Land is the most fundamental asset for any agribusiness.
You can do nothing without it.
It accommodates the entire enterprise. Through it, you play host to livestock and/or crops.
But land is anything but homogenous. It varies wildly.
Neither is the particular demand for land identical from farm to farm.
Even within niches, like poultry (for example), the need for certain types of land features is very different.
Demand for land depends on:
- Scale of production
- Logistical connectivity
- Amenity etc.
Land also underpins the long term nature of your agribusiness investment.
Once planted, to uproot your venture before harvest would be to forfeit a whole season (cycle) of productivity and gain.
What a loss!
Making the right call on where to site your farm is key.
- Do you have a secure arrangement with a landlord?
- Are there planning covenants preventing your future expansion?
- Will you incur the opposition of neighbours due to pollution (noise, air, water etc.)?
Also, when it comes to land investment…
…the BIG question often is can you afford it?
The next question after this is, will it be worth it in the long run?
The first place to look is at what is already in your hand.
…you may have a vision which is MUCH bigger than what your current dwelling could host in the near time…
But there is great virtue in starting small and growing slow.
Here’s what I mean:
Take this scenario…
Say you have the vision to own a 1,000 broiler poultry farm.
With an approximate floor space requirement per bird of 1sq.ft. (at 1,750g in weight),
You calculate the broiler house to be 1,000 sq.ft. (1/40th of an acre) minimum.
You hope to double this capacity (2,000 broilers) not before too long though.
When you add room for storage, an incinerator, civil buildings, feed and water silos, parking etc.
You figure you might need even ⅓ acre to give room for growth up to about 4,000 broilers within 6 years.
You live on a small residential property with about 200 sq.ft. of spare land.
Nowhere near big enough for your 6-year plans – but big enough for 100 broilers or so.
The question is…
[A]…should you search for a larger property and take a long term loan/mortgage?
[B]…or start small?
This is where benefit-cost analysis comes into it.
Many would advise you in this position to get a loan (so long as you are in the position to pay it back).
In the minds of many, a bigger farm = bigger profit.
Is this true?
Let’s take a look…
A benefit-cost analysis is the professional tool of choice for estimating if a long term project is worth the investment, or not.
- It helps you decide if your money would be better spent elsewhere.
- Bank managers and lenders use it.
- It indicates confidence in a particular business case/proposal.
If it’s good enough for the pros, why not measure your plan by the same yardstick?
With the kind of trade-off above…
i.e. 1000 broiler farm with a mortgage vs. 100 broiler farm without finance…
…you want to see on paper if the plan you have is actually feasible.
This is where a benefit-cost analysis becomes handy…it’s just so simple to read.
Once you’ve plugged in your input numbers, it gives you back a number.
If the resulting number from the analysis is below ‘1’ – then your plan seems to be unfavourable on paper. Your money would be better spent on an equivalent consumer investment product, like a savings account.
If the resulting number is above ‘1’ – it seems your idea could work out the better option.
A result equal to ‘1’ – is breakeven. Nothing gained & nothing lost.
Will the land acquisition become an asset or a liability?
Either way, there are always operational expenses and overheads…
But when you throw the price of land on top,
…does the business still theoretically work out?
Let’s take a look at some detail…
You project the investment of setting-up the farm over 6 years
In other words, you aim to have the farm pay you back with profit within this timescale.
You line up a head-to-head comparison on paper of the decision to buy, to rent or to stick…
Using the benefit-cost analysis you prepare your numbers:
[A] Scenario 1: Buy
The capital expense to buy land is considerable.
But once acquired, affordably – it offers peace of mind and sovereignty that a tenant doesn’t enjoy.
Just imagine if your 6-year plans of growth were cut short by a terminated tenancy agreement…
You decide to write out a plan to see what buying might look like, financially:
You find a price per sq. ft. for agricultural land
And also, you find the conversion ratio between sq.ft. to acres to help in your estimation (~ 1sq. Ft. = 0.00003 acres)
You figure, to accommodate your growth plans you’d need about 0.15 acres (inc. ancillary buildings, plus space for storage, incinerators, road parking etc.).
On the market, there are several plots, many with water & power plugged in.
You factor in the cost of poultry sheds. For the first 3 years, you expect to hold your 1,000 bird flock size – without increasing.
After that, you aim to grow at +1,000 per year, once the demand is sure.
This would give you an eventual building cost for the construction of around 4,000 sq.ft. of poultry housing.
You add equipment costs for brooding, wiring, feeder, drinkers, storage, incinerators etc.
Next, your operational costs, particularly chicks and feed:
In a 52 week year, you expect to turn around about 6 batches.
This would mean your cost of goods sold in a year would amount to 6,000 chicks (at locally available prices).
You estimate your target marketable live weight of bird to be 2kg.
From your research, a feed conversion ratio of 2.3 would mean each bird in each batch would require just under 5kg (4.6kg) of feed to reach the target.
This means your annual feed requirement (for a batch size of 1,000) will be about 29,900kg
When you research local broiler meat prices per kg…
…you now have all you need to run your first benefit-cost analysis for your proposed project.
With all price estimates sourced and calculated, my benefit-cost ratio to buy land for a 1,000 broiler was 1.11…
Meaning on top of what the cost of the endeavour is, you would make an additional 11%.
[B] Scenario 2: Rent
The rent option would be the same again as above, but minus the cost of land purchase (instead, adding the equivalent cost of a rented plot).
The new benefit-cost ratio, when calculated was 1.38
38% return above inflation.
More than 300% times the benefit of land purchase.
…there are caveats (considerations):
#1 when you rent, you forego any potential capital gains on the increasing value of your asset.
#2 when wanting to build improvements onsite, tenants need landlord permission (this may not be granted)
#3 lease arrangements can be dissolved
The security you get from owning an asset rather than leasing can sometimes be worth the reduced profit.
[C] Scenario 3: Stick
The third option was setting up a modest 100 broiler operation from your own smallholding.
According to a far more streamlined entry point, the benefit-cost ratio is estimated to be 1.41.
This is the most rewarding option yet (by the proportion of amount invested).
…the overall earnings are smaller, but the percentage financial yield is over 40% above inflation.
Sanity vs. vanity.
What are the advantages of starting small and growing affordable?
Make your mistakes with lesser consequence.
Learn ‘the ropes’ at a humble level.
Earn and save to buy bigger -without debt!
And now, over to you:
Are you caught in indecision over planning your broiler farm land commitments?
Or, have you already invested and are considering expansion?
Either way, write me back and let me know.
I read every comment.