Financial indicators are of great importance, but other factors must also be taken into account. A feasibility study may be a requirement for raising bank, non-bank or equity funds, but it is important to do, even if the funding is secured (a government guaranteed project).
The main objective is to find the go-no go factors that might prevent the project from succeeding or maximizing its potential.
Here are some examples of critical factors:
- Cost and reliability of electricity and water supply
- Availability of suitably sized land
- Routes and transport to major markets
- Environmental and animal welfare regulations
- Regulatory factors for vaccines and drugs
- Possibility of repatriating profits
Critical factors must first be resolved – otherwise there is no point in continuing (not going), for example if there is no way to repatriate profits, no international investor will show interest in the project.
Why do a feasibility study at the start of a breeding project?
The feasibility study takes a dream, or an idea, and checks whether it is possible to make it happen. Most business ideas don’t come to fruition and of those that do start, many end within the first year. A lot of time and effort can be wasted trying to implement an idea that is flawed. Much worse, a lot of capital can be invested in a project that ends because it is impractical.
Here are some examples of what can go wrong:
- Inexpensive frozen pork may be imported at dumped prices. In this case, the question is: will local consumers be willing to pay for fresh local produce at a higher price? Dumping of cheap chicken will also reduce the demand for pork.
- Are there good quality breeders locally? If not, what are the regulations regarding the importation of frozen semen. The quality of the breeding stock is a key performance factor. The feasibility study should be based on what will be available for the project and not on international guidelines.
The feasibility study aims to test the initiative. It must be done in a neutral manner. We all like to think our intuition is perfect, but it needs to be tested against the hard anvil of facts.
In the long run, an investment in quality feasibility is very rewarding. If the outcome is positive, then you will have a solid foundation to move forward. The feasibility study can be followed by a full business plan. which will be the roadmap of the project.
If for some reason the result is negative, this is also very valuable information. It’s better to know in advance if a project is likely to fail, rather than investing time, effort, reputation and money in a project that has a flaw.
A feasibility study is like a teaser for a complete business plan and the result can indicate that the project can pay off its investment in a short time. At this point, it doesn’t matter if it takes three or five and a half years. The order of magnitude is what is important. Assuming this is an acceptable return, it is worth investing in a comprehensive business plan.
What a feasibility study is not
- It is not an academic study. He must be very focused. The study is time sensitive, and just because a certain plan was not viable five years ago does not mean it is not viable now or in the future.
- It should not define the scope or the basic ideas of the project. The basic concept to be tested should be well defined, for example a feasibility study to verify an integrated pig project in Zambia with 2000 sows. The study might say the litter should include a feed factory (due to the lack of a local alternative), but won’t decide whether you should grow pork, goats, or avocados.
- It must NOT be a template. It is true that there are many standard models on the Internet that offer to do a feasibility study for $ 100. The feasibility study should be designed for the specific needs of the client based on local conditions. No model can do it.
What does the feasibility study contain?
Market and needs analysis
- What will the market be for the product?
- How much can be sold at what price?
- How is the market segmented?
- Which segment is best to attack?
Example – The current market for pork in Europe is rapidly moving towards meat grown using farrowing systems where the sow is free to roam. The plan should assess how consumers will behave in the future and how future regulation will develop. The decision could be critical for the future of the project. Thus, if barns are designed to be cramped, they may not be adaptable to future regulations.
If the market is an established market, such as the US pork market, there is a lot of data and it is relatively easy to gauge market trends (although we cannot predict future disruptions).
If the market is new or small, then the task is much more difficult. The fact that pork production and consumption is low, may be due to the fact that there is no production, but may also be the result of limited demand or a preference for poultry.
If the size of the project is too large for the local market, then we need to consider what effect the new production will have on the market price. A classic mistake that I have witnessed in a related industry – the price of quail eggs in a certain market was very high, so a farmer built a 40,000 eggs per day project. He did not consider that before starting the market was balanced with a production of 2,000 eggs per day for specialty restaurants and so on. Once it flooded the market, the price fell to near zero.
Another consideration is how the competitors will react. So, for example, if a large company dominates an imported meat brining market, it has the option of lowering its prices to maintain its market dominance.
Need to make a detailed and high level sketch of the project.
- Scope – decide which elements will be included in the project. Will it be modular or built at the same time?
- Capital – all buildings, land and equipment necessary to establish the project.
- Availability of raw materials – piglets, feed (unless grown under the project), electricity, water, vaccines, etc.
- Labor and professional skills requirements. Visa regulations to import a worker (skilled or not)
- Regulations – construction – environmental, land ownership, import and corporate taxes, foreign currency restrictions, etc.
The model should be challenged and stress tested using WCGW (What can go wrong) analysis. Now is the time to identify possible obstacles and see if they can be resolved.
Financial analysis at this stage should focus on key indicators of success.
It is necessary to analyze capital, costs, operating costs and fixed costs and compare them to estimated revenues.
The key indices will be the ROI and the NPV or the time of return on investment. Sensitivity analysis should be performed eg price of product (pork), merit of indices. Even if the NPV is good, you need to calculate the weather, a small price reduction will cause the NPV to drop sharply.
Two important points that are often overlooked at this stage:
- Minimum starting size – we might not want to do the whole project at once but do it in a modular way. This may be the result of considerations of capital investment, land availability, market development, or capacity and skills building. Clearly, if we can invest a quarter of the capital for a quarter of the production, this can reduce the risks (pilot project). The problem is that often the size of the neighborhood is too small to be profitable. We still need a slaughterhouse and a flour mill, both of which are volume sensitive. We are losing economies of scale and that will increase the price of the product and our competitiveness. While a large-scale project can be successful, a smaller-scale project can be doomed to failure.
- Cash flow – a full cash flow analysis is part of the full business plan, but already at this stage we need to make sure that the funding will cover the expected cash flows. Every livestock business needs working capital, so there is a lag between the purchase of raw materials and the inflow of money.
Link to current investor interests
One of the main reasons why no two feasibility plans are the same is that the project should be seen as part of the current portfolio of companies or investors.
Is the project a green land or an extension? Is it more the same? For a large existing company, building a new integrated 10,000 sow project will not pose many capacity or technological issues. The main concern will be how the project relates to the overall structure and market of the company. A new investor will have a completely different perspective because the risks are different.
A reality in which two investors conduct a feasibility study for the same project and get completely different answers can happen. Whether investor A owns or associates with a supermarket chain. He wants pork production to integrate vertically. He knows he can sell the pork because he has the storage space. Investor B grows corn and owns an animal feed plant, which is operating at 50% capacity and is interested in synergies with the grain sector. In such a case, each investor will get a different answer from a feasibility study.
The feasibility study is of great importance and can save a lot of money and future heartache. Producers and entrepreneurs are strongly recommended to make this additional investment at the first step and avoid complications and unnecessary waste of resources and efforts.