Transcript agecon2.tamu.edu

Lone Star Agrisolutions
AGEC 489/689
Spring 2008
Consulting for Sleepy B Ranch
Cow/Calf Operation
Location: Franklin, TX
Constituents
 Ranch President/CEO - Brad Roberson
CONSULTANTS for Lone Star Agrisolutions:
 Production Advisor - Brandon Grooms
 Cost Efficiency Manager - Casey Munn
 Agricultural Economist - Gary Coke
 Business Analyst - Maria Afonso
 Financial Analyst - Luke Funderburg
Sleepy B Ranch
 Commercial Brangus Cattle
 Cow/Calf Ranch
 Cows wean one calf per year (usually)
 Calves sold between 600 & 700 pounds
 Calves sold through a Private Contract to
Stocker Operations
Start-Up Assumptions
 200 Bred Heifers purchased for Brood Cows
 5 Bulls purchased
 90% Calf Crop of 180 per year
 1,500 acres of land owned
 All machinery owned
 $50,000 Beginning Cash Balance
Start-Up Costs
 200 Bred Heifers –
$802/
Cow, $160,400/ Total
 5 Bulls -
$1,800/ Bull, $9,000/
Total
 Total Start-Up Cost -
$169,400
 Requesting a Loan for
80% of Start-Up Costs:
$135,520
Yearly Expenditures
 Direct Materials - $297/ calf, $53,556/ year
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Hay
Range Cubes
Creep Feed
Salt and Meal
Mineral
Textured Sweet Feed
8 Way Vaccination
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Vibrio/ Lepto Vaccination
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Yearly Expenditures
 Fixed Overhead - $2,023/ Year
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LA 200
Penicillin
Equipment Maintenance
Miscellaneous
 Depreciation - $4,967/ Year
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(Heifer & Bull purchase price – Cull Cow & Bull sale price)/ 7 years
 Disbursements for Overhead - -$2,943/
Year
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Overhead Cost – Depreciation = Disbursements for Overhead
Yearly Expenditures
 Direct Labor - $922/ Year
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Owner feeds/maintains cattle; Hired Labor
only for working cattle bi-annually, fixing the
fence, etc.
 Administrative Costs - $2,825/ Year
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Insurance - $1,025/ Year ($5.00/ Head)
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Property Taxes - $1,800/ Year ($1.80/ Ac)
Total Yearly Expenditures
 Total Yearly Expenditures = $55,040/ Year
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Direct Materials + Disbursements for
Overhead + Direct Labor + Administrative
Costs = $55,040
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$55,040 / 180 Calves = $306/ Calf
Historical & Forecasted Sale Price
$1,200.00
$1,000.00
$800.00
$600.00
$400.00
$200.00
Begin Forecasted Prices
$0.00
1995
2000
2005
2010
Calf Prices
2015
2020
Economic Assumptions
 Condition of the Economy:

Input costs increase yearly due to inflation and
increase in demand for feed.

Forecasted Calf prices drop in 2010 and 2012

U.S. economy is in a recession

Credit crunch makes it harder to obtain loans and
find investors
Baseline Scenario
 Assumptions:
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Variable costs and fixed overhead increase
3% per year.
Straight-line depreciation used.
Administrative Costs are the same every year.
Forecasted sale price changes yearly.
Shock Scenario
 Assumptions:
 10% drop in prices
 Selling 170 calves instead of 180
 Direct Materials and Fixed Overhead costs
increase 9.5% per year
 Condition of the Economy Worsens:
 Input costs increase from 3% to 9.5% due to
inflation and increase in demand for feed.
 U.S. economy in a greater recession
Choosing the Required Rate of Return
2008
2009
2010
2011
2012
Required rate of return:
1. Risk free rate of return
2. Business risk premium
3. Financial risk premium
4. Required rate of return
3.00%
17.00%
6.06%
26.06%
3.50%
17.00%
3.09%
23.59%
4.00%
17.00%
1.71%
22.71%
4.50%
17.00%
1.09%
22.59%
5.00%
17.00%
0.55%
22.55%
5. Present value interest factor:
0.79330
0.64190
0.52309
0.42671
0.34821
1) Rfree rate from federalreserve.gov -- current rate for a 5-yr treasury bond
2) Business risk for the cattle industry is huge – the CV for calf prices is .13
3) Since our loan dwindles significantly after the first 3 years, we took our
financial risk down to ~1% in the 4th/ 5th year
4) Realistic required rate of return measures between 20-25%.
Table of NPV/Net Cash Flows for
Baseline and Shock
NPV
Baseline
$ 51,858.24
Shock
$
275.86
Net Cash Flows
2008
2009
2010
2011
2012
Baseline $ 53,036 $ 75,712 $ 45,500 $ 87,100 $ 65,295
Shock $ 40,228 $ 57,687 $ 28,954 $ 60,818 $ 38,625
Ratios – Financial Analysis
Current ratio
6.00
5.00
4.00
3.00
Minimum
2.00
1.00
0.00
2008
2009
2010
After Shock
2011
Before shock
2012
Ratios – Financial Analysis
Debt Ratio
Maximum
0.6
0.5
0.4
0.3
0.2
0.1
0.0
2008
2009
2010
After Shock
2011
Before Shock
2012
Ratios – Financial Analysis
Rate of Return on Assets
30.00%
Should be Positive
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2008
2009
2010
After Shock
2011
Before Shock
2012
Ratios – Financial Analysis
Variable Expense Ratio
70.00%
60.00%
The Lower the Better
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2008
2009
2010
After Shock
2011
Before Shock
2012
Ratios – Financial Analysis
Debt Repayment Capacity
4.0
3.5
3.0
2.5
2.0
1.5
1.0
Minimum
0.5
0.0
2008
2009
2010
After Shock
2011
Before Shock
2012
Sleepy B Ranch
 Conclusion
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Ratios steadily improving
Average NPV Positive
Operation is feasible even in shock scenario
(shock scenario is rather extreme)
Lone Star Agrisolutions for
Sleepy B Ranch
Questions?