Where do agricultural profits go? An in-depth analysis of where the profits go

Why have so many well-known enterprises chosen to invest in agriculture in recent years? What they have their eye on is the profits of modern agriculture.

Apart from bulk grain and oil agricultural products, the profit margins calculated for most cash crop cultivation and livestock farming are not low, and this is also an important reason why agriculture attracts so much capital competing to invest.

Liu Chuanzhi, chairman of Legend Holdings, even said that modern agriculture may be more profitable than selling computers.

For example, the annual gross profit margin of greenhouse vegetables can reach more than 40%, and the gross profit margin of specialty fruits may exceed 100%. But when you actually do it, it is not that simple. Many who rashly invested in agriculture lost everything, and still could not figure out how they had "died."

And this raises a question worth reflecting on: where have agriculture's profits gone?

Gross profit margins that lie

Profits calculated on paper may be reliable for the secondary and tertiary industries, but not necessarily for agriculture. For example, supermarkets generally need to maintain a gross profit margin of 20% to 25% in order to ensure a net profit of around 3% to 5%.

So how much gross profit margin does agriculture need to ensure it makes money? This is a question that is hard to answer in practice, because this kind of calculation can only serve as a bit of reference and is simply not applicable. The agricultural market fluctuates greatly and is hard to predict, to some extent no different from gambling on luck, as with the "garlic you ruthless" and "ginger you army" episodes.

Agricultural products are not entirely priced by the market

Major agricultural products such as grain and live pigs, because they involve the fundamental issue of social stability, are not fully marketized in any country. Instead, macroeconomic regulation and control are needed to ensure that the quantity of supply is guaranteed and prices tend to remain stable. An economist joked that one pig can hold CPI hostage. Because the Chinese diet uses pork as the main meat product, and prices have fluctuated very sharply in recent years, the impact on the overall price index is indeed considerable. So as soon as the pig price shows its head, it must be suppressed: subsidies in the production sector, release of reserve pork, supplementary imports... the price simply has to be pulled down. But once production falls, subsidies are canceled and frozen pork is purchased for reserves, yet expanding exports is difficult. Therefore, the profits of agricultural products are inevitably affected by the state's macroeconomic regulation and control, and this is an important factor that cannot be ignored.

Labor is a major cost that cannot be ignored

What farmers can do, enterprises may not necessarily be able to do. Because farmers do not pay themselves wages, and however much they earn is their own. The profit margins of many industries look beautiful before deducting labor costs.

The most typical example is the beef cattle industry. When market beef prices are high and supply is very tight, outsiders certainly see good profits, yet few enterprises show interest in this industry. The fundamental reason is still that it does not make money. Because the cattle-raising cycle is too long, requiring at least more than two years to see returns, the cost of enterprise farming is too high. Only farmers in mountainous areas can raise them: no need to build facilities, feed is mainly solved by using nearby resources, and labor costs are also very low, so the final profit is not bad.

If an enterprise raises them, then the costs of facilities, feed, labor, capital and so on need to be calculated, and given current market conditions, it is also hard to make money. Looking again at those steadily rising prices of agricultural products on the market, there is basically one pattern: whatever can be industrialized and mechanized rises slowly. Whatever cannot be industrialized or mechanized has a relatively expensive market price, and gets more expensive year after year. In the past people laughed at developed countries for water being more expensive than milk and vegetables being more expensive than meat, but now in China it is about the same.

Storage losses must also be counted

The biggest feature that distinguishes agricultural products from industrial products is their freshness and perishability. Fresh-keeping storage is not only technically difficult, but also persistently high in cost, and the losses in the final storage stage are not a small number. Even for storable agricultural products like grain, losses in the storage stage are 8% to 10%, let alone all kinds of fresh agricultural products that are not easy to store or transport.

For ordinary vegetables, from the field to long-distance trafficking to the vegetable market to the consumer's hands, how much loss is there exactly? For example, the Chinese cabbage that everyone commonly sees: in the process from the field to the consumer's hands, exactly how many layers of outer leaves must be peeled off? There is also water loss. The water content of vegetables and fruits is generally above 90%. Water loss during transport is common, and not only does the weight drop, but the appearance is also easily damaged.

What was mentioned above is still normal loss, generally around 30%. Now it can be understood why the early fresh food e-commerce businesses all collapsed. Because they naively locked horns with the vegetable market, thinking that the Taobao model could be copied directly to agricultural products, not knowing that the wholesale and retail model of the vegetable market is precisely the most efficient and lowest-cost part of the agricultural product sales chain.

People who sell vegetables year-round all know that fresh vegetables of the day must never be left overnight, yet fresh agricultural products sold online actually take several days to circulate to consumers' hands. How could that have good results?

As for the most miserable situation, it is being unable to sell them. For industrial products, when the market is bad, the worst case is to cut prices to clear them. But once agricultural products are in oversupply, one can only watch helplessly as they rot in the warehouse or in the field, because for long-distance transport, the freight is more expensive than the vegetables. And once the season has passed, the next crop must be planted immediately, so they can only be mechanically plowed into the soil and used as green manure. A whole season's effort is wasted, and fertilizer, pesticides, labor, machinery and other costs are thrown in as well.

You can afford to earn, but not to lose

Making money in agriculture is not easy, but losing money is much easier. The profits you calculate simply cannot withstand the impact of risk. Agricultural risks are truly hard to control. Nationwide, the area of crops hit by natural disasters each year is about 1/6, mainly including drought, floods, hail, frost, pests and diseases and so on, impossible to guard against. A single natural disaster can wipe out the profits you calculated.

For example, a late spring cold spell in spring may freeze the flower buds of cash trees such as walnuts, apples and Sichuan pepper, directly affecting that year's yield, and in severe cases may lead to total crop failure. Another example: a single hailstorm can leave apples that could originally sell for three yuan per jin covered in bruises overnight, and in the end they can only be disposed of to a juice factory at a price of a few mao.

At present, the coverage of agricultural insurance is still quite limited. In most disaster situations there is no insurance to pay compensation, and this risk can only be borne by oneself.

You are dueling with interest

The financing cost of agriculture is very high. If you could have as much money as Lenovo, you would settle down, prepare for ten years without making money, cast a long line to catch a big fish. But most business entities investing in agriculture do not have this strength, and can only struggle bitterly over funding issues. When farmland cannot be mortgaged and guarantees are difficult, during key farming seasons one can only rely on private financing. The high interest cost alone can devour a large amount of profit. Once market conditions fail to meet expectations, the story of "cheap grain hurts the farmers" plays out. And the investment cycle is so long, so falling just before dawn has become an important phenomenon in agricultural investment.