Five Major Pitfalls of Agricultural Investment, Be Sure to Pay Attention Before Investing
One. Where did the money go?——The funding predicament of agricultural enterprises
Falling before dawn, this is the most tragic scene of many agricultural investments. The Qingdao blueberry and Sichuan kiwifruit bases acquired by Lenovo, to some extent, their original operating companies were also suffering the pain of a “darkness before dawn” style ordeal. Being able to meet Lenovo may not count as “a beauty marrying into a wealthy family”, but at least it avoided a tragic ending caused by an inadequate capital chain. Why are so many agricultural enterprises suffering from severe capital bottlenecks? Generally, there are the following situations:
The first type, getting the investment budget wrong.
Copying the industrial “heavy assets, light liquidity” model, assuming that concentrating the initial investment mainly on land acquisition, building farms, and buying equipment is enough, and that a small amount of working capital will keep things running, but the result is far from this. If in industry the ratio of fixed investment to working capital can be 8:2, then agriculture needs the reverse, 2:8. Unfortunately, investors coming to the primary industry from the secondary and tertiary industries often cannot imagine agriculture's huge demand for working capital.
A very simple point: agriculture is highly seasonal and cyclical, the cost of funds tied up in raw materials and storage is also high, and the turnover speed of working capital is clearly slower than in industry. This alone inevitably ties up a large amount of working capital. Take live pigs, which are already relatively short-cycle in modern agriculture, yet still require a 6-month turnover period. Moreover, it must be noted that during this cycle, if the pigs have not grown to full size, they absolutely cannot be sent to the slaughterhouse, meaning there is no payment collection during this cycle, only continual additional working capital, toughing it out.
Industrial products, at least, can still be sold while being produced, or part of the products can be disposed of at a low price to meet an emergency. Agriculture has no way to do this. Even worse, agriculture is the production of living life. In industry, in the worst case, due to a liquidity shortage, the production line can be paused, but agriculture cannot even do this worst-case option; it simply cannot stop. Pigs absolutely cannot be fed four times a day less, vegetables absolutely cannot lack water and fertilizer at critical periods, dairy cows must continue to be supplied with dozens of jin of forage and dozens of jin of water every day. Animals and plants all grow according to their own biological laws and cannot stop.
⟦NL> The second situation, underestimating the investment cycle.
Although in theory the investment payback period is clear, in reality the influence of various factors often leads to severe deviation from investment expectations, and the income period is endlessly delayed. For example, if the plan is to complete the transfer of farmers' land in winter and begin basic construction or sowing in spring, but if the land in the hands of several farmers does not transfer smoothly, so that the overall land transfer cannot be completed in spring, then the entire subsequent plan cannot even be discussed. Or it may be delayed until summer to complete the land transfer. Although infrastructure construction can still be done, the sowing season has been missed, and one can only wait until the next year.
In the course of production and operation, severe natural risks may also be encountered at any time, leading to the destruction of seedlings and farms. In serious cases, one can only start all over again, not only suffering heavy losses but also severely lengthening the cycle. For example, severe winter cold may cause newly planted saplings in autumn to freeze to death, so they can only be replanted in spring, but the effect is poor. A severe late spring cold may cause fruit tree flowers and young fruit to freeze to death, causing severe yield reduction or even total crop failure that year. For example, in 2012, 37.443 million mu of crops were affected nationally, accounting for 15.3% of the total crop sown area of 245.1235 million mu, of which 17.21235 million mu were damaged, accounting for 7.0%; total crop failure reached 2.73945 million mu, accounting for 1.1%. The natural risks of agriculture are not only high in probability, but in reality have already become normalized.
The third situation, taking financing difficulty too lightly.
Industrial land is state-owned land. Once the right to use it is obtained, it can be used as collateral for loans; industrial workshops, products, machinery, and so on can all be mortgaged, so there are always multiple channels to ease the predicament of working capital. But agriculture is different. First, agricultural land is collectively owned. If an enterprise transfers farmers' land, it can only obtain the management right of rural collective land, which cannot be mortgaged for loans. Second, the livestock, trees, crops, and so on operated by agricultural enterprises also cannot be mortgaged for loans, exactly as rural people say, “with ten thousand strings of family property, anything with hair does not count”. Third, since an agricultural enterprise's assets are like this, finding guarantees is also quite difficult. Of course, the Third Plenary Session of the 18th Central Committee has decided that the contracted management right of agricultural land can be mortgaged, but a process of revising relevant laws is still needed, and formal implementation still takes time.
Therefore, financing for agricultural enterprises is very difficult. Basically only rural credit cooperatives can lend, but the interest is relatively high; there is also the policy-based Agricultural Development Bank, but conditions are strict and the targeted scope is relatively small. In the course of agricultural operations, once there is a shortage of funds at a critical period of production, such as a shortage of pig feed or topdressing and pesticide application for fruit trees at key times, some agricultural enterprises can only rely on usurious loans for emergency relief, which is a method of drinking poison to quench thirst. The heavy interest alone will crush the enterprise, yet there is no way out. How can this last long? Some agricultural enterprise operators I have met, when speaking of fund shortages at critical production times, truly seem to have the mindset of selling children and daughters, which makes one deeply sympathetic.
The fourth situation, policy expectations falling through.
In the past, it was said that agriculture depends first on policy, second on input, and third on science and technology. This formulation is still not outdated now. Because agriculture is weak in nature, national support is self-evidently important for doing agriculture. Just by observing, one can find that some listed agricultural enterprises mainly rely on policy subsidies to maintain a positive profit level in order to prevent delisting. But the problem is that ordinary cities and counties lack the financial capacity to provide large amounts of agricultural subsidies, and mainly rely on striving for projects from the provincial and central levels. The variables in the middle are quite large. Although leaders above may have given instructions and the local administrative supervisor may have made guarantees, the result is still unreliable. Not to mention that national policies will adjust with changes in the market, and it is obviously impossible for agriculture, with such a long cycle, to catch up with the changes and adjustments of national policy.
For example, since 2012, due to overcapacity in the live pig industry, the state basically stopped the policy support projects related to the live pig industry implemented since 2008. Enterprises investing in the live pig industry during this period obviously could not obtain subsidies and projects, and coupled with poor market conditions, they could only encounter a predicament of adding frost to snow. There is another situation, where the local government invites enterprises to settle in under the name of investment attraction, but it is very likely that after landing, the preferential policies cannot be put in place, and policy changes caused by changes in the county's supervising leaders may also reduce earlier government promises to smoke and clouds. Although one cannot say one lives by projects, once policy expectations fall through, the impact on the production and operation of agricultural enterprises is quite large.