Case Description
There is a business opportunity to purchase 80 acres of prime farmland in Illinois for 80,000 dollars, which can be used to grow corn (Brickley, Smith, & Zimmerman, 2015). With the announcement by the US government to increase the production of corn-based ethanol as a substitute for gasoline, the idea is to sell corn to the refineries and extract a profit from that. According to various sources, the venture is risk-averse, as it is always possible to sell the land later at a profit, once the farmland prices grow. The purpose of this paper is to analyze the potential profitability of the venture.
SWOT Analysis
- Strengths: Prime farmland would yield large volumes of corn, resulting in higher-than-average harvests.
- Weaknesses: Lack of experience in farming, additional expenses for employees, equipment, and preparation of the land for growing corn.
- Opportunities: Profits from selling corn to ethanol plants, benefitting from the overall increase in corn demand by 45% in 2020 (Doran, 2018).
- Threats: High competition, failure to provide the necessary volumes to break-even, lack of workers to collect corn.
Porter’s Five Forces Analysis
Competition in the Industry
Competition in the corn industry in Illinois is high. Corn is one of the region’s prime crops, and there is a multitude of farms that produce it (“Corn,” n.d.). At the same time, the competitors already present at the market have a well-established list of contacts to sell their products to, which is something the new business would have to develop on their own.
Potential of New Entrants to the Industry
The potential of new entrants to the industry is medium. To produce corn, it is required to buy land and farming equipment, such as tractors, tools, corn collectors, etc. Besides, farming corn would require hiring seasonal workers to plow the field and gather the crops. As illustrated by the case study, buying 80 acres of land in Illinois would require 80,000 dollars, and additional expenses needed to start the farming would estimate to just as much, amounting to a total of 160,000 dollars (Brickley et al., 2015).
Power of Suppliers
The power of corn suppliers at the moment is medium-weak due to high competition. However, it is estimated to grow as the demand for corn for domestic consumption, and ethanol production would grow. Considering the existing political climate, food production plants and ethanol refineries are more likely to buy the products domestically rather than abroad, further improving the power of suppliers.
Power of Customers
As it stands, the power of customers is medium-high because the US is the largest corn producer in the world, with access to foreign markets in China and Brazil. However, with the expected increase in corn consumption and the worsening of the relations between the US and China, domestically-produced corn is going to become more valuable, contributing to the diminishing of customer bargaining power (“Corn,” n.d.).
The Threat of Substitute Products
Due to the iniquitousness of corn, it is considered to be the primary substitute product for many other crops and resources. It is unlikely for corn ever to be replaced in the food department. However, the interest in corn-based ethanol may fade due to economic inefficiency, the discovery of alternative power sources, and oil drilling. Thus, the threat of substitution in the food sector is low, and in the petroleum sector – medium-high.
Conclusions
The idea to purchase land in Illinois for corn has potential. Regardless of the US ethanol project, the overall demand for corn is likely to increase, meaning that the venture will continue to be profitable. However, the facilitation of farming operations would require additional resources besides the 80,000 dollars required to buy the land. Without them, it is unlikely to be able to get the venture going. Therefore, while the idea itself may work, the reasoning provided for it is incomplete.
References
Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2015). Managerial economics and organizational architecture (6th ed.). New York, NY: McGraw-Hill.
Corn. (n.d.). Web.
Doran, T. C. (2018). Corn outlook: Domestic, global demand remains strong. AgriNews. Web.