Supply, demand and price
Now, if a hydroponics or aquaponics farm uses grow lights, there are, indeed, advantages, especially regarding controlling the environment where the crops will grow, particularly the amount of available light per day that the plants need for optimal growth
Basil and mint used to cost P650 to P700 per kg (grocery price). A few months into the pandemic, that has changed. A lot. Now, they’re priced at P476 and P403 per kg, respectively.
From a high of around P700 to a low of P403, that’s a loss of roughly 42 percent of value. From a financial statement perspective, imagine the projected revenue fall by that much. If the projection is P1,000,000 per year, then it drops to P580,000.
How will this affect the balance sheet and the cash flow? How will obligations be paid? And if there is leverage involved, and the debt is substantial, how high is the likelihood of default? What is the effect on the collateral and credit standing? What is the legal risk?
Going back to economics, low demand creates oversupply, and because the market wants to get rid of the surplus (especially the perishable kind), the price is adjusted downwards to attract buyers because consumers respond to price.
The pandemic, which has shut down many businesses in the food industry, has pulled demand to significant low. Because of oversupply, the price has naturally followed the downward trend.
Now, if a hydroponics or aquaponics farm uses grow lights, there are, indeed, advantages especially regarding controlling the environment where the crops will grow, particularly the amount of available light per day that the plants need for optimal growth. And if you use LED, the light required per day is covered without having to worry about producing so much heat that is no longer healthy for the crops.
But there is also a downside to using grow lights instead of relying on sunlight which, in the Philippines, we already have a lot of. Just imagine the cost of those lights (including depreciation, meaning you have to replace them after “x” number of years), as well as electricity consumption (remember that some were charged by Meralco several times more, based on an “average” consumption rate during the lockdown period), etc.
If one intends to shift a hobby to a fully operational commercial farm, how will the enterprise cover for these costs? What more if the revenue, because of sudden decline in demand for the product that has also reduced the price per kg, drops by as much as 42 percent? How will this affect the viability of the company?
And these overhead costs of systems that use artificial light is reflected in the price per kg of herbs, for example, which were grown indoors.
I have seen hydroponically grown basil that use artificial lights sold at around P2,000 per kg. Even if it is marketed as clean, fresh, pesticide free, naturally grown,
etc., it’s still very expensive.
But assuming that the enterprise caters to a niche market that’s willing to pay a premium for fresh products, then all would seem fine. Yes, during ordinary times, there are niches in the market that has buyers willing to pay that price despite the presence of cheaper alternatives.
However, how did spending habits change as we entered an economic crisis due to the pandemic? Will consumption of premium produce survive this plight?
Assuming that sound business practice means selling at three times the cost, or for every peso spent sell at P3 (otherwise hindi na sulit, nakakapagod lang) then, conservatively, it’s safe to assume that the cost of production of that P2,000 per kg basil is P666 (derived by dividing P2,000 by 3). That’s the breakeven price.
Competitors are selling the same (or similar) product at around P476 (for the basil). That’s a 28 percent difference. Which enterprise will flourish or, at the very least, survive the economic downturn and which one will be in for a really, really difficult time? Which one will have the competitive advantage?
And what’s the key takeaway here regarding overhead costs and growing indoors using artificial lights as a business enterprise?