Recent warnings about durian growing areas in the mass media have made me think a lot about how people make decisions, especially deciding to choose an investment option for growing fruit trees. shared.
Even though I know that the “king of fruit” is a high-priced product and brings impressive profits to gardeners, I still believe that when considering growing any type of fruit tree that is on the rise in price hot weather, gardeners also need to carefully understand the associated potential risk factors. From an economic perspective, this article will analyze some of the risks that gardeners may encounter if they put their financial resources into plants that are on the top of “hot trends”, especially the risks caused by long-term supply shifts.
Let’s start with cash flow
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In terms of finance, there are many criteria to evaluate the effectiveness of an investment activity. Commonly used criteria include: net present value, internal rate of return and payback period. But no matter what criteria are used, cash outflow and cash inflow are still crucial components, determining whether a project is financially successful or not.
For gardening projects, cash outflows can be: land rental, fence construction and irrigation system installation; money to buy seedlings, fertilizers, and pesticides; labor rental fees; money spent on learning farming techniques… The point worth noting is that, when a crop is in the hot growth phase, the amount of money spent on initial investment may increase quite a lot compared to the current conditions. Normally, many people want to invest at the same time, leading to an increase in the price of input factors. The phenomenon of rising coffee prices leading to increased demand for seedlings and, as a result, the recent sharp increase in coffee seedling prices is perhaps a vivid illustration of this problem (source).
On the cash inflow side, this variable mostly depends on harvest output and product selling price. While output is influenced by farming conditions and techniques, resale price is determined by the correlation between supply and demand in the market.
The problem is that, when the price of a fruit tree tends to increase sharply, many people tend to expect that the price will continue to increase and if they start planting, their products will still be harvested. sold at high prices in the market. However, this way of reasoning can bring potential risks to gardeners’ investment activities because the short-term supply-demand relationship and the long-term supply-demand relationship can be very different.
The relationship between supply and demand is not constant
In the short term, the supply of fruit products in general tends to be inelastic with price. In other words, whether prices move in an upward or downward direction, it is difficult for growers to adjust supply output immediately to adapt to market demand. In the case of an inelastic supply curve like this, an increase in demand can produce a larger increase in price than in a case where the supply curve is more elastic in price.
Now imagine the news of rising prices causing many gardeners to expand their planting areas, what will the problem be like in the long term? Suppose a fruit takes five years from planting to harvest. If today the price of this fruit is trending up and you decide to start growing it. After five years, there is no guarantee that you will be able to sell your product at a price as high as the current price because the market supply and demand at that time may have changed significantly compared to today. now.
That said, a continuous increase in the price of a fruit at a certain period in the short term is not a sign that investing in growing this fruit will definitely bring financial results in the short term. future. This is because future cash flows are influenced by selling prices. And in turn, the selling price in the future depends on many factors related to supply and demand of the product such as: planting area; favorable weather and climate; domestic consumption demand and export demand,…
Psychological traps
In investing in general, risk and expected return often tend to go hand in hand. Agricultural investment is no exception. The above analysis shows that “catching the trend” of growing fruit trees when prices are rising will be quite risky for growers because initial investment costs tend to increase, while market supply and demand at times Harvest point is very difficult to predict. However, there are still cases where some gardeners invest this way with the mindset that choosing “trendy” plants will easily find higher profits than investing in common plants.
Another psychological factor that easily makes people fall into the trap of growing fruit trees that are at feverish prices is crowd psychology. This is a quite famous research topic of the behavioral economics school and in agriculture, a very easily seen manifestation of crowd psychology is that when choosing plants for their garden, people We often refer to information about plants from previously successful gardening models. This psychological trend, when widespread, will risk creating an excessive increase in supply, leading to a reversal of the upward price trend into a downward price trend as farmers have encountered many times in the past. via.
[ Vỡ mộng với trái cây “vua” ]A few recommendations
In general, nearly every investment activity has its own risks. To be able to make systematic decisions and partly limit the adverse effects of risks, it is thought that gardeners should first not only choose crops according to the “plant, cut down” movement but also evaluate them. carefully consider your investment plan; At the same time, pay more attention to the recommendations of the authorities and the mass media.
In case of deciding to invest, the gardener must have a backup plan to cope with possible financial risks. Two typical types of risks in this situation are risks due to fixed costs and risks due to the use of financial leverage. Initial investments such as land preparation, irrigation system installation, seedlings… are often in the form of fixed costs. No matter how much or how little the output is harvested, no matter how much the selling price is, the costs spent at the beginning cannot be changed.
The concept of financial leverage refers to financing investment activities with debt. Normally, interest costs will be fixed at the time of signing the loan contract. Therefore, if using loan capital, growers need to choose a reasonable loan ratio because if the output and selling price are too low, the possibility that the revenue will not be enough to repay the debt may still occur. .
Risk diversification is also a strategy that agricultural investors can consider. Instead of focusing most of their financial resources on the game of crops with rising prices but many risks, growers can allocate a part of their investment capital to other production and business activities. less risk to create a multi-component investment portfolio capable of spreading risk.
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