Ceres Farms Incorporated Business Plan

Ceres Farms Incorporated – Business Plan

Table of Figures:

Figure 1: NPV Sensitivity to critical variables (15% discount rate) 8

Figure 2: Break Even Revenue 9

Figure 3: Map of Ceres Locations 11

Figure 4: Illustration of the human resource structure 25

Figure 5: Percentage of Contribution Margin by Crop 37

Figure 6: NPV sensitivity to critical variables (15% discount rate) 46

Figure 7: Breakeven Revenue 46

Table of Tables:

Table 1: Total Human Resources Costs 2002 6

Table 2: Estimated Sales Volumes and Revenues (for 2002) 7

Table 3: After Tax Financial Ratios 8

Table 4: Leased Equipment and Associated Costs 15

Table 5: Equipment Purchases and Associated Costs 16

Table 6: Building Purchases 16

Table 7: Timeline of Operations 18

Table 8: Chemical Program Points 19

Table 9: Chemical Costs After Point Savings 20

Table 10: Fertilizer Costs 21

Table 11: Inoculant Costs 21

Table 12: Seed Costs 21

Table 13: Insurance Coverage and Premiums 22

Table 14: Crop Insurance 22

Table 15: Five-year Projection of Management Salaries and Benefits 28

Table 16: Five-year Projection of Wages/ Salaries and Benefits for Labourers 29

Table 17: Ceres Farms Inc Customers 32

Table 18: Alternative Contract Options and Descriptions 35

Table 19: Estimated Sales Volumes and Revenues (for 2002) 37

Table 20: Marketing Budget 38

Table 21: Dividend Payments 40

Table 22: Working Capital Requirements 41

Table 23: Cost Projections 42

Table 24: Ratios 43

Table 25: Break-even Revenue for Net-Income and Cash 45

Table 26: Sensitivity Analysis (15% Discount Rate) 45

Executive Summary

Introduction

Ceres Farms Incorporated specializes in grain, oilseed, and pulse crop production and marketing. Ceres will operate in two locations farming approximately 10,000 acres at each location. The two locations chosen were Melfort and Aneroid. These locations were chosen because of the different growing seasons and weather patterns in the two areas. Yield risk will be reduced because of the difference in weather (i.e.- a severe storm or drought is less likely to affect both locations). The different climates also allow Ceres to grow a more diverse selection of crops. This enables Ceres to capitalize on more profitable crops and generate larger returns. Equipment costs will also be minimized because both areas can be farmed with one set of equipment. Due to the size of Ceres Farms, it is likely to receive purchasing power when dealing with input suppliers, and greater marketing power due to large volumes of grain being sold. Ceres Farms will also benefit from a specialized, highly skilled labor force.

Operations

Ceres Farms will be farming 9600 acres in Aneroid (SW, Sask.) and 10,240 acres in Melfort (NE, Sask.) all with one set of equipment and one set of employees. This is possible, because of the spread between the two locations and their associated differences in weather patterns. By doing this Ceres will achieve increased cost efficiency over most other farming operations, through economies of size.

The land used will all be leased (5yr lease) except for the purchase of one quarter at each location for the storage facilities. The lease payments will be split into two; one will be at the start of the crop season and the other will be at the end of the season. Which is traditional and also helps the cash flow. In Aneroid the cropping rotation will be lentils, durum, and then chemfallow. In Melfort the cropping rotation will be barley, canola, wheat, and peas.

Ceres plans on starting seeding in Aneroid on April 15th and finish by the end of April. Melfort seeding operations will be started by May 1st and finish by approximately June 1st. Harvest operations are planned to start in Aneroid by August 4th and finish by August 20th. Melfort harvest operations are planned to start by August 23rd and are planned to finish by October 1st.

Chemical costs for 2002 are estimated at $454,550. Most of our chemicals have been chosen on the basis of a lucrative program offered by Syngenta Crop Protection. Chemical assumptions were from Saskatchewan Agriculture and Food. The total fertilizer and inoculant costs for 2002 came to $324,206 and $42,979 respectively. The total seed cost for 2002 came to $190,908.[1] Fertilizer, inoculant, chemical, and seed account for approximately 43% of total costs in 2002. Variable input costs are inflated at 2% annually to compensate for inflation.

Human Resources

Ceres Farms Inc. will employ four full time employees and up to eight different part time employees. The four full time employees will consist of an office manager, an operations manager and two full time labourers/truck drivers. There will be three part time employees for seeding operations, 2 will be needed for spraying operations, and up to 5 will be needed for harvesting. All employees will have their wages and salaries increase by 2% a year, and will receive benefits that include Employment Insurance, Canada Pension Plan, and Worker’s Compensation. The total human resources costs for the first year of operation will be $233,140 approximately 10% of total costs.

Table 1: Total Human Resources Costs 2002

Marketing

Ceres marketing objective is to obtain a price that covers costs and makes Ceres Farms a profitable venture. Ceres Farms is a price taker and has no influence on the price received. Therefore, in order to achieve a favorable price, Ceres must sell when potential market opportunities exist. The office manager will continually monitor the market and determine when, as well as what percentage to contract, hedge or sell in order to successfully market Ceres’ grain. Some of the fundamental factors that will affect the marketing manager’s decisions include:

· Crop forecasts

· Foreign and domestic demand

· Carryover

· Seasonally

· Weather conditions

· Government reports

Marketing Board Grains

Ceres must market the designated barley, durum and wheat for human consumption through the Canadian Wheat Board. The CWB is the marketing agency for Western Canadian wheat and barley growers. The CWB is a three-pillar system, which consists of single desk selling, price pooling and a government guarantee. Because these grains are based on a pooled price Ceres has no control over what price is received. Ceres can only deliver these commodities when called for and hope that the CWB obtains a premium price.

Non-Board Grains

Non-board grains for Ceres include lentils, peas, canola and possibly barley. There are many alternatives available for non-board grains such as selling directly for cash, contracting, or hedging. Ceres will most likely hedge a percentage of estimated production in order to reduce price risk. This percentage will vary according to market conditions such as carryover, foreign and domestic supply and demand, crop forecasts, and weather.

Sales Revenue

The following table shows the estimated sales volumes and revenues for the year 2002. Yields are based on the ten-year average yields from Saskatchewan Agriculture and Food (SAF). Prices for board grains were calculated using a five-year average port of Vancouver price. The appropriate rail, elevation and discounts were deducted from these prices. Prices for non-board grains were calculated using five-year averages from SAF.

Table 2: Estimated Sales Volumes and Revenues (for 2002)

Finance

Ceres Farms Inc. will initially require $2.5 million to start up the business, which will be financed entirely thew equity. Table 3 consists of several important financial ratios for Ceres Farms Inc.

Table 3: After Tax Financial Ratios

Ceres Farms Inc. has determined the critical variables in the operation to be:

· Price of Crops

· Yields of Crops

· Cost of Fertilizer

· Cost of Chemical

· Cost of Seed

· Cost of Fuel

· Cost of Wages and Salaries

Figure 1: NPV Sensitivity to critical variables (15% discount rate)

Figure 2: Break Even Revenue

Summary

The results of our analysis indicate that Ceres Farms Inc. is a feasible venture providing that $2.5 million in share capital can be attained. The internal rate of return was 16.1% and the net present value was $133,631 using the 15% discount rate. This venture is very sensitive to price and yield fluctuations which increases the risk associated with investing in the corporation. However, using average prices and yields this is a feasible operation.

Main Report

1.0 Introduction

Ceres Farms Inc. is a large grain, oilseed, and pulse farm Co. that will capitalize on economies of scale. The company will farm a total of twenty thousand acres with approximately ten thousand acres in two different locations in Saskatchewan, using one set of equipment. Ten thousand acres will be located in the Southwest, around the town of Aneroid. The other ten thousand acres will be located in the Northeast, around the town of Melfort. These locations provide good access to grain markets, and allow for diverse crop rotations. The weather patterns in each location will allow Ceres Farms Inc. to use one set of seeding equipment and one set of harvest equipment to minimize cost. Other advantages of the large size are purchasing power when dealing with input suppliers, and greater marketing power due to large volumes of grain being sold. Figure 4 shows the travel route and the location of both areas, which Ceres will farm.

Figure 3: Map of Ceres Locations

2.0 Industry Overview

The Saskatchewan Agriculture sector is typically known for its wheat and durum production. Prior to the 80’s many grain farms were typically fifty- fifty-crop summer fallow rotations, which wheat and durum were the primary crops grown. However in the past several years’ producers have dramatically diversified their crop choices and cropping practices. Today numerous pulses, oilseeds, cereals, spices and alternative crops are grown across the province. Direct seeding and zero tillage has also become widely accepted throughout the dark brown and black soil zones. A zero tillage and chemical fallow combination has been adopted across many parts of the brown and dark brown soil zones.

Grain farming has been a part of Saskatchewan for the past century however not since the dirty thirties have farm incomes been so low. For the past twenty-five years Saskatchewan farmers’ incomes have been on a steady decline. There are many contributing factors:

· First, the real prices of many key commodities have been dropping. According to Schoney (1997) the real price of wheat has been decreasing by approximately 2.5 % a year since 1960 he also states the real price of Lentils and Canola have been declining by approximately 1.5% annually for the same time period.

· Secondly, the use and cost of many crucial inputs has dramatically increased. Consider the cost of machinery replacement, which has increased by 36% since 1992, and fertilizer is up 25%. These increases and many others can be seen, by viewing the Western Canada Farm Input Price Indices in the Saskatchewan Agriculture and Food Hand book (1999).

· Third, government support for prairie farmers has dropped significantly in the past 10 years. The producer subsidy equivalents (PSE) for Canadian wheat producers were over 41% in 1988 and fell to18% in 1998 (Furtan 2001). There has also been an increase in both the U.S. and Europe PSE’s over this same time period. These PSE’s in Europe and the U.S. often create incentives for increased production thus pressuring world markets as a result of the excess supply.

· Finally, technology advancements have forever changed the face of rural Saskatchewan. Years ago a 500 acre farm was considered large; it employed several people to help with the planting and harvesting of the crop. However today a 5000-acre farm employing the same number of people is not uncommon. Farms today have become highly capital intensive and less labor intensive. As the bigger tractors, seeders, and combines continue to role into rural Saskatchewan the people will continue to be driven out. The number of farms in Saskatchewan has been decreasing since the thirties and as well the size of farms has been increasing. The change to a high-risk capital-intensive farm has caused huge barriers to entry for people looking to get into farming. This combined with the current state of farm incomes has resulted in very few new farmers. The age of farmers is also increasing due to the high risk and capital levels needed to start up. There is simply not much attractive to young people about an occupation with large debts, high risk, and high stress. Farming is also further becoming an occupation in which the operator has to become a jack-of-all-trades. In order for today’s farmer to compete he must be educated, and experienced as a mechanic, agronomist, marketer, and manager.