5 Questions an Investor Should Ask Before Investing into an Insect Farm

Investing into the growing industry of high-scale insect farming that has undoubtedly high potential is a case of high risk / high reward. The high reward comes from the growing and unexploited markets and the high risk from the limited knowledge and the undeveloped market environment. Here in this blog I list some of the most important questions that investor should ask and that the farmer must have clear answers that are supported with solid arguments.

aurinko

In my perspective the one of the most important qualities for a high-scale insect farm is its flexibility. Because of all the uncertainty surrounding the industry the most important question is how the farm can adopt to changing legislation, trends and new scientific knowledge. All these factors increase the risk exposure of the insect farming companies. This main question is cut in to more detailed questions here below. The questions and the reasoning behind them are explained with higher detail in my thesis that can be found here: https://ilkkataponen.com/2015/05/20/thesis-supply-chain-risk-management-in-entomology-farms/

ilkka-heinäsirkka

1. What species are you farming?
2. How many species are you farming?
3. What type of feed are you using?

The question number one is very fundamental question and sets direction for the farming company. As concluded in my thesis the biggest risk threatening the companies is a pathogen break out. The risks are especially associated with insect farming because the pathogens are still very poorly known. For this reason insect farms should choose their species to be one of the ones that are best known, or they should have extraordinary knowledge or resources related to the scientific research with the selected species. In my thesis I name the three most common species farmed today. The species are Tenebrio molitor, Hermetia illucens and Acheta domesticus. If a farm has selected species that are not one of this three the species should at least be present in the “Belgium ten”, a list of ten approved species by the Belgium authorities  ( You can find the list here: http://www.afsca.be/foodstuffs/insects/).

Changing the insect species is not easy after building the infrastructure around the certain needs and choosing only one species is a risk for multiple reasons. The farm should be prepared for changing the primary species in order to avoid the following risks:

-It is possible that the selected species might not be in list of insects that are first allowed for use for human food and animal feed.

-If the species will not be one of most common ones to be used in the future the company will be left out from the growing knowledge of the most common species and from the growing logistics downstream.

-There is no knowledge of how any insect species will perform in very high volumes. It is possible that even the most promising species will turn up to be unsuitable for high-scale farming.

Same goes with the selected feed. Even if the selected species would be approved by legislation and the species would perform well in high-scale environment, it might be that the selected type of feed makes the end product remain banned. This type of situation might be ahead for example for the companies using biological waste.

4. Do you consider biological research important?
Companies are going to two different ways when it comes to biology research about the farmed species. Few bigger companies have multiple scientists with their teams working on building a better understanding on pathogens and what are the best and most efficient ways of farming. In the other end there are companies with no biological knowledge. It is essential to know the reasons behind the company’s selection between these two approaches. Is it so that the research is just waste of money, or so that the research will bring better quality, risk management and higher efficiency?

5. How have you prepared against pathogen breakouts?
There are multiple risks in insect farming, but the most dangerous one is a pathogen breakout. As mentioned before the knowledge about the insect pathogens is really basic and they pose risks that can in the worst case kill off entire colonies. According to Doctor Jorgen Eilenberg of University of Copenhagen, leading insect pathogens expect in the world, companies cannot with current knowledge prevent pathogens breakouts completely. It is undeniable scientific fact that the sufficient risk control against pathogen can only be reached by risk pooling and segregation of different functions.

If the farm uses same batch of feed for all of its insects, they are all located in a same space or if they use same AC- machinery the investor should be alarmed and ask how the farm can justify the ignorance towards the risk?
pirkko

Flow and Resource Effectiveness – Case of a Football Event

In this blog I offer you something that might seem bit off topic first, but in the end is actually heavily linked with productivity and effectiveness also in insect farming. I was recently  invited to attend a football game to a stadium where I usually do not go. The home team’s head coach Mika Lehkosuo is a leading talent of his profession in Finland and he has been heavily involved of bringing a new type of thinking to Finnish football; consistency and constant improvement.

These qualities are in the core of Lean thinking, a working philosophy I also discussed in my thesis. Even though I introduced the coach for you now, I will be giving here an example of possibilities of lean thinking outside of the playing field, from the stadium services that were not arranged very well. I have to say that the level is the norm rather than an exception for what I am used to in sports events. Stadium services in this case are the stands selling beer, coffee, sausages etc.

There are two ways to look at working effectiveness, Resource and Flow. Resource effectiveness is the traditional way where the organization is making sure that all the employees are occupied with something to do all the time. It would be a clear sign of having too many resources if some of the employees have nothing to do at times, right? It might be so that the employees are fully occupied, but their time is in fact used to unnecessary tasks. An example is presented in the end of the text.

Flow effectiveness approaches the need of employees from the different point of view. The question here is not how the get the most out of the employees, but how to minimize the number of unfinished tasks, in this case the waiting customers. For me it seems that at the stadium the organization has been thinking only of the Resource effectiveness.  Even though all the stands were open they could have had more employees in them. The resource effectiveness was very high; the employees had customers to serve from already before the start of the intermission all the way a bit past the break when the second half of the game was already on. It is worth noticing that the customers, the spectators of the game, have learned that they must leave the stands before the intermission starts in order to be able to get the beer or sausage or at least avoid long queue.

It is clear that this is bad customer service. People pay to see the game and are forced to skip part of the show only because they want to spend more money. Surely the organization is aware of this issue and possibly they justify the situation for costs reasons (Resource effectiveness). The justification is valid only if only the direct costs are considered. Now in this current way it is true that the Sales Divided by Variable Costs- rate is better compared to situation where there are more employees, but the Resource thinking brings many hidden secondary costs and actually it might be so that the adding of employees might in the long run be more cost effective. Let’s break down the negative effects the Resource thinking is bringing that would be solved by Flow thinking. In other words what would happen is the amount of employees would be decided on the basis how can we serve the customers the fastest:

Increased customer satisfaction. People will enjoy the event more when they get good and speedy service. Enjoying the event will increase their tendency to come back again. The increased demand for tickets in the long run caused by the good service decreases the needs for costly marketing campaigns. The increased need for marketing campaign is a secondary cost of bad service.  Even though added employees to the selling stands decrease the direct profits of the sales, but in fact the organization could view the lost direct profits as investments for marketing. I want to underline here that even though I wrote that the profits are lost, according to the lean thinking the profits are lost only in the short run, but the adding of employees is a profitable choice in the long run for the explained reasons.

Increased employee satisfaction. In the current situation employees are working under increased stress as the customers are tense or even upset for the long wait. The endless- looking queue is breathing to the necks of the employees while they are trying doing their best. Increased employee satisfaction will lead to smaller employee turnover, less sick leaves, and to better and friendlier service. And lasts my favorite..

Increased employee effectiveness. When an employee is in charge of multiple tasks they are forced to stop and start the tasks multiple times. This forces employees to use their time for actions that do not create value for the customer. Let’s have an example where a customer buys a beer: 1. The employee takes the order 2. walks few steps for the fridge 3. pours the beer 4. walks back to counter 5. hands out the beer 6. opens the register 7. takes the payment From these 7 identified steps only the 4 bolded ones are necessary and value bringing actions, the other 3 are simply Muda, the Japanese term used in school of Lean for waste. If there would be a beer pouring employee helping let’s say three cashiers all the employees would have an increased effectivity rate. In this example the cashier does not have to walk anywhere; just takes the order, asks for the beer from the colleague, and takes the payment. Additionally, the register does not have to be closed as the cashier is present all the time. Now careful with terms! The employees are effective because they do value adding actions even though they might be standing idle for minute or two here and there. All the Muda is stripped away.

By the traditional thinking the idle standing employee is not effective but a traditional organization does not differentiate the tasks as value bringing and waste creating tasks. So putting it short the employees are doing less but they are more effective.