Avoid the pitfalls of farmer-owned businesses

Some farmer-owned value-added businesses are major success stories. Others have been spectacular failures.

According to 2011 Nuffield Scholar Kelvin Meadows, success or failure isn’t entirely tied to the strength of the business idea. It depends to a large extent on governance and how business decisions are made.

Unfortunately, as farmers we have some quirks that can get in the way of business success beyond the farmgate.

Meadows and his wife, Shelley, were outstanding young farmers for Saskatchewan in 1998. They now live in Moose Jaw and pursue business interests such as farmer-owned Avena Foods in Regina, which produces whole grain oat products for the celiac market.

During the extensive travelling that comes with being chosen as a Nuffield Scholar, Kelvin researched and interviewed 23 enterprises from England, Wales, Ireland, France, Ukraine, the northern United States and Western Canada. He wanted to determine the attributes of successful farmer-owned value chains with an emphasis on governance.

His research shows that many farmer-initiated ventures don’t invest in a formal feasibility study and don’t have a comprehensive business plan.

Another consistent failure was a lack of documentation and record keeping in the early stages. That can lead to subsequent friction at the board table when everyone has their own interpretations and recollections of past decisions.

According to Meadows, companies generally succeed because they have a champion. In many cases, this will be the chief executive officer. Hiring the wrong CEO can be fatal. If a company is undercapitalized, the directors may be unwilling to pay the price necessary to get the best person for the job.

Two important items are often overlooked by inexperienced boards hiring a CEO: contract length and terms of dismissal. Most companies will have different CEO needs during the life of the business.

Meadows said it was disheartening to see the number of struggling or failed companies who admitted putting themselves in a negative cash position by choosing to ignore the business plan and moving forward with building a facility even though they had not raised the required funds.

As well, struggling companies consistently waited until their cash reserves were depleted and lenders were knocking at the door before approaching shareholders for additional capital.

Businesses that are farmer or community-owned typically want facilities in their local communities. It’s important to pick a site that’s a good location for long-term viability, not just the site that supports community development.

Is the steering committee or the board of directors comprised entirely of farmers? If so, you may want to consider identifying other people who can bring a different skill set and point of view to the table. Meadows also said it’s a distinct advantage to have both genders on the board.

“Companies that could not define their market struggled and were eventually sold or went out of business,” Meadows wrote.

“They could not create enough margin to operate their facility while continuing to pay competitive prices to their suppliers.”

It’s natural and healthy for farmers to team up to pursue value added opportunities. Meadows’ report is a good read for anyone heading down that road.

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