opportunity analysis - growthalberta.com · receipts in 2001.1 more than 51 million acres of land...

OPPORTUNITY ANALYSIS Agricultural Diversification

Investment Opportunity Identification Study

Page 1

Definition Agricultural producers continue to look for ways to improve and expand their business. Diversification can help this process by increasing revenues, maximizing underutilized capital or resources, reducing losses due to seasonality, and mitigating risk. It can be an expansion or contraction, or an entire or partial change in the operation. It is important to recognize that the opportunities for diversification pertain to both primary and secondary producers. Primary production is the process of cultivation or extraction of natural resources for commodity sale. Secondary production pertains to any business that adds value to commodities. Diversification can occur in two ways: vertical integration or horizontal integration.

Vertical integration involves taking part in any segment of the business, up or down in the operator’s value chain. By doing this, an operator is able to maximize the value received from selling their products or services. For example, chicken producers may produce their own feed or they may sell their eggs directly to consumers at a farmers’ market. Another example would be a pulse crop producer working together in a co-op to invest in an animal food plant to add value to their commodity.

Horizontal integration involves forming new, unrelated lines of business. These

new lines of business usually pertain to different inputs and are dissimilar to the current business. For example, an alfalfa producer may decide to use some of his fields for a new form of oilseed used in the production of bio diesel or ethanol. Another example would be a rancher renting a room in his or her home as a bed and breakfast.

Industry Overview Agriculture is the process of producing food, feed and fibre by cultivating plants or raising animals. It is one of Alberta’s largest industries, accounting for $8.3 billion in farm receipts in 2001.1 More than 51 million acres of land is used for crop and livestock production. In 2001, Alberta accounted for 22.9 percent of Canada’s total agricultural production, while only representing nine percent of the population.2 Between 1992 and 2001, agricultural production increased by 69 percent in Canada. The value-added agricultural manufacturing industry involves processing, refining and developing products from primary agricultural inputs. Value-added agriculture is a growing industry in Alberta. The value of all agri-food manufactured in 2001 was $9.3 billion.3 In 2001, the agri-food manufacturing industry in Alberta employed 23,000 people and was projected to grow to 28,300 in 2002.4 The agri-food processing sector is the largest manufacturing sector in Alberta, accounting for 23 percent of all goods manufactured in the province.2

1 AAFRD. http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sdd1512/$FILE/table1.pdf 2 Alberta’s Agri-Food Industry Growth Strategy: $20/$10 by 2010. AAFRD 3 AAFRD. http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sdd5280/$FILE/table22.pdf 4 AAFRD. http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sdd5276/$FILE/table12_fig6.pdf



Page 2

Alberta Agriculture, Food and Rural Development (AAFRD) has established a new vision and strategy for the entire agriculture and agri-foods industry. This vision is titled “$20/$10 by 2010”, referring to $20 billion in revenues in the value-added agriculture industry and $10 billion in the primary industry by the year 2010. This is a bold goal, especially for the value-added industry, since it includes growth projections of 102 percent between 2001 and 2010. The strategy cites policy and program changes to help facilitate growth on the production and consumer side. It also identifies key sectors and opportunities that are projected for rapid growth. Currently, Alberta is the largest producer of beef in the country and owns 42 percent of the nation’s cattle. The cattle industry accounted for nearly $4 billion in farm receipts, which was approximately 48 percent of Alberta’s total receipts in 2001. Alberta’s agricultural economy is currently facing huge challenges due to the two recent cases of Bovine Spongiform Encephalopathy (BSE). This has severely impacted the producers and the communities in which they reside. The Alberta government and the cattle producers have been addressing this problem for almost a year. Agricultural diversity is one strategy that can mitigate the risks of this reoccurring.

Market Overview The AAFRD has defined seven opportunities to diversify agri-business. These strategies can be vertically or horizontally integrated. It is also important to recognize that not all opportunities will apply to all businesses. The most important part of these opportunities is preliminary feasibility research.

Agricultural Tourism: Agri-tourism is a growing sector in Alberta and the demand is continually increasing. There are many types of agri-tourism experiences and activities in which visitors can take part, such as attending a farmers’ market or a county fair, visiting a rural petting zoo, picking fruit on a u-pick farm, or visiting a Hutterite colony. During a recent survey, 47 percent of people in Alberta had taken part in an agri-tourism activity at least eighty kilometers away from their home. Of all the people surveyed, 99 percent of people responded that they were very or somewhat likely to take part in an agri-tourism experience within the next year.5 Accommodation can be an important attraction for travelers planning overnight vacations. There are two types of farms and ranches that provide accommodations. First is the ‘farm/ranch stay’ that includes short visiting periods and less formal accommodations. Next is the ‘farm/ranch vacation’, which includes visits for 3.5 days or longer, more extensive recreational activities and more formal accommodations and meals. The most recent information states that there are 37 operating country vacation farms or ranches in Alberta. Only seven of them are located north of Edmonton.6

5 AAFRD. http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/apa7606?opendocument 6 AAFRD. http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agdex3477?opendocument



Page 3

Agri-Fibre and Agri-Forestry: This is a growing industry that offers a diverse range of products. It has been developed from scientific research on new and innovative materials created from primary commodities, such as hemp, straw, wood fibre, animal fats and plant byproducts. Some uses for these materials include textiles, straw board, pulp, cogeneration, ethanol and bio-diesel. Ethanol and bio-diesel production and refining have recently been garnering substantial media attention. Woodlots and tree farms are being developed as landowners learn forest care techniques and gain a better understanding of the value of trees. Woodlots make up 1.5 million hectares of Alberta’s forests and offer economic, social and environmental value.7

Alternative Stock: There are a number of different land and aquatic animals that can be raised for commercial value. Some of these include fish, rabbits, bison, elk, deer, game birds, waterfowl, llamas, alpacas and ostriches. Each type of animal has its own strategic advantage, and markets for these animals are growing at home and abroad. Many of these animals could be raised on the same ranch as current livestock, or some ranches could be converted fairly inexpensively to solely produce these animals.

Farm Direct Marketing: Farm direct marketing involves selling food directly to the end user. Through vertical integration, value can be added to the food chain by processing or selling fresh produce directly to consumers. Some ways to sell directly to the end user is through farmers’ markets, roadside stands, u-pick operations, or by selling directly to restaurants. Farm direct marketing involves more work for the producer and may be restricted by regulation, but likely will be rewarded by larger margins.8 Consumers are interested in direct purchasing for such reasons as freshness, community support, authenticity and security. There are currently 99 farmers’ markets in Alberta with five in the GROWTH Alberta region.9 There is also a growing market for another type of direct marketing known as subscription. Subscription is a contract between a farmer and the end user, in which the end users, usually from urban areas, purchase the rights to a specific animal or plot of land. The producer then cultivates the land with crops or raises the livestock that the consumer “subscribed” until it is ready for harvest. In this way, a family can know how their food has been grown and ensure that the food is fresh. The benefit to the farmer is a locked-in price to mitigate fluctuations in market prices, and profit will be increased, as there is no middleman.

7 AAFRD. http://www.agric.gov.ab.ca/sustain/woodlot/woodlot2.html 8 AAFRD. http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agdex3482/$file/845-6.pdf?OpenElement 9 AAFRD. http://www.agric.gov.ab.ca/store/farmersmarket/index.html



Page 4

Horticulture: Horticulture is defined as the cultivating of plants, flowers, vegetables and fruits. These plants can be for medicinal, esthetic or nutritional use. Several of these crops are sold directly to the market because they are extremely perishable. Horticulture represents a large market for vertical integration by adding value to goods before sale. Examples of vertically integrating horticulture include growing berries and making jam with them or growing, preserving, and drying flowers.

Organic: Organic farming involves the growth and harvest of feed or food crops and livestock in an environmentally friendly way. In order for crops to be considered organic, no herbicides, additives or inorganic fertilizers may be used in production. Organic animals are treated humanely and are fed certified organic material. The Organic Crop Producers and Processors/Pro-Cert Canada (OC/PRO) or the Organic Crop Improvement Association (OCIA) can certify organic producers in Alberta. Certification includes an audit of all processes from the producer to consumer. There are five organic producers in the GROWTH Alberta region.10 These producers grow and raise a myriad of different agricultural goods. Consumers are willing to pay a premium price for organically grown products because they consider them more valuable. However, producers face risks of lower yield due to the lack of chemicals used to protect their crops and animals. It is important to find a willing buyer before entering the organic growing business, as it remains a relatively new market.

Specialty Crops: This opportunity includes non-traditional crops, such as oilseeds, herbs and pulse crops. Recently, peas were cited as the highest returning crop per hectare in Alberta.11 Peas ranked ahead of traditional crops, such as canola, wheat, barley, and oats. Specialty crops have specific consumers and require due diligence in finding a market before investment. Farmers can produce some of these crops with little capital investment; others will take a great deal of time, effort and money to begin producing. An organization exists that is devoted to specialty crop development in Alberta called Alberta New Crops Network (ANCN).12 Their aim is to facilitate the development of this sector by acting as a networking group. ANCN is a specialty crops advocate, lobbying policy makers on behalf of producers. In Northern Alberta, the Crop Diversification Centre North (CDCN) is the leading research institute for crop diversification.13

10 AAFRD. http://www.agric.gov.ab.ca/food/organic/directory/ 11 Alberta Pulse Growers. http://www.pulse.ab.ca/news/Jan2004-%20Canadian%20Crops%20Ranked%20by%20Return%20Per%20Acre.pdf 12 http://www.albertanewcropsnetwork.org 13 AAFDC. http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/cdc5230



Page 5

Current Assessment Political:

Government support: The provincial government’s revenue goal of $20 billion in value-added agriculture and $10 billion in primary production by 2010 will not succeed without agricultural diversification. The goal of the Alberta Agriculture Research Institute (AARI) is to attract investment, support research and development, and facilitate communication throughout the industry. At the grass roots level, AAFRD has business development officers (BDOs) to assist farmers with their regions’ diversity. The BDOs in the GROWTH Alberta region are Rod Carlyon, Westlock (780-349-4466) and Bert Denning, Barrhead (780-674-8247).

Export markets: Canada’s economy is very reliant on selling goods to other nations. This reliance can be to the economy’s detriment when exports are halted due to price shifts or extraneous factors such as tariffs, BSE, exchange rate fluctuations or border restrictions.

Regulation: There are many regulations for growing, processing and selling food in Alberta. It is imperative that when considering a new venture or expanding sales, steps are taken to adhere to all of the regulations applicable to the enterprise. To find out more about the regulations that apply to agricultural businesses see: http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/agp5030?OpenDocument.

Environmental: Climate: Crops and livestock need suitable growing conditions to be successful.

Cold weather restricts the types of crops and species of animals produced. A shortened growing season reduces the types of crops that can be cultivated and the number of harvests that can take place. Mad cow disease: Bovine Spongiform Encephalopathy (BSE) has decimated

the cattle export market and affected many people in the GROWTH Alberta region. In 2001, there were over 300,000 head of cattle and calves in the region.14 The population of cattle continues to grow, since ranchers are unable to sell their older livestock across the border. The price of cattle in Canada has decreased dramatically as a result of the increase in supply. Seasonal business: Crop production is a cyclical and seasonal business as the

majority of the work is done during the summer months and revenues do not materialize until the harvest is complete and the goods are sold. Hedging can help mitigate price risks and diversification can reduce seasonality by marketing and selling during the off-season.

Societal: Consumer demand: Demand for agricultural goods is a function of the

population. A farmer sells through the value chain or direct to the consumer, but only the end user influences demand. As long as Canada grows in population or new emerging markets are opened for import, farmers and ranchers will experience steady or increasing demand for their products.

14 Statistics Canada. Agricultural Census 2001



Page 6

Shifting demand: People are continually demanding new goods and specialty products. Current demand is shifting as consumers desire convenient, fresh products made within the community. Consumers’ needs can be broad or narrow, and it is now up to a producer to satisfy these needs.

Family farms: Urbanization has resulted in the reduction of family farms, as many children are not willing to work the farm after their parents are unable to continue farming. Average farm size is increasing as large farming organizations are buying family farms, which create even larger operations, in an effort to achieve economies of scale.

Technological: Capital intensive: Farming today has become a technologically intensive

business. Equipment is very expensive, but it allows farmers to increase efficiency and output.

Economies of scale: Technological advances enable farmers to increase output, thus increasing the amount of land one person can farm. Large operators may be slower to adopt a diversification strategy.

Conversion/Expansion costs: When changing or creating a new business line, there may be a need for new equipment and training. These costs can vary but must be considered before entering into a new line of business.

Critical Success Factors Market identification: It is the responsibility of the primary producer to find and

develop his or her own diversification strategy. Some tips to identifying markets include:

o Finding goods of which Alberta is a net importer and identifying whether growing that commodity in the region is feasible;

o Identifying goods that producers give away or sell to friends and family that may have a broader market; and

o Being aware of current trends occurring in the region and abroad that may have a potential for more producers.

Research: This is the single most important step to diversifying an agricultural

business. The research should include an environmental feasibility study, market research and a business plan. These steps will ensure that the right venture is found for current business circumstances. A feasibility study should consider the climate, the amount of resources and equipment that will be needed, as well as the amount of time required. The goal of the study is to assess whether the endeavour fits within the current business or lifestyle. Market research will determine whether there is demand for a certain commodity. Before entering a diversification venture, a marketing plan should be in place. Once the research is completed, a business plan should be written to determine a strategy for the enterprise and to attract financing, if required.



Page 7

Start small: A new endeavour can require a large amount of work and may involve a steep learning curve. By starting small, an enterprise will reduce the amount of risk taken and the strain on current resources. For example, in direct marketing, a farmer may start by selling goods to friends and family. Word-of-mouth selling can be the biggest and most successful marketing tool used by an agri-business.

Networking: Initially, it is important to meet people in industry or government who have experience in the field, have researched the venture or can help make connections. Networking may identify potential partners that can help reduce costs and increase the market size.

Commitment: The rewards of diversification can be substantial, but dedication is required to produce positive results. Research, production and marketing require time, and often, money. Many agricultural businesses try to diversify but end up failing due to a lack of commitment.

Qualitative Assessment There are many opportunities for farmers and other agricultural businesses to develop in the GROWTH Alberta region. The seven types of diversification mentioned above all have a strategic fit within GROWTH Alberta as the region already has appropriate infrastructure and environmental conditions to support agriculture. Agricultural ventures that require water have access to rivers and the labour force is appropriately skilled. Diversity in the region is not just a good idea; it is necessary for the survival of many farms. BSE is severely affecting the profitability of cattle ranchers, and large-scale farming is forcing family farmers out of the industry. There are few barriers to entry for agricultural diversification. The biggest problems producers face is a limited amount of time and land on which to produce; however, the region is currently not producing at maximum capacity. Innovation will continue to create better ways to farm and maximize the potential of the region’s land. It is up to the producers and managers to identify and develop the best opportunities for their businesses.

Economic Overview Diversifying an agricultural business will range from costing very little to being extremely capital intensive. A business should look first internally or to banks for financing; however, obtaining money from these sources is often difficult for agricultural businesses. There are alternative places to find financing and assistance. AVAC Ltd. is an Alberta government fund developed to finance idea and pre-commercial stage business opportunities in the value-added sector. To obtain financing through AVAC, a business must add value to an agricultural commodity, be in the early stages of development, have an applicant that can match the amount of financing, and the amount required must not exceed $25,000. This money is advanced with the intent to be repaid if the venture is successful. The benefit of AVAC funding is that this loan will remain off the balance sheet and thus will not affect the debt to equity ratio when attracting other investors.



Page 8

The strategic goal of Alberta Crop Industry Development Fund Ltd. (ACIDF) and Alberta Livestock Industry Development Fund Ltd. (ALIDF) is to assist in developing a diversified, aggressive, high capacity, sustainable agricultural industry in Alberta. Together, these funds can provide grants for most types of agricultural businesses, as well as funding for research and development.. The grants are typically between $10,000 and $200,000 and are awarded to businesses that meet their criteria and goals. People looking for financing to support their idea and business plan can apply to all the above organizations as well as the Diversified Livestock Fund of Alberta (DLFOA), AARI, and the Agriculture and Food Council through one application to the Agricultural Funding Consortium (AFC). The AFC will present the proposal to the consortium, and it will be assessed by the most appropriate organization. Another solution for people who have a commercially feasible idea is to access capital through the Agriculture Financial Services Corporation (AFSC). The AFSC is an Alberta Crown Corporation that offers many services associated with agricultural diversification, including insurance, disaster relief, farm loans and small business loans. To obtain financing through AFSC, a business or individual must have performed the appropriate research and due diligence and be ready to commercialize.

Quantitative Assessment The criteria ranking on the next page is assessed on the development of the agricultural diversification cluster as a whole. Specific diversification opportunities may have different rankings.



Page 9

Criteria Rank Description of Rank 1. Number of jobs created Low 0-5 jobs created

Medium 6-10 jobs created How many jobs will be created by this opportunity? High 11+ jobs created

2. Quality of jobs created Low Besides on-the-job training, additional education not required

Medium Technical school/college diploma/trades training required

Will the jobs created require additional education?

High University degree required

3. Impact on the environment Low Extensive environmental impact, requires provincial and/or federal assessment

Medium Some environmental impact, requires provincial assessment

Will environmental assessments be required? Minimal environmental impact is desired. High Minimal or no environmental impact

4. Potential for spin-off business Low Spin-off businesses unlikely Medium Spin-off businesses possible Spin-off businesses create additional jobs

and provide additional services. High Spin-off businesses likely

5. Impact on existing community Low Limited effect on community Medium Community will be slightly enhanced A positive impact on the existing

community is desired. High Community will be much enhanced 6. Amount of financing required Low Greater than $250,000 required

Medium Between $100,000 and $250,000 required From a community standpoint, the less financing required, the better. High Less than $100,000 required

7. Community support Low Community is indifferent to the idea Medium Community is verbally supporting the idea A large amount of community support may

be required for some opportunities. High Community is actively supporting the idea

8. Project risk Low Opportunity carries great risks Medium Opportunity carries moderate risks Opportunities with little or no risk are

more desirable. High Opportunity carries minimum risks

9. Timing of project Low Opportunity will take > 2 years to implement Medium Opportunity will take 1 - 2 years to implement Opportunities that can be implemented in

a shorter time frame are more desirable. High Opportunity can be implemented in < 1 year

10. Infrastructure Low Extensive new infrastructure required to implement opportunity

Medium Some new infrastructure required to implement opportunity

Opportunities that require little or existing infrastructure are more desirable.

High Minimal, existing, or no infrastructure required to implement opportunity

11. Resources Low Imported resources required to implement opportunity

Medium Local resources required to implement opportunity

Opportunities that require fewer or local resources are more desirable.

High Minimal or no resources required to implement opportunity



Page 10

Glossary AAFRD Alberta Agriculture, Food and Rural Development

AARI Alberta Agriculture Research Institute

ACIDF Alberta Crop Industry Development Fund Ltd.

AFC Agricultural Funding Consortium

AFSC Agriculture Financial Services Corporation

ALIDF Alberta Livestock Industry Development Fund Ltd.

ANCN Alberta New Crops Network

BDO Business Development Officers

BSE Bovine Spongiform Encephalopathy

CDCN Crop Diversification Centre North

DLFOA Diversified Livestock Fund of Alberta

OC/PRO Organic Crop Producers and Processors/Pro-Cert Canada

OCIA* Organic Crop Improvement Association

* The data contained within this report is not intended to be used as a sole source of information. Growth Alberta, Meyers Norris Penny and other contributors to this report do not accept responsibility for the accuracy of the information provided or for the decisions or actions taken with respect thereto.

opportunity analysis - growthalberta.com · receipts in 2001.1 more than 51 million acres of land...

Documents