W23_TRI_ Investment on Poultry Farming

 

1.      Problem recognition, definition and evaluation

The economy of Indonesia has well grown which impacts to Indonesian’s welfare. As a result, food-based business becomes star among general industries. The demand of cow and chicken meat, two main favorite menus for Indonesian, in addition eggs have increased gradually in recent years.

As cow meat is still mostly imported, Government is then encouraging farmers and breeders to farm poultry in villages through partnership program with Local Cooperation to avoid importing chicken or eggs in the future.  The farmers have to provide the cage and manpower for breeding poultry, while Cooperation provides poultry, selling, transportation and its food during breeding. The risk for the farmers is manageable, since they don’t take into account if the poultry die due to diseases or disasters.

Therefore, an economic analysis is required to look at such business opportunity.

2.      Development of the feasible alternative

There are 2 types of farming poultry, i.e. White and Red Poultry.

·         White Poultry: to breed the type of poultry that will be made for the chicken meat. The lifecycle of white farming is only 40 days, plus preparation and cleaning becomes 2 months (6 times / year).

·         Red Poultry: to breed the type of poultry that will be used for eggs-processing purpose. The lifecycle of red farming is 4 months, plus preparation and cleaning becomes 5 months (2 times / year).

In facts, the white poultry has higher risk rather than the red ones, since it has higher probability on poultry death. In addition, the whine poultry has worse smell that being complained by environment and leads to more retribution.

3.      Development of the outcome

The types of cost for building and running the farming are:

·         Investment Cost (initial cost to set up the cage/farming house for about 3 months)

·         Manpower (cost assumed 10% increase / yr)

·         Electrical Power (cost assumed 5% increase / yr)

·         Vaccines, Fogging (cost assumed 5% increase / yr)

·         Local Retribution and Tax (cost assumed 5% increase / yr)

·         Others (cost assumed 5% increase / yr)

Meanwhile, the revenue is from the selling of poultry and its feces (price assumed 5% increase / yr).

4.      Selection of criteria

The most prospective farming, in term of economics, is seen from BEP, IRR and NPV generated from Free Cash Flow (FCF). The discount rate used in analysis refers to WACC (Weighted Average Cost of Capital).

5.      Analysis

The cash flow of each farming type is as follows:

Figure 1. FCF White Farming

 

 Figure 2. FCF Red Farming

Then, WACC is calculated based on the forecasted capital structure (conservative model used Tax 10%).

  WACC = (Portion Equity x Equity Rate) + (Portion Loan x Loan Rate) (1 – Tax)

= (0.4 x 20%) + (0.6 x 13%) (1 – 10%)

= 15%

According to Figure 1, Figure 2 and the calculated discount rate, the economic indicators of each farming type are shown in Table 1.

Table 1. White Farming Indicators

Table 2. Red Farming Indicators

 

6.      Selection of alternative

Based on analysis above, the white poultry is the most interesting investment in this farming.  However, the white poultry also provides higher risk (death, pollution), in which investors/farmers has to take into account. Consequently, an advance analysis needs to be conducted to balance between benefit and its risk.

7.      Performance monitoring and post-evaluation of results

In conclusion, the partnership model of poultry farming is beneficial for investors/farmers. But, the advance analysis is required to balance the benefit of each type of farming and its risk. Furthermore, in order to lower the risk, another business action may be taken, such as acquiring existing poultry farm that has settled and proved in the farming system. Such an acquisition will make the alternative options wider for getting the purpose of optimum investment.

 

References:

·         Bridel, Wes. (2009). Rate of Return: Beyond the Basics. Retrieved from : http://www.kingdomcalling.com/2009/10/14/rate-of-return-beyond-the-basics/

·         How to calculate your Return on Investment. Retrieved from : http://www.fatpitchfinancials.com/392/how-to-calculate-your-return-on-investment/

·         Sullivan, G. William, Wicks, Elin M & Koelling, C. Patrick. (2012). Engineering Economic 15th Edition: Chapter 5 Evaluation a Single Project, pp. 180-208