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Archi-ponics: Commercial Crop Production, Part 1 – Start Up Expenses

Hydroponic farming is one of the most inviting business ventures in the current marketplace. Hydroponic farming is one of the most inviting business ventures in the current marketplace.

The challenge for most growers looking to get into commercial hydroponic crop production is the up front costs of the hydroponic system and greenhouse equipment, as well as the price of land. Then there are operating costs to consider: electricity to power the pumps, lights, water, fertilizer, labor and packaging.

Unfortunately, some of these costs are expected to increase in the future. The plastic for the hydroponic systems is petroleum based. Utilities are also tied to our dwindling natural resources. And cheap but reliable labor is hard to find. Yes, there are many Americans working for less, but not so much in agriculture. There are several farm operations here in Southern California who constantly find themselves short-handed. It's becoming obvious that our fellow countrymen don't necessarily want to work on a harvesting crew. For example, the campaign "Take Our Jobs" was intended to offer those harvesting jobs to American citizens, yet a very small number of people have taken them up on their offer.

One thing to understand when you are considering embarking on hydroponic crop production is that there really is no need to fork over a lot of money to buy land.

That said, here’s the good news:Hydroponic farming can be financially rewarding. Depending on the product and how it is marketed, with controlled environments and hydroponics, crop producers can achieve up to $1,000,000 per acre. You read right. That’s one million dollars.

In fact, the legendary commodities trader Jim Rogers is predicting that farming is the new hot profession, that in the future, with demand going up and supply going down, farmers will have the opportunity to make good money. (Here’s his interview on CNBC.)

One thing to understand when you are considering embarking on hydroponic crop production is that there really is no need to fork over a lot of money to buy land. The viewpoint of many investors is that land is not a good investment, as land prices are expected to stay low for some time.So the potential crop producer need not look at buying land. Start up money is better spent on purchasing equipment that will create capital - the hydroponic system, irrigation, and so on.

When putting together the costs and cash flow projections, remember to look at what is referred to as “Return on Equity” (ROE). To figure your ROE, take the total net revenue of a business (this is how much the operation made after paying all the bills), and divide it by the total start up costs (the cost of all equipment and supplies needed until the business pays for itself). For example, if your greenhouse nets $20k per year and you spent $120k to start the business, to figure the ROE take the $20k and divide it by $120k or (20,000÷120,000 = 0.16, or 16%). This is considered an attractive investment. What the ROE tells you is how fast the investor can expect to recoup his money, and how fast the business can “scale up,” meaning how fast the business can grow and the investors’ initial investment of $120k can yield increased returns.

If your ROE is predicted to be around 10% or below, it may be more difficult to find investors. However, if investors are still buying bonds with a return of around 3%, your business may look like a better bet. Yes, hydroponics equipment is expensive, but it’s also very productive, so focus the investment on what can create the return. As mentioned earlier, in this real estate market it may be better to veer away from land purchases and instead consider long-term leases. This structure can make your business more attractive and it’s more likely you’ll raise the needed capital to get your hydroponic farm off the ground. Best of luck!

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Colin and Karen Archipley have found their hydroponics business very rewarding for a number of reasons.
Last modified on Tuesday, 07 August 2012 13:27

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