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Is your expansion feasible?

Dan Little Published on 20 September 2011

Whether you are expanding or simply renovating an existing facility, a detailed feasibility study may save you thousands of dollars and hours of time. However, before getting into the details of the feasibility of a specific project, it is usually quite helpful to conduct a SWOT (strengths, weaknesses, opportunities and threats) analysis on the current production system.

This SWOT should evaluate facilities, financial conditions and management concerns. The findings of the SWOT analysis can then be compared with the expected outcomes of competing projects to determine the priority of projects considered.

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The project under consideration should have a projected positive impact on the findings of the SWOT analysis.

• Strengths and weaknesses – refers to conditions of the facilities, finances or management as they relate to the profitability of the business.

• Opportunities and threats – refers to external business factors and how they impact the business. Examples of external threats would be weather, interest rates, feed costs and milk prices. While it may be difficult to totally control these outside factors, many of these risks can be minimized with proper advanced planning.

A basic feasibility can be broken down into three major areas of analysis: financial, technical and marketing.

Financial
This is the portion that usually comes to mind concerning a new idea or project. First, the scope or size of the project must be determined. This is followed by detailed estimates that include permitting, excavation, building materials, labor, livestock, equipment, electrical, water and other components of the project.

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After all costs are determined, add at least a 15 percent contingency during the planning phase. Additional operational costs should also be added to the total cost to ensure adequate operating capital is available for the project.

Next, a source and use of funds can be summarized and a cash flow projection prepared to determine if you have sufficient equity available to support the construction and start of your project. The cash flow projection will provide you with an estimate of the extent of an operating line of credit that will be necessary to cover costs until the operation is in full production.

It is especially important to project the cow flow and milk production through the first three years of the project, since the milking percentage will drop dramatically 12 to 16 months after startup.

Finally, the cash flow projections must be merged with the initial balance sheet information to project the return on investment or return on equity of the project.

Fundamentally, if the cost to borrow money (interest rate) is greater than the return on investment, you may want to reconsider the project. Startup costs will drive the balance sheet net worth lower in the first year, but the project should start increasing net worth in the second year.

Technical
This aspect of the feasibility study addresses issues such as cow comfort, labor efficiency, ventilation, lighting and building design. It is critical to evaluate the projected space allocations for the dairy to ensure pre-fresh and post-fresh pens have adequate bunk space.

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Ventilation and lighting specifications must be met in all phases of production. Detailed drawings are necessary to evaluate cow flow and people traffic. This is also a good time to re-evaluate feed storage and manure management plans to ensure all environmental regulations are met.

Marketing
This is the most neglected aspect of most dairy feasibility studies. Many dairy producers assume their milk market will always exist and that feed supplies will not change. A complete feasibility study addresses market factors, competition and backup strategies in the event a supplier or processor disappears from the local market.

Market sensitivities are useful tools to evaluate the impact price changes will have on the financial parameters that were projected in the financial phase of the feasibility study. These sensitivities often lead to detailed discussions of contingency plans in the event the project does not move forward as planned.

Happy cows?
It has been my experience that in the instances of properly planned and implemented projects in which the facilities have been well designed, the finances are well structured and when management communicates effectively … the cows do great! PD

Dr. Little is a dairy production and financial management consultant with DairyNet, Inc. in Brookings, SD. Learn more about DairyNet at www.dairynetinc.com or send an email to .

—Excerpts from the DairyNet Pipeline Vol. 4, Issue 35, June 2011

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Dan Little, DVM
DairyNet, Inc.

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