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The importance of a feasibility study for swine projects

A feasibility study is a vital tool to establish the viability of livestock project. This should be the basis to inform the go-no go decision. In addition, it will indicate the main processes and challenges in the implementation.

22 June 2021, at 9:00am

The financial indicators are of high importance, but there are other factors to consider as well. A feasibility study may be a requirement to raise bank, non-bank or equity finance, but is important to do, even if finance is guaranteed (a government guaranteed project).

The main aim is to find the go-no go factors that could prevent the project from being successful or maximizing its potential.

Here some examples of critical factors:

  • Cost and reliability of electric and water supply
  • Availability of land of suitable size
  • Roads and transportation to main markets
  • Environmental and animal welfare regulations
  • Regulatory factors regarding vaccines and medicines
  • Possibility of repatriating profits

The critical factors must be solved first – otherwise there is no point in continuing (no go) eg if there is no way of repatriating profits, no international investor will show interest in the project.

Why should we do a feasibility study at the start of a livestock project?

The feasibility study takes a dream, or an idea, and checks if it is possible to implement. Most business ideas do not reach fruition and of those that start, many close within the first year. A great deal of time and effort can be wasted trying to implement an idea that is flawed. Much worst, much capital can be invested in a project that closes as it is impractical.

Here are several examples of what can go wrong:

  • There might be cheap frozen pork being imported at dumping prices. In this case the question is, will local consumers be prepared to pay for fresh local product at higher cost? Dumping of cheap chicken will also reduce demand for pork.
  • Is there breeding stock of good quality available locally? If not what are the regulations about importing frozen semen. The quality of the breeding stock Is key performance factor. The feasibility study should be based on what will be available for project and not international guidelines.

The feasibility study aims to test the initiative. It should be done neutrally. We all like to think our intuition is perfect, but this has to be tested against the hard anvil of facts.

In the long run, an investment in a quality feasibility is very rewarding. If the result is positive, then you will have firm foundation to move forward. The feasibility study may be followed up by a full business plan. which will be the road map for the project.

If for some reason, the result is negative, then this is also very valuable information. It is better to know in advance, if a project might 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 full business plan and the result might indicate that the project can return its investment in a short time. At this stage, it is really of no importance if this will take three or five and half years. The order of magnitude is what is important. Assuming this is an acceptable return, it is worth investing in full business plan.

What a feasibility study isn’t

  • It isn’t an academic study. It should be very focused. The study is time sensitive and the fact that a certain plan wasn’t viable five years ago, does not mean it isn’t viable now or it in the future.
  • It should not define the scope or basic ideas of the project. The basic concept to be tested must be well defined, eg, a feasibility study to check an integrated pork project in Zambia with 2,000 sows. The study might indicate that the scope has to include a feed mill (due to lack of local alternative), but won’t decide if you should grow pork or goats or avocados.
  • It should NOT be a template. It is true there are many standard templates on the internet that offer to do a feasibility study for $100. The feasibility study needs to be designed for the specific needs of the customer based on local conditions. No template can do that.

What is in the Feasibility Study?

Market and need analysis

  • What will be the market for the product?
  • What amount can be sold at what price?
  • How is the marketed segmented?
  • Which segment is best to attack?

Example – The current market for pork In Europe is shifting rapidly towards meat grown using farrowing systems where the sow is free to move around. The plan needs to assess how will consumers behave in the future and how will future regulation develop. The decision might be critical to the project’s future. So, if the barns are designed to cramped they may not be adaptable to future regulation.

If the market is established market, such as the American pork market, there is plenty of data and it is relatively easy to assess market trends (though we can’t predict future disruptions).

If market is a new or small one, then the assignment much harder. The fact, that pork production and consumption is low, might be because there is no production, but might also be the result of limited demand, or preference for poultry.

If the project’s size is too large, compared to the local market, then we have to consider what effect new production will have on market price. A classic mistake I witnessed from a related industry - the price of quail eggs in a certain market was very high, so a farmer built a 40,000 egg a day project. He did not consider that before he began the market was balanced at production of 2,000 eggs a day for specialty restaurants etc. Once he flooded the market, the price dropped to close to zero.

Another consideration is how competitors will react. So, for example, if a large company is dominating a market brining in imported meat, it has the option of dropping its prices to preserve its market domination.

Process analysis

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 once?
  • Capital - all the buildings, land, and equipment needed to establish the project.
  • Raw materials availability- piglets, feed (unless grown as part of the project), electricity, water, vaccines etc.
  • Labour and professional skill requirements. Visa regulations to import worker (skilled or not)
  • Regulation – building- environmental, land ownership, import and company taxes, foreign currency restrictions etc.

The model needs to be challenged and stress tested using WCGW (What can go wrong) analysis. This is the time to identify possible hurdles and see if they can be solved.

Financial analysis

The financial analysis at this stage should focus on the key indicators of success.

There is a need to analyses capital, costs, running and fixed costs and compare with estimated revenue.

The key indices will be ROI , and NPV or time to return investment. Some sensitivity analysis should be done eg price of product (pork), how well founded the indices are. Even if NPV is good, you need to calculate weather a small reduction in price will cause big fall in NPV.

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 to do it in modular fashion. This can be the result of considerations of capital investment, land availability, developing the market or building up capabilities and skills. Clearly, if we can invest a quarter of the capital for a quarter of the production this might reduce risk (pilot project). The problem is that often the quarter size is too small to be profitable. We still need a slaughterhouse and feed mill, which both are volume sensitive. We lose economies of scale and this will increase the product’s price and our ability to compete. While a full-scale project might be successful, a smaller scale might be doomed to failure.
  • Cash Flow - a full cash flow analysis is in the realm of the full business plan, but we need already at this stage assure that the financing will cover the expected cash flow. Each livestock business requires working capital, so there is a lag between purchasing raw materials and the incoming cash.

Linking to investors current interests

One key reason why no two feasibility plans are the same, is that the project has to be considered as part of the companies or investors current portfolio.

Is the project green field or an expansion? Is it more of the same? For a large existing company, building a new 10,000-sow integrated project will not cause many capability or technological challenges. Most of the concern will be how the project links with the company's overall structure and market. A new investor will have a completely different perspective as the risks are different.

A reality in which two investors conduct a feasibility study for the same project and get completely different answers may happen. If investor A owns, or is aligned to, a chain of supermarkets. He wants the pork production to vertically integrate. He knows he can sell the pork because he owns the shelf space. Investor B grows corn and has feed mill, which is operating at 50% capacity and he is interested in synergies with grain business. In such a case each investor will get a different answer from a feasibility study.

Feasibility study is of high importance and can save a lot of money and future grief. It is highly recommended to growers and entrepreneurs to make this extra investment at the first stage and avoid complications and unnecessary waste of resources and efforts.