The importance of a feasibility study for poultry projects
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 financing, but it is important to do so anyway even if the financing is guaranteed (such as a government guaranteed project).
The main objective is to find the go-no go factors that could 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 an appropriately sized plot
- Routes and transport to major markets
- Environmental and animal welfare regulations
- Regulatory factors for vaccines and drugs
- Possibility of repatriating profits
Critical factors must be resolved first, 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 for the project.
Why should you do a feasibility study at the start of a poultry or breeding project?
The feasibility study takes a dream or an idea and analyzes whether it is possible to make it happen. Most business ideas don’t come to fruition, and many that start up end in the first year. A lot of time and effort can be wasted trying to implement an idea that is flawed. Worse yet, a lot of capital can be invested in a project that has to close because it is impractical.
Here are some examples of what can go wrong:
- Inexpensive frozen chicken 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 cost?
- Is there a local supply of quality hatching eggs? If not, can eggs be imported reliably (the problem is regulatory and logistical).
The feasibility study aims to test the initiative. It must be done in a neutral way. We all like to think our intuition is perfect, but it needs to be tested against the harsh anvil of facts.
In the long run, an investment in a quality feasibility study is very rewarding. If the outcome is positive then you will have a solid foundation on which to move forward. The feasibility study can be followed by a complete business plan, which will be the project roadmap.
If for some reason the result is negative, this is also very valuable information. Knowing in advance if a project is at risk of failure is better than investing time, effort, reputation, and money in a flawed project.
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 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 urgent and the fact that a certain plan was not viable five years ago does not mean that it is not viable now or that it could be 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, eg a feasibility study to verify an integrated poultry project in Ethiopia of 12,000 tonnes per year. The study might indicate that the scope should include a hatchery or breeding farms (due to the lack of local alternatives), but will not decide whether you should grow chicken or avocados.
- It does not have to 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 be the market 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 egg market in Europe is rapidly moving towards cage-free. Most investors realize that they should avoid caged eggs, but don’t fully understand the difference between alternatives, such as barn, aviary, outdoors, and organic. The plan should assess how consumers will behave in the future and how future regulations will be formulated. The decision could be critical for the future of the project. So, for example, if the barns are placed too close to each other, there will be no room to roam free.
If the market is well established, such as the US broiler market, there is a lot of data and it is relatively easy to assess market trends (although no one can predict future disruptions).
If the market is new or small, then the mission becomes much more difficult. The low production and consumption of poultry may be due to the fact that there is little production, but may also be the result of limited demand or a preference for pork.
If the size of the project is too large for the local market, then you need to consider the effect that the new production will have on the market price. A classic mistake that I have witnessed: the price of quail eggs in a certain market was very high, so a farmer built a project of 40,000 eggs per day. He did not consider that before starting, the market was balanced with a production of 2,000 eggs per day for specialty restaurants, among others. Once it flooded the market, the price fell to near zero.
Another consideration is how the competitors will react. For example, if a large company dominates a meat import 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 in one go?
- Capital – for all buildings, land and equipment needed to set up the project
- Availability of raw materials – chicks, feed (unless grown under the project), electricity, water, vaccines, etc.
- Labor and professional skills requirements. Visa regulations for importing workers (skilled or unskilled)
- Regulations – construction, environment, land ownership, import and corporate taxes, foreign currency restrictions, etc.
The model needs to be challenged and stress tested using WCGW analysis (which can go wrong). 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 the capital, costs, running costs and fixed costs, and compare them to the estimated revenues.
The key clues will be return on investment (ROI) and net present value (NPV), or payback time. Sensitivity analysis should be performed, eg price of product (chicken eggs), adequacy of indices. Even if the NPV is good, you need to calculate whether a small price reduction will cause the NPV to drop sharply.
Two important points that are often overlooked at this stage:
- Minimum starting size – you may not want to undertake the whole project in one go, but develop 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 you 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. You still need a slaughterhouse and a flour mill, both of which are volume sensitive; the economy of scale is lost and this will increase the price of the product and your ability to compete. 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 complete business plan, but you should already make sure at this stage 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 money coming in.
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 the company or investor.
Is the project a green land or an extension? Is it more the same? For a large existing company, building a new integrated 24,000 tonne project will not pose many capacity or technological issues. Most of the concerns will be focused on how the project relates to the overall structure and market of the business. A new investor will have a completely different perspective because the risks are different.
Two investors can conduct a feasibility study for the same project and get completely different answers. If Investor A owns or is related to a supermarket chain, he wants egg production to be vertically integrated. He knows he can sell the eggs because he has the storage space. Investor B grows corn and owns a feed mill that 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.
A 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 to avoid complications and unnecessary waste of resources and efforts.