Paul V. Dietrich Farms’ Ltd.: Expansion Plan 

In November 2020, Paul Dietrich, a seventh-generation Canadian farmer, was presented with an investment opportunity. A local farmland owner was selling a 150 acre parcel that adjoined some land Dietrich already owned. The current owner wished to sell the property privately and offered the opportunity to bid to only two businesses: Paul V. Dietrich Farms Ltd. (Dietrich Farms) and a local dairy farm. Dietrich knew that the local dairy farm was eager to expand its land base and was aggressive with tits plans to do so. Given that and the recent appreciation in land values, Dietrich estimated that a competitive bid would need to be offered to get the deal. Dietrich wanted to evaluate the attractiveness of this opportunity, considering the long-term financing required for a land purchase as well as short-term financing needs to navigate the seasonal nature of cashflows that came with growing field crops. He new it would be imperative to consider both how this opportunity would be perceived by his bank and how best to present this opportunity to his bank. He also wanted to evaluate whether an investment in tile drainage would be worthwhile should he be successful in purchasing the 150-acre parcel.

You are required to answer:

1.What risks and opportunities does Dietrich face in the field cropping industry?

2.Identify key success factors for this industry. Is Dietrich well-positioned for success?

3.Project Dietrich’s cashflow for 2020-2023 and evaluate the farmland investment decision. Should Dietrich put in a bid?

4.If Dietrich purchases the land, is the investment in the tile drainage worthwhile?

5.How should Dietrich present his proposed plan to bank?

HINTS FOR ANALYSIS:

•Identify all the risks and opportunities of agriculture industry which may affect Dietrich. Also identify key success factors like strengths. You can also carry out SWOT analysis of the business.

•Identify relevant costs and project monthly cashflows. You need to project cash inflows and outflows of the proposed investment.

•Calculate and interpret net present value, internal rate of return, and discounted cash flow.

•Conduct thoughtful sensitivity analysis that reflects an understanding on the industry and business risk profiles – Use ‘what if’ analysis.

•Evaluate a business expansion opportunity from the perspective of a prospective funder i.e. Bank. – Calculate relevant ratios.

Concepts in Practice:

1. Classification of risks:

•Business Risk Vs. Financial Risk

•Market Risk, Credit Risk, Operational Risk

•Leverage and Break-Even Analysis

2. Cost of Capital: Financing cost

3. Capital Budgeting:

•Discounted Cash flow methods of evaluation : NPV and IRR

4. Risk Analysis in Capital Budgeting

•Sensitivity Analysis and Scenario Analysis