From a prospective Australian investor, querying how to plan a commercial hydroponic enterprise.

Answers by Rick Donnan

Answers by Rick Donnan

Question
From a prospective Australian investor, querying how to plan a commercial hydroponic enterprise.

I am part of a syndicate of investors that is interested to set up a hydroponic business. What we require is information about the ongoing costs of running a hydroponic greenhouse and the volume of produce that can be grown.

Answer
This is the most common type of question that we receive, averaging over one per issue. Typical versions of this question are: “I want to grow this crop in this area, what hydroponic system should I use?” Or more basically, “what crop and system should I set up to make lots of easy money?” The answer has to cover the essentials of planning.

Note that by ‘hydroponics’ I mean the broad range of ‘soilless culture’ systems, not merely water-based systems.

Planning
To operate a commercial hydroponic enterprise is to run a small business in the field of intensive horticulture. The enterprise must not only produce reliably, but also give an acceptable financial return. There has been a very high success rate for existing commercial growers converting from the soil to hydroponics, but new growers have had mixed results.

Inexperienced people venturing into commercial hydroponics have had a similar proportion of failures to those typical of anyone starting into small business. In common with all small business failures the major cause has been a lack of good planning. Of the new commercial hydroponic ventures started in Australia, many have been successful. However, quite a few have failed, plus many more have proved to be far less profitable than expected.

Examining the causes in these cases usually shows that vital factors have been overlooked, or seriously underestimated, when the enterprise was being planned. The most common mistakes are to underestimate the skills involved, especially the horticultural and marketing skills needed, and to be too optimistic about the income and expenditure.

To keep hydroponics in perspective, remember that it is merely a growing technique! Your planning should therefore follow the normal sequence for considering any horticultural enterprise. Any decision to use a hydroponic system should not be the starting point!

The planning sequence is a cyclic process, working through the following aspects. As you gain some information at each stage, feed it back to an earlier stage and work the exercise through again. Continue this process until you select a crop, environment and growing system that suits your overall objectives and is economically viable.

• The market. You must be able to sell your crop for a price that gives you a reasonable return. This needs detailed attention to marketing.
• The crop and the growing environment. This is independent of the hydroponic system, and some form of protection or control may be needed. The availability of good water is vital for hydroponic production.
• The growing system. Consider the system for each crop independently as there is no universal system. Evaluate their advantages and disadvantages, getting different opinions. What supporting systems and equipment are needed?
• Management. It takes considerable skill and experience to grow a commercial crop, especially to grow it to schedule and of the good quality required. This applies whether using the soil or not. When using a hydroponic technique, additional skills are needed to manage the system. In my opinion, of the growing skills required only about 10% relate to hydroponics and 90% relate to horticulture. The usual range of small business management skills is also needed.
• Financial analysis. Take care that your forecasts and budgets are realistic. Unfortunately, yields and income are often overestimated, and costs underestimated. Do a cash flow budget on a monthly basis and check that you have sufficient cash reserves for the start-up and low income periods.

Real life experiences
The success of setting up commercial hydroponic units has varied greatly between countries. The extremes are the USA and the Netherlands (Holland).
The first general exposure of the possibilities of commercial hydroponic production came in the USA in the early 1930s with the promotions of Dr Gericke, then a lecturer at the University of California. This was given hyped-up exposure by the media, then promoted with extravagant claims by unscrupulous entrepreneurs to gullible buyers. The results were predictable failures. This set the pattern for later schemes with similar results in the ’50s, ’70s and ’80s. Unfortunately, the result has been that the USA is best known for this huge record of commercial hydroponic failures, rather than its limited number of successful operations, which now total several hundred hectares.

In contrast, the experience in Holland has been the exact opposite. Here, there was a huge, technically advanced glasshouse industry. Recognising a need to get out of the soil, existing growers began converting to hydroponic systems about 1980. The result was virtually a 100% success rate, with now well over 6,000 ha of hydroponic systems. Looking back to the planning detail described earlier, you can see that the reason for this success was that the converting growers already had all the other requirements in place and only had to change their growing technique.

The Australian experience has been somewhere between these two. Many new operations have succeeded, as have almost all who have converted to hydroponics out of the soil. A few failures have been those setting up themselves and there have been a few, usually large, investment schemes that have failed. However, the most common problems have been promoters selling turnkey projects claiming impossible returns. Through hard work, quite a few of these buyers have managed to eventually become successful growers, but those who had borrowed heavily, or weren’t prepared to work hard, soon failed.

Summary
In summary, commercial hydroponic growing is a demanding technology, carrying risks for those without the necessary skills to be competent managers. Plan carefully and beware of budgets and schemes, which appear too good to be true – they inevitably are.

The risks are real and should make you wary, but not deterred. In the right economic framework with astute marketing, knowledgeable management, especially of the horticultural aspects, a suitable production system and good old-fashioned hard work, hydroponic farming can be a profitable and rewarding enterprise.

For new and intending growers, refer to Protected Cropping Australia (www.protectedcroppingaustralia.com).

PH&G August 2013 / Issue 134


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