Step 2: ???
Step 3: Profit!!!
Though amusing, it has a grain of truth - there are several stages a business has to go through to make money. Usually these include:
- Research & Development (R&D) - figuring out what will sell and how and when to make it.
- Financing - getting the money to front the costs of production.
- Production - making the product.
- Selling - getting customers interested in buying it.
- Distribution - getting it to them.
Business Risks in Agriculture
All of these concerns are magnified in agriculture, which deals with a perishable product with a very long and unpredictable production process. Farmers might borrow money to do the planting, and later run into trouble when a bad crop or low prices at harvest time left them with insufficient money to pay back the bank.
Current Risk Management Process - Futures
Presently, farmers can deal with this using futures. This is essentially pre-selling the harvest at a set price now. Though this provides protection against price changes, it adds a transaction cost. Furthermore, futures are typically only available for a few years ahead. At the end of the day the farmer is still at the mercy of global commodity markets.
CSAs are a form of project-based crowdfunding where customers' payout depends on how well the crop does, as opposed to a fixed interest payment.
- Research & Development (R&D) - figuring out what will sell
- Financing & Selling - customers buy a share of what the farm will produce. Note that unlike a future, which is to buy a fixed quantity at a fixed cost, a customer buying a CSA share buys a variable quantity at a fixed cost.
- Farmer has less risk of losing money if harvest isn't good.
- Farmer has reduced financing transaction costs since it's now combined with marketing.
- Farmer has reduced marketing costs due to repeat customers.
- Customer has lower cost food due to lack of middlepeople and the taking on of some risk. Note that presently most CSAs focus on organic produce and other high end food so the price appears high, even though CSA food is generally cheaper than purchasing food of equivalent quality from a store.
- No food wasted at farm - everything produced goes to the customers.
Project based crowdfunding appears most suitable for industries with the following characteristics:
- Consumer product.
- Long (but not overly long - several months to a couple of years is likely the practical limit) production time.
- Economies of scale in production or significant minimum quantities.
- All product is delivered over a short period of time.
- Real estate - new construction.
- Specialized electronic gadgets or software with short lifespan before obsolescence.
- Concerts, shows, other live events.
- Package vacations.
- Specialized services (such as music teachers in a rural area).
- Fractional ownership of custom luxury vehicles.