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19th January 23
Feasibility Assessments for Agribusiness
Agribusinesses across the value chain have to deal with a large number of uncertainties that can impact the business and result in volatility in income generation. These risks are split into the below distinct risk groupings.
- Production Risk – is the possibility of yield/output levels being lower than anticipated and derives from adverse weather conditions, disease and pest damage, equipment and machinery malfunction among others.
- Marketing Risk – is the possibility of losing markets for business products or attaining prices that are lower than anticipated. This risk is to a large extent influenced by supply and demand dynamics.
- Financial Risk – arises from the inability of the business to meet its obligations, generating lower profits than anticipated and inability to maintain and grow equity. This risk arises from production and marketing risk but can also be influenced by other factors such as inability to raise adequate funding, high cost of debt, high input costs, inflation and unfavorable exchange rates.
- Legal Risk – arises from a business’ inability to fulfil contractual agreements. In the context of people (including business human resource), legal risks will arise from negligence within business premises.
- Environmental Risk – is closely linked to legal and results from environmental liability arising from water, land and other natural resource use.
- Human Resource Risk – include the negative impact arising from lack of adequate skills and expertise to run the business and inadequate business succession planning.
- Institutional Risk – arises from uncertainties arising from government policy and include tax laws, price controls, regulation on water use, waste disposal among others.
It is important to note that although the sources of these agricultural risks differ, they are all interlinked because risks influence each other. For example, production risk is influenced by the ability of the business to raise financing and the skills of labor.
The above risks underscore the importance of conducting a feasibility assessment when venturing into a new business/enterprise. A feasibility assessment refers to the analysis of the viability of a business idea and aims to determine whether a business venture is sustainable in the long run. This assessment provides valuable information for a “go/no-go” decision which helps save on time, money and effort that would otherwise be employed on an unviable venture. These assessments are thus relevant for businesses at every stage whether start-up or growth.
Feasibility for agribusinesses typically focusses on technical, market, commercial and organizational aspects:
This is an assessment of the production process and focuses on methodology for delivering products/services to the end consumer. It entails an internal capacity needs assessment and review of external systems and linkages along the specific commodity value chains to identify opportunities for the business/projects. The aspects to be reviewed here are determined by the stage in the value chain that a business operates.
For example, for a primary production business, the focus will be on land availability and suitability, farm infrastructure, crop management practices etc. while for a processing business the review would touch on processing machinery and equipment, raw material availability and quality, inventory control, production scheduling among others.
Our partner, Crop Nutrition Laboratory Services have underscored the importance of this with one of their experiences working with an agribusiness that invested in an agroforestry project prior to conducting land suitability surveys. The project failed and the proprietors lost money as the rooting depth of the land was not suitable for growing the specific crop.
This is an in-depth review of the industry that the business intends to sell its product in and provides details on the size, growth rate, trends and outlook. It also aims to identify potential markets, market competition and barriers to market entry.
I have in the past carried out a feasibility review of a dairy business doing primary production on own farm and with contracted farmers and was exploring the processing of milk. As you may know, the dairy business in Kenya is extremely competitive. While the business had identified a market for its products, our assessment revealed opportunities for selling to a large network of organizations affiliated to the business which would result in lower costs of getting the product to market and less competition.
Commercial feasibility provides a review of the financial requirements to build the business. This covers amount of investment, approach to securing the investment and business commercialization strategy. It also covers return on investment.
A feasibility exercise on a viticulture project indicated that the project could not be commercialized in its existing state and would require significant investment to get it on a path to profitability. However, for a number of reasons, raising the full amount of funding required was going to be a difficult task for the project. We therefore presented a two-step fundraising strategy that involved a short-to-medium term rehabilitation exercise on the existing vineyard and winery at minimal costs as well as a long-term strategy involving expansion of land under cultivation and modernization of the winery.
This focuses on management’s skills and other non-financial resources required to execute the project. It not only seeks to identify skill gaps but also assesses challenges in the talent acquisition process. In addition, it aims to provide information on business structures, laws and regulations, business permits and licenses among others.
Most businesses will have adequate skills and labor resource at a certain level of operation but will require an increase in labor numbers including the hiring of specific skill sets for expansion. While conducting a feasibility exercise on a coffee and macadamia project in Malawi, our findings indicated that the current farm management was fit for purpose at existing level of farm operations. However, with plans underway for expansion and farm development, there was a need for the recruitment of a more senior general manager to oversee the farm operations and an in-house agronomist to support the business’s expansion efforts.
A feasibility assessment therefore acts as a risk management tool from the onset, highlighting risks and providing mitigating factors. Other reasons why conducting a feasibility assessment is important are that it:
- Provides of quality information to aid in decision making
- Enhances the probability of success of the business through evaluating relevant parameters, identifying risks and providing mitigation measures
- Helps narrow down business alternatives and provide focus to the specific project
- Identifies new opportunities for the business
- Helps in raising capital from funding institutions
Agri Frontier Limited provides agribusiness feasibility assessment services in partnership with Crop Nutrition Laboratory Services. Our experience in the sector provides detailed knowledge that we draw upon to ensure your business gets it right from the get-go. We are happy to engage so let’s chat.