Building an Urban Farming Business: The Setup and Numbers

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If you haven’t read the first post in this urban farming business series, go back and do that before you continue!

In my first post I talked about the business idea and how it got started.  I also talked about how I went out and pitched customers, validated the idea, and even landed a client.  I got some feedback on that post and it seems like many wish to learn more about the numbers and the basic setup of the business.  Seeing as I just got back from the delivery with one of my clients, I figured there’d be no better time to sit down and write down the second chapter of the story.

The Setup

Some people expressed an interest in seeing how the greens are grown, so I figured I would link you to post that I have already done on the subject:

If you have any more questions, let me know!

Asking the Right Questions

Most Interesting Businessman

It seems like every business has different metrics that need to be measured to determine profitability.  As a business owner, you have to know certain things about your operating procedures in order to optimize them for the lowest cost, highest output, or highest profit.

I have never run a physical product business before, but I was very aware of this fact and my mind was immediately thinking about all of the different things I would need to know in order to run a well optimized business.  I sat down and brainstormed all of the questions that I needed to answer if I was going to pursue the business.  To me, this is a very effective way of understanding all of the challenges that you will need to overcome if you want to grow your business.  Here’s what I came up with:

Growing Process Questions

  1. What type of medium to grow the microgreens in (coconut coir, organic soil, synthetic material – or a mixture?)
  2. How long does each plant take to grow to a harvestable stage?
  3. How many ounces of dry seed of each different plant translates into how many ounces of harvestable greens?
  4. How much water does it take to bring one tray from germination to maturity?
  5. How do I grow plants properly so I can get a restaurant on a consistent weekly delivery schedule?
  6. How much time does it take to harvest one tray?
  7. What is the best way to package the greens for maximum freshness, while also keeping costs manageable?

Pricing and Sale Questions

  1. How much should I sell the greens for?
  2. What unit of measure would be the standard amount for sale?

Competition Questions

  1. Who is my main competition?
  2. What is my unique advantage over my competitors?
  3. How do I convey this advantage to my potential customers?
  4. Is it feasible for me to beat the competition, or are they entrenched?

Supply Questions

  1. How do I keep my costs low for seeds, growing medium, and equipment?
  2. Where can I find the best supply of high-quality bulk seeds?
  3. How do I ensure that I waste as little as possible of both dry seed and harvested greens?

The Numbers

After I brainstormed all of these questions, I set out to tackle them one by one.  The first thing I had to do is see if I was looking at a profitable business, or simply a hobby income.  To do this, I had to know how much dry see translated into how much harvestable greens.  This would allow me to add up the costs for growing medium, seed, water, and labor, and compare that to the amount of money I can make out of 1 pound of seed.

It’s very tough for me to come up with the exact profitability of each type of microgreen, because they all cost a different amount for a pound of dry seed, as well as produce a different harvestable yield per ounce of dry seed. I’m still running through the numbers for most of my varieties, but I will give you an example of one variety that I feel is relatively accurate.

Arugula

Arugula MicrogreensArugula is a very popular salad green that has a punchy bite to it.  It is one of the most popular greens that I sell.  I can purchase 1 pound of arugula seeds for $8.70.  So far, I’ve been seeing one tray with about half an ounce of seed.  That means that I can see around 32 trays with 1 pound of seed.  So far, my measurements have shown me that one tray of arugula will output about 6 to 8 ounces depending on how long I let it grow.  Taking the low end of 6 ounces, multiplying by 32 trays, and finally by $2/oz, we get a potential of $384 out of a single pound of arugula.

Now let’s look at the costs.  I am using a growing medium that cost me about two dollars per tray right now, though that is subject to change in the future.  Labor wise, it probably takes about 20min total to plant, water, and harvest a tray.  However, batching significantly decreases this time, so let’s assume it takes around 10 min. total.  So, I’m looking at a cost of $64 + $8.70 + 5.5 hours to produce around $384 of revenue.  Subtracting monetary costs and dividing for time, we get an hourly rate of about $56.60.

Yes, I know there are a LOT of assumptions in this calculation.

For instance, the first thing to note is that arugula is by far one of the cheapest seeds that you can buy.  Other varieties I grow cost anywhere from $15-$60 per pound.  That is going to take a nice chunk out of revenue.  There’s also the issue of time.  When I have more clients, my time cost is going to go lower and lower, because I will be able to batch both growing and delivery.  Currently I am making a single trip for a single client, because I do not have enough business in the area (yet) to batch deliver.  The profit calculation is something that I’m tracking and Excel and it is always changing as I learn more about each variety of plant, how to minimize costs, and how to maximize yield.

How To Optimize This System

I and dedicated to figuring out the best way to optimize my growing processes to increase my revenue and lower my costs.  Here are the ways that I thought of so far:

  • Buy seed in 5lb increments to take better advantage of bulk purchase discounts
  • Buy growing medium and larger quantities for the same reasons as above
  • Optimize growing time of each green so that I get the most yield per tray and harvest at maximum microgreen size
  • Optimize watering to use the perfect amount of water
  • Automate or outsource planting, watering, and harvesting in order to cut down on labor time
  • Batch delivery (requires more clients in a geographic location) to cut down on delivery time

I’m sure as I learn more there will be more ideas, but that’s what I’ve come up with for now.  Hope this is a helpful look at some of the numbers and inner workings of the business.  Let me know in the comments if you have any other questions or would like some clarification – as I said, I am very new at this type of documentation and I hope that it is helpful for some of you.

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17 thoughts on “Building an Urban Farming Business: The Setup and Numbers

  1. Have you considered the licensing requirements/regulations? Are you selling raw agricultural product or are you selling food? Do you need to have your business inspected and certified? Does your state require you to collect sales taxes? Some states if you cut it and package it, it’s processed food and subject to those regulations/inspections, some if you cut, wash, and package it its processed food, some states have regulations as to whether or not the bag or package is closed or open (which determines whether it is food or raw agricultural product). Some require inspections for water supply, etc, etc, etc.

  2. Do the micro greens grow back after cutting them for harvest ?

    How do you even deliver micro greens to clients, if it’s supposed to be consumed right after harvest ?

    Does it really have such a short shelf life and if yes, how do we deliver to clients ?

    • Some do and some don’t. I used to deliver them in 3oz plastic containers, but am now delivering in small closeable plastic baggies. If you have a clean growing environment and properly handle your soil, you actually do not need to wash the greens which adds considerable shelf life. In theory YES, you are ‘supposed’ to consume most vegetables as close to harvest as possible, but the economics of restaurants requires them to buy in bulk and dole out over the next 3-4 days or so.

  3. Hi Kevin,

    Thanks for an interesting and informative post. I’m new to – in fact just starting off with – microgreens

    I had a couple of questions – hope you can help :
    1) What’s the tray size / type that you use? (for which you’ve provided the arugula calculations)
    2) Where do you get your seeds from?

    Look forward to hearing from you.

    Best,
    Shweta.

  4. Hi Kevin,

    Congratulations we th this post . It’s great!
    But i have one question: What do you do with the soil after harvest? Do you reuse it in other trays?

    Best regards

  5. Let me start by saying I wish you the best of luck, and know that somewhere out there the next microgreens king of America is working toward his goal, and hopefully that king will be you.

    I have quite a bit of experience in business generally including in providing agricultural products to an upscale market.

    Beware the siren song of cost of goods sold calculations for living things. It may seem like there is a crazy profit margin built into your microgreens, but you’re not factoring in the costs over time of turning this into a real business. Once it goes beyond the embryonic stage you need to take into account a building, hydro equipment, lighting, bookkeeping, marketing, utilities, insurance, labor (including your salary), employment taxes, repairs and maintenance, tax preparation, etc. The superficially huge profit margins shrink fast. Not saying you can’t do it, but go into it knowing that this will be a long slog, and the single most valuable asset you’ll develop is your customer list.

    • You are 100% right about this Paul and I thank you for being blunt about it. Can I ask what you were selling to upscale markets?

      I will definitely need insurance, utilities (at scale this is a real expense), bookkeeping (I can get this very very low with current SAAS application that I’m already using for my current business), equipment, tax, gas, and maintenance. It looks really high right now because of this but I wouldn’t be surprised to see my margins drop by a significant amount in the future.

      I’ve spoken with a grower on the east coast that’s doing around 300 trays a week at $15-17 per tray, so I KNOW that there is opportunity there. He’s been able to expand and I believe he’s a one man shop. I think with great optimization and systems I can really reduce a lot of these costs, but you are definitely right about the margin calculation. I’d love to chat with you a bit more if you’ve got the time!

  6. Just some thoughts….

    Marketing and delivery time are substantial. Even if you have one steady customer, you need to communicate and spend time with that customer. Clean up time is always needed. Product development time is important, you need to be working on your next expansion or new product. You might double your estimate of production time to get an accurate estimate of total time needed to run the business.

    Utility costs? are you using lights or sunlight? Are you including part of your rent in the cost? It may not be necessary, if you are willing to subsidize the business and not charge it rent, but if you ever expand to a new location, then you will need to take that into consideration.

    At this point, dollars per hour is not that important. What is important is that you are recovering your investment and doing much better than covering costs. You are going to want to expand and invest more in your business, so earning money in to pay for expansion is your most important goal now.

    How much space do you have available to grow? That is a constraint that you could add to your calculation to determine the maximum amount that you could make with your current situation (you can expand by getting more space).

    Now that you have your foot in the door, you need to plan for next spring. Find out what your customer needs, find some land, put up a hoop house, and expand your product line.

    • Good points Paul. It takes me about 20 min. to make a delivery to this particular customer per week, so that’s about another two hours per month. I have a few more restaurants lined up in that area, so we could increase that time to about an hour a week and for extra hours per month. I plan to spend about four hours a week hitting the streets and marketing to restaurants once I have my “microgreen sample” process worked out a little bit more thoroughly.

      I use sunlight to grow the greens, so there are not any utility costs except for water. I’m not including rent as a part of cost, but for taxes I will be able to deduct a portion of my rent with the square footage I dedicate to the business, so right now running out of my home is actually a tax benefit with no extra expense.

      You’re right about dollars per hour not being important right now. Seems like when you start a business, you have a wealth of time and not a wealth of money, so ignoring dollars per hour is a smart play. The most important goal right now is definitely to run the business in a way that allows me to expand quickly on the profits that I make from current customers. I have some lofty goals for this business and would absolutely love to have it become my main source of income.

      If I wanted to, I could really max out the space of this house and I feel that I could serve up to 10 restaurants with this set up – more if I expand into the garage and use LED lighting, which costs about the same per month as a single CFL bulb.

      Thanks again for the comments and you’ve put some good ideas in my head for things to think about as I grow.

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