Lone Star Agrisolutions

Consulting for Sleepy B Ranch

Cow/Calf Operation

AGEC 489/689Spring 2008

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 Hay Range Cubes Creep Feed Salt and Meal Mineral Textured Sweet Feed 8 Way Vaccination

Vibrio/ Lepto Vaccination

Yearly Expenditures

Fixed Overhead - $2,023/ Year LA 200 Penicillin Equipment Maintenance Miscellaneous

Depreciation - $4,967/ Year (Heifer & Bull purchase price – Cull Cow & Bull sale price)/ 7 years

Disbursements for Overhead - -$2,943/ Year Overhead Cost – Depreciation = Disbursements for Overhead

Yearly Expenditures

Direct Labor - $922/ Year Owner feeds/maintains cattle; Hired Labor

only for working cattle bi-annually, fixing the fence, etc.

Administrative Costs - $2,825/ Year Insurance - $1,025/ Year ($5.00/ Head)

Property Taxes - $1,800/ Year ($1.80/ Ac)

Total Yearly Expenditures

Total Yearly Expenditures = $55,040/ Year Direct Materials + Disbursements for

Overhead + Direct Labor + Administrative Costs = $55,040

$55,040 / 180 Calves = $306/ Calf

Historical & Forecasted Sale Price

$0.00

$200.00

$400.00

$600.00

$800.00

$1,000.00

$1,200.00

1995 2000 2005 2010 2015 2020

Calf Prices

Begin Forecasted Prices

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: 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 2012Required rate of return:1. Risk free rate of return 3.00% 3.50% 4.00% 4.50% 5.00%2. Business risk premium 17.00% 17.00% 17.00% 17.00% 17.00%3. Financial risk premium 6.06% 3.09% 1.71% 1.09% 0.55%

4. Required rate of return 26.06% 23.59% 22.71% 22.59% 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

Baseline ShockNPV 51,858.24$ 275.86$

2008 2009 2010 2011 2012Baseline 53,036$ 75,712$ 45,500$ 87,100$ 65,295$ Shock 40,228$ 57,687$ 28,954$ 60,818$ 38,625$

Net Cash Flows

Ratios – Financial Analysis

Current ratio

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2008 2009 2010 2011 2012

After Shock Before shock

MinimumMinimum

Ratios – Financial Analysis

Debt Ratio

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2008 2009 2010 2011 2012

After Shock Before Shock

MaximumMaximum

Ratios – Financial Analysis

Rate of Return on Assets

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2008 2009 2010 2011 2012

After Shock Before Shock

Should be PositiveShould be Positive

Ratios – Financial Analysis

Variable Expense Ratio

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

2008 2009 2010 2011 2012

After Shock Before Shock

The Lower the BetterThe Lower the Better

Ratios – Financial Analysis

Debt Repayment Capacity

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011 2012

After Shock Before Shock

MinimumMinimum

Sleepy B Ranch

Conclusion 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?