Study: What's important to farmer investment decisions?
If I start a value-added agricultural business, will farmers invest in it? This is the uncertainty faced by many farmer entrepreneurs attempting to fund a value-added business. A long-time consultant friend of mine told me, "I can find business opportunities for farmers, but I can't anticipate if they will invest the funds needed to capitalize the business."
To shed light on this topic, the Iowa State University (ISU) Ag Marketing Resource Center funded a study to survey farmers about their investment decisions. The Iowa Farm Business Association cooperated with us to randomly survey their farmer members. During the spring and summer of 2006, 90 completed surveys were obtained. The information below is based on the results of these surveys.
The farmer respondents ranked the importance of several factors commonly used to assess a business investment. The farmers considered all of the factors important. But some were more important than others. Management of the business rated the highest. Leadership of the project and product demand followed. Interestingly, the estimated return on equity ranked the lowest. The ranking may indicate a certain amount of investor sophistication. An awareness that the first five factors need to be in place before the return on investment will be realized.
- Management of the business
- Leadership of the project
- Demand for the product
- Financial strength of the business
- Access to the market
- Estimated return on investment
We attempted to identify various attributes of an investment and determine the importance of these attributes in the farmer's investment decision. Four general investment attributes were analyzed.
- Location: This attribute focuses on the potential impact of the business on the local community and surrounding farms.
- Familiarity: This attribute focuses on the farmer's knowledge and comfort level with the business and industry.
- Control: This attribute focuses on the importance of control of the business by local farmers.
- Profitability: This attribute focuses on financial return issues.
The survey provided descriptive statements for each of the general attributes. The farmers were asked to respond to these by indicating the importance of each statement. The respondents reported that all of the attributes were important. However, considerable variation existed among the attributes.
The farmers' past value-added investment decisions provided the following categories. The responses were categorized by farmers who invested in a value-added business and those who did not.
Respondents cited the positive effect on local crop and livestock prices and the rate of return on investment as the two most important attributes. Improving farm profitability by increasing prices was just as important as the rate of return on the investment in the business. Moreover, combining these two factors with the positive local economic impact of an investment creates a powerful motivation for farmers to invest in local agricultural processing businesses.