Answer the following 3 questions using the information in the given scenario (some information may not be relevant to questions):
1. Should the farmer buy his neighbor’s adjacent land to grow crops? If so, what crop should the farmer grow on the land? Why? Provide a financial analysis to support your discussion.
2. Assume the farmer decided to buy the neighbor’s land. How should he fund the purchase of his neighbor’s land? What are his options? Be specific.
3. When will the farmer break-even if he buys the neighbor’s land?
Scenario:
You are a professional advisor, assisting your client in making strategic business decisions based on your analyses and valuations.Your client is a grain supplier from Manitoba who owns 200 (100% Class A voting common shares, 100 Class B non-voting common shares, 500,000 Redeemable preferred shares) of an incorporated private farm (Muddy Boots Farm Ltd.) that currently grows sunflowers, wheat, barley and flax on 2,650 acres of farmland. Adjacent to the farmer’s farmland is a production facility that sits on 50 acres of land. All land and buildings are fully-owned by your client through inheritance of the farm through generations of the family. The production facility is running at 78% capacity. The production facility is able to convert harvested grain to a sellable product within two days.
During the 2021-2022 growing season, the farmland was allocated at 25% per each of 4 crops: sunflowers, wheat, barley, and flax. Current rate of return is 15%. The farmer currently has $55,000 cash in the bank. The client’s succession plan is to hand-over the company to his/her son in 8 years, while maintaining a percent ownership in the farm to fund his/her retirement annually with $45,000 pre-tax. The farmer’s son is actively involved in the farming operations and is a reasonable choice to run operations after his parent’s retirement.
The neighbor is selling 650 acres of adjacent farmland for $3,200/acre (firm) cash on the transaction date. The neighboring farm’s soil is ready for crops and the soil nutrients are suitable to grow corn or barley. Your client is considering purchasing the land to increase agriculture production.
Your client has been approached by a fellow farmer in the local community who is interested in sharing the production facility for his own harvest, starting next year. If new systems are installed to the production facility to allow for more efficient production, it will cost $250,750 in upgrades. The more efficient systems will result in 8% pre-tax cost savings of grain processed for each year thereafter.
The farmer has legal contractual agreements for the next 4 years with grain distributors to supply the following percentage of annual production: 40% sunflower seeds (at standard mix), 70% wheat, 55% barley, and 40% flax. The remaining crop is sold through the Manitoba Crop Alliance at fair value. Corporate tax is 28%.
See Crop Production Costs:
https://www.gov.mb.ca/agriculture/farm-management/production-economics/pubs/cop-crop-production.pdf
https://www.gov.mb.ca/agriculture/farm-management/production-economics/cost-of-production.html
Crop Outlook:
https://agriculture.canada.ca/sites/default/files/documents/2022-04/canada_outlook_principal_field_crops_2022_04-eng.pdf
https://agriculture.canada.ca/en/sector/crops/reports-statistics
