish farm: $4,900 - $5,500/acre </li></ul><ul><li>Land -- 23 - 26% </li></ul><ul><li>Pond construction -- 33 - 35% </li></ul><ul><li>Water supply -- 11 - 14% </li></ul><ul><li>Equipment, feed bins -- 28 - 30% </li></ul><ul><li>If you already own the land: investment is $3,600 - $4,200/acre </li></ul>
  35. 36. Balance Sheet <ul><li>Lists what assets and liabilities would be for the new aquaculture business. </li></ul><ul><li>Used to calculate net worth (owner equity) </li></ul><ul><li>Used to determine solvency and liquidity (financial strength & position of the business) </li></ul><ul><li>Lenders prefer owner equity of 60-65% for aquaculture loans. </li></ul>
  36. 38. Income Statement <ul><li>Itemizes farm income and expenses </li></ul><ul><li>Called profit and loss statement </li></ul><ul><li>Calculates </li></ul><ul><ul><li>net farm income </li></ul></ul><ul><ul><li>return to capital </li></ul></ul><ul><ul><li>Return to labor & management </li></ul></ul><ul><ul><li>return to equity </li></ul></ul>
  37. 40. Cash Flow Budget <ul><li>What is it? </li></ul><ul><ul><li>It is a summary of the cash inflows and outflows over a given period of time. </li></ul></ul><ul><ul><li>It is an important forward planning tool. </li></ul></ul><ul><li>Purpose : </li></ul><ul><ul><li>Estimate future borrowing needs </li></ul></ul><ul><ul><li>Estimates the loan repayment capacity </li></ul></ul><ul><ul><li>Schedule payments and harvests </li></ul></ul>
  38. 41. Cash Flow Budget <ul><li>Shows cash receipts and cash expenses by month, quarter, or year </li></ul><ul><li>Includes only cash expenses </li></ul><ul><li>Indicates when cash is available for loan repayment </li></ul><ul><li>Indicates when cash is needed to keep business going </li></ul><ul><li>Should include family living expenses </li></ul>
  39. 43. Cash Flow Budget <ul><li>Indicates when additional cash is needed in the business. </li></ul><ul><li>Can be used to plan operating lines of credit. </li></ul><ul><li>Can be used to schedule purchases of new equipment or major repairs. </li></ul><ul><li>Can be used to plan stocking and harvesting schedules to meet financial obligations. </li></ul>
  40. 44. Conclusion <ul><li>Fish farming is a great way of life but requires a great deal of preparation and planning </li></ul>
  41. 45. Components of a Business Plan <ul><li>Description of the proposed site and production system </li></ul><ul><li>Marketing plan </li></ul><ul><li>Financial analysis </li></ul><ul><ul><li>Annual Costs & Returns </li></ul></ul><ul><ul><li>Required Financing </li></ul></ul><ul><ul><li>Farm Appraisal </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><li>Brief resume of borrower </li></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Cash Flow Budget </li></ul></ul><ul><ul><li>Personal Financial Statement </li></ul></ul>