Why You Need Supply Contracts Before Venturing Into Agriculture Related Businesses
There are two major types of agriculture related businesses you can get into. The first one is that of producing and selling various agricultural products (these being either those that come from farm animals, or those that come from cultivated crops). The second type of agribusiness enterprise you can get into is that of providing the various inputs and services that are required by the people who are actually in the business of creating farm produce. From agrochemicals, to agricultural consultancy services and onto agricultural produce transport services, everything in that range would fall in this second category.
For the purposes of this discussion, however, we will restrict ourselves to the first category of agriculture related businesses, that is, those that are actually involved in the creation of agricultural produce, whether by way of animal husbandry, or by way of crop cultivation. And that is where we encounter a commonly given piece of advice to people considering venturing into those areas, to the effect that they should ensure that they have supply contracts, before venturing into those businesses. What we are trying to understand is the reasoning behind that piece of advice.
We may mention in passing that a person/business is said to have a supply contract when they have gotten into an agreement with a certain other person/business (this time a buyer for what they produce), to be supplying them with the same. The typical supply contract will have clauses mentioning the prices at which the supply is to be made, the frequency at which the supply is to be done, and how/when either party to the transaction can withdraw from the contract.
So, why would it be advisable for you, as a person considering going into a productive agriculture related business to ensure that you have such supply contracts?
Well, for one, having a supply contract ensures that you don’t end up in the sad predicament where you pour resources and time into the production of stuff, only for you to end up with nobody to sell it to. A supply contract gotten into prior to the production of stuff effectively translates to a ‘ready market’ for the stuff you eventually produce. And a ready market for agricultural product is very important because without it, you stand the very real risk of suffering financial ruin should your produce end up with no one to buy it.
Closely related to that is the fact that a supply contract, before embarking on the production of agricultural foodstuffs would give you a clear picture on how much to produce. In other words, a supply contract, before venturing into an agriculture-related business, would mitigate against the overproduction mistake that many people make, to their detriment. When you overproduce, especially in the case of perishable products, you end up in a situation where you have to sell them at throw-away products, and where sometimes, you end up missing buyers even when you are ready to take any price.
Further on is the fact that you need supply contracts before venturing into agriculture related businesses for the simple reason that others in the same types of business are also getting into such contracts. This is not a case of mob psychology. What it means is that most buyers you could sell to may already be into supply contracts with those other producers. And that being the case, if you go into production without one such contract, you could end up in the predicament with no one to sell your produce to, as all potential buyers have contractual obligations to other producers that they have to honor.
If you are in the Agriculture industry in Canada, then you need to enlist your company in the Canada Business Directory .