Issue 07: Planning Commercial Hydroponics Part 2

Issue 07
November/December – 1992
Story Title: Planning Commercial Hydroponics Pt.2 – Step by Step
Author: Rick Donnan

In the final part of this feature, Rick Donnan takes a closer look at the management side of hydroponic farming, and the typical experiences of the new grower.

Management Factors
As you will be operating a small business you need to consider your own management skills. What is your background in business management, budgeting and accounting sales and marketing, supervision? Do voti have good contacts in your proposed business? Are you – handy at construction and repair? What is your experience of growing commercial crops, hydroponics, and insect and disease problems and control?

Availability of Resources
If you have gaps in your skills you need to consider where you can get advice and assistance when needed.

Your major problems will tend to be nutrition, pests and diseases. Are there consultants or extension officers available who can advise you quickly? If you plan to employ consultants it is important to get referrals from satisfied customers’, preferably growers who have been using their services for well over a year. Be cautious of glowing references from new customers. Make inquiries about dissatisfied customers. While a specialist hydroponic consultant may be useful on occasions, your more frequent need will be for someone with an expert horticultural knowledge of your particular crop. You will need to make regular, or at least occasional, use of an analytical laboratory. Check out their costs and response time, plus their reputation and ability to give advice.

For equipment, are there skilled technicians and repair people available? Also, is there a source of skilled labour available when you need them?

Forecasts and Predictions

The main forecasts that you need to make are for the yields and prices. Yields were covered in ‘Production Management’ earlier.

Unless you can arrange a contract price you will need to be guided by previous prices. Do not merely work with average prices but record the price pattern over the year. Consider whether there are factors that will make the coming year’s prices different. For example, high prices for a particular crop will usually attract other growers to grow that crop. This often results in oversupply and a severe drop in prices, so take care not to be dazzled by very high prices caused by abnormal circumstances.

Operating Costs
Include all expenditure in your operating costs forecast. Items include: labour costs, including training and over heads; consumables; equipment maintenance and repair; structure, equipment, and possibly crop insurance; marketing and advertising costs; and the replacement cost of worn out equipment.

Cost/Benefit Analysis
This is where you determine whether your venture should be profitable.

When determining the capital cost be careful to include all items, and to fully allow for the costs of installation and getting fully operational. This includes the cost of doing the necessary research and planning. Another important cost is that of financing – both interest and repayment of any loan.

When considering operating costs don’t look only at the coming year, but also 5 and 10 years ahead. Do this also for your replacement and repair costs.

From your projected costs and income calculate a month by month cash flow budget. Don’t be too optimistic as to how soon you will start to generate income. Next, check that you have sufficient cash reserves to tide you over your start up or over any period of unexpectedly low income.

When completing your cost/benefit analysis consider both pessimistic as well as optimistic scenarios. Be aware that many people in the past have been too optimistic. There has been a strong tendency to underestimate costs and to overestimate yields and prices. It is wise to do a simple ‘sensitivity analysis’. This consists of reworking your financial analysis for a range from low to high values for both prices and yields. This enables you to consider your vulnerability and judge the risks accordingly.

Most people who have had no experience of growing a commercial horticultural crop have little appreciation of the amount of your time that the crop demands. Try to get a realistic assessment of the time required. Many crops require detailed attention 365 days a year, similar to a dairy farm. Also, if you plan to supply into a whole sale market then someone will need to start the day very early. These time demands will have a considerable impact on your lifestyle, and that of your family.

Brochures are sometimes very lyrical about the idyllic lifestyle associated with hydroponics. If you enjoy farm life, then that’s great. But, if you plan to become a ‘gentle person’ farmer-then think again. Certainly some hydroponic systems have a major advantage in reducing physical work, such as bending down to pick strawberries. Nevertheless, there is still a high work load involved.

In my experience the highest drop out rate of those starting into commercial hydroponic is retired people. This is not because they lack the skills of other groups quite the contrary. What happens is that they find the time demands are too high, often much higher than the job from which they started.

Another factor to keep in mind is the stresses that can be involved in running a small business in intensive horticulture. There are factors such as pests, storms, heat waves, frosts, market gluts, low prices, to name a few, that can be largely out of your control, but will have a major effect on your livelihood. If you have lived on the land before, you accept this as part of life. However, people whose previous employment has been on a regular salary sometimes discover it hard to cope with these uncertainties.

From a shaky beginnings in the 1930s, hydroponics was very slow to have any significant commercial developments. By 1960 there would have been no more than 100 hectares (250 acres) worldwide. This started to change dramatically during the late 1970s, and today there are over 5000 hectares (12,500 acres) of commercial hydroponic production.

In England and Holland practical systems were developed first in research establishments. Later followed small commercial trials run by keen, good growers. One commercial success was achieved, standard techniques were developed and extension officers trained in these. The typical pattern was that good greenhouse growers ‘ who could see some benefit to gain, would move out of the soil into hydroponics. Virtually all these changeovers were successful. Of course, their businesses were already well established-they were only changing their growing technique.

These successes then developed a momentum leading to the huge expansion of the 1980’s.

In contrast, in the USA, while most systems were trialled experimentally, this was often not done commercially before they were promoted by entrepreneurs. Many schemes were sold as complete greenhouse units including the hydroponic system (turn-key projects). They were often overpriced and promoted with exaggerated claims of impossibly high yields. However, the most important factor was that they were usually sold to people whom either had, or were fed, totally unrealistic expectations. Completely overlooked were the basic requirements of a viable market and a good knowledge of how to grow the crop involved.

The results were catastrophic-over 1000 gravel bed schemes down to under 10 by 1984, 1200 NFT schemes down to under 200, and a large sand culture industry decimated. Many of these schemes were relatively small, averaging about 650 square metres (one sixth of an acre), but some cost multi-million dollars. Nevertheless, there is still a viable commercial hydroponic industry in the USA, but it is small, scattered and based on skilled growers. Experience in Australia has been about midway between these two extremes.

Typical New Grower
Experiences in Australia
There have been three basic approaches that new growers have used to start into hydroponics-design and build their own set up (often with some assistance), buy a consultant’s package, or buy a complete ‘turn-key pack age’. All three approaches have resulted in a typical mixture of successes and failures.

Those individuals who have done it themselves and been successful have usually been aware of the need to plan carefully, and to learn about their crop and market as well as hydroponic techniques. Some have effectively used hydroponic and crop consultants on a fee for service basis. The most successful have been those with previous management experience, especially that of running a small business.

The failures have usually been the result of the following:

lack of realistic planning.
Underestimating the skills involved, especially marketing and horticultural skills.
Copying others without understanding the basics.
Having unrealistic expectations of very high yields.
Not seeking assistance until it is too late.
Starting too big, or expanding from a very small trial to large scale commercial production in one bound.
Discovering a revolutionary system or nutrient formulation and keeping it secret until their fortune can be made-a good way of re-inventing other people’s mistakes.
Working only from books… While studying books is a good way to learn, practical experience is essential. Also beware that often hydroponic books are either aimed at hobbyists or are years out of date regarding current commercial systems.
Unfortunately, many books, as well as magazine and newspaper articles, promote a hyped-up, unrealistic picture of hydroponics.

Turn-key Packages
Over recent years there has been an increasing number of companies offering a range of turn-key packages. These sell the inexperienced grower a total package of protected structure, hydroponic and support systems. Often, consulting and marketing agreements are included. Many of these packages cost around $100,000 and some far more than that. The reputations of the companies selling these range from good to very doubtful.

Some of the hydroponic package farms sold are still operating, presumably with success. However, many others are now either operating at a loss, or had to be sold at a loss, or they have closed down. In the worst cases people have gone bankrupt and been forced to sell their farm or home to pay off their debts.

If you are considering buying one of these package units, then it is essential for you to go through all the planning steps in this article, independent of your supplier. Perhaps, investing in an independent consultant or advisor to evaluate the project can avoid nasty shocks later.

Get referrals to growers who use the package, and visit as many of these as you can. Visit commercial hydroponic producers using other systems, even if you have to pay them a fee. Check whether the referral growers have a financial interest in your buying the package. Also, try to find if there are unsatisfied customers. Contact them and assess whether they have justified complaints.

The best referrals are those growers who have been using the package for at least one, or preferably two years. Be very careful of being influenced by those who intend to, or have recently invested in the package. While very genuine, they are often possessed of a favour which tends to blind them to reality. Unfortunately, in a year’s time their attitude may totally change. In particular, carefully check out schemes pushing aspects such as:

very high returns and short payback period.
guaranteed markets and top prices for your produce.
brand new high tech systems and space-age technology.
spectacular yields-because it is hydroponics.
totally controlled growing.
no pests and no diseases.
continuous year round production.
no skills needed.
easy work and an idyllic lifestyle.

Be prepared to learn from past experiences. There has been a very high success rate for existing growers converting from soil to hydroponics, but new growers have had more mixed results.

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 lack of good planning. With hydroponics, the more obvious aspects are to underestimate the marketing and horticultural skills needed. On the financial side, yields and income are often overestimated, and costs underestimated.

In general, a common difficulty has been not recognizing that hydroponics is only an aspect of an intensive horticulture operation. It is simply another method of producing a crop.

This article provides an outline basis for planning. You will need to work through the sequence numerous times in order to get to a realistic final decision and detailed plan. With a realistic plan behind you, a good eye for detail, and an enthusiasm for work, you should be very successful.

Many of the best growers that I know have started from scratch and eventually become more successful than most experienced growers, but this has taken time and good planning and management.

An excellent book on planning is the Master guide to planning. The book poses a comprehensive series of questions and provides expert comment to help you answer them. It also includes a detailed case study.

Master Guide to Planning Profitable Hydroponic and S/CEA Operations Worldwide by Adam J. Savage pH.D. (1987). Published by the International Centre for Special Studies, 400 Hobron Lane-Suite 3502, Honolulu, Hawaii 96815-1209, USA. Price $US50 plus postage.

Another good reference is the Proceedings of the Introductory South Pacific Hydroponics Conference (1990). Price $A35 post free Australia, NZ. Obtainable from the Australian Hydroponic Association, c/- 12 jikara Drive, Glen Osmond, SA 5064; telephone (08 ) 379 1306.

There are a number of correspondence courses on hydroponics from institutions such as some TAFE colleges and the Australian Horticultural Correspondence School. A good course which particularly emphasis planning is:

Commercial Hydroponic Production, a NSW Agricultural Home Study Program. Available from C.B. Alexander Agricultural College, Tocal, Patterson, NSW 2421. Ph: (049) 38 4262.