Capital Improvements
Howard HaldermanDavid Martin
Adam Gore
The Investor
Farmland Investors/Owners
Types of Investors:- Individuals- Corporations- Private Equity Funds- Pension Funds- Other Institutional Investors
Se
pte
mb
er
20
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Investors buy …
» Solid Returns˃ Farmland viewed as a “blue-chip” stock˃ Strong capital value growth (5% CAGR in US)˃ Steady dividend (cash) income (3-4% ROI)˃ Nearly zero vacancy rate
» Inflation hedge˃ Farmland positively correlated to inflation
» Good portfolio diversification˃ Farmland returns negatively correlated to other
investments.
The Key . . .
Execution
The Challenge is Execution:
1) Investment Thesis and Parameters2) Acquisition Strategy3) Management of Assets4) Reporting5) Mark to Market Valuation
The Solution . . .
Execution
Hire the Right Professional(s) Who Will:
1) Develop the Investment Thesis & Parameters2) Develop and Execute Acquisition Strategy3) Manage Your Assets4) Report5) Perform Mark to Market Valuations
Cap Ex . . . Why?
Capital Improvements
What Should an Investor Consider:
1) Value Add Strategies2) Improvement Enhances Value of the Farm3) Improvement Increases Income Potential4) Improvement Reduces Risk5) Improvement Improves IRR while Reducing
Risk
Cap Ex Projects ...
Capital Improvements
What Projects Make Sense:
1) Irrigation (Flood/Land Leveling and Center Pivot)
2) Drainage3) Grain Storage4) Farm Headquarters Enhancements5) Improvements that Add Value to Production
Cap Ex Finance ...
Capital Improvements
Financing:
1) Equity2) Leverage (if cost of debt less than ROI)3) Combination4) Joint Venture with Producer/Partner
Execution ...
Capital Improvements
Project Manager Execution:
1) Research Improvement Need and Thesis2) Develop Investment Recommendation3) Present Plan4) Secure Bids – Recommend Partner5) Oversee Project Development (GC)6) Provide Interim Reports and Final Summary
Data based out of Louisiana.
Adam Gore
Land Leveling
What is it?
» Process for raising or lowering the elevation of certain areas in a field to allow irrigation.˃ Most common form of irrigation method in the Delta.˃ “Zero Grade”
+ field is perfectly level throughout.+ Better suited for rice where a constant flood is preferred.
˃ “Graded”+ 0.1 to 0.2 in. change in elevation every 100 to 200 ft.+ Allows the water to move more quickly to end of the field.+ Improves draining of the field.+ Better suited for corn, soybeans, milo, and cotton.
http://moteslandleveling.com/contact
Equipment
» Size of project determined by yards of dirt per acre.
» Dirt buckets˃ Typically 10-25 yards
» Laser Levels˃ Used to measure elevation of
different places in the field.
Why Do it?
» Increases productivity of the land.» Improves drainage.» Usually leads to higher land rent.» Increases demand of farm, attracting more
quality tenants.» Increase in future land values» Decreases some production risk.
What does it cost?
1 acre= 500 yards leveled Cost per acreFuel ($1.30/ yd at $4/ gal) $ 650 Survey $ 20 Land Preperation for dirt buckets $ 10 Drainage Pipe $ 35 Site Prep, Clearing, and Ditching $ 100 Irrigation Pipeline $ 175 Irrigation Risers $ 25 Irrigation Pumps $ 75 Management Fee $ 25 Total $1,115.00
Cash Rent Return
Dry Land Rent (per ac.) $ 90
Irrigated Rent (per ac.) $ 160
Net Increase $ 70
Annual ROI 6.3%
Crop Share Return
Dry Land Soybeans Irrigated SoybeansYield (bushels per ac.) 30 60
$ per bushel $ 13.00 $ 13.00
Total Revenue $ 390.00 $ 780.00
Owner's Share ($/ac.) $ 97.50 $ 195.00 Annual ROI= 8.74%
Crop Share Return cont’d.
RiceIrrigated Soybeans
Dry Land Soybeans
Yield (bushels/ ac.) 160 60 30$ per bushel $ 6 $ 13 $ 13 Total Revenue $ 936 $ 780 $ 390 Owner's Share ($/ac.) $ 234 $ 195 $ 98
Annual ROI= 3.50% 12.24%
Increase in Land Value
Before Development
After Development
Dry Land FMV $ 1,750 $ 1,750 Total Land Investment $ 1,750 $ 2,865 Cash Rent $ 90 $ 160 Cap Rate 5.14% 5.14%FMV based on Cap Rate $ 1,750 $ 3,111
Value Increase $ 246
Data based out of Central Indiana.
David Martin
Subsurface Drainage
What is it?
» Buried corrugated tubing.» A way to get water off a farm quicker.» Runs at a .2% grade.» Can drain 30- 40 ft on both side of tile,
depending on soil type, depth and width of tile.
Why do it?
» Reduces risk.» Decreases the chance of
losing vital fertilizer.» Increases productivity.» Allows earlier entry.» Increases value of the
farm.» Allows for better micro-
organism activity.
Types of Tiling
Pattern Tile Spot Tile
Pattern Tile
» Evenly drained.» In a year with above
average rainfall, removes water quicker.
» Earlier field entry. » Less compaction
during planting.
Spot Tile
» Lower cost.» Can be installed after
planting or after harvest.
» Quick results if limited on capital expenditures.
Central Indiana
Corn
Pre- Tile Post Tile
Soybeans
Pre- Tile Post Tile
Per Acre Costs (16.5 ac.)
Feet Cost Feet CostLabor 3,380 1.00$ 8,759 0.30$ Tile4" 7,629 0.45$ 5" 2,250 0.67$ 8" 1,130 1.86$ 1,130 1.86$
Total per acre 423.59 494.70
Spot Tile Pattern Tile
Revenue
Pre-Tile Spot Tile Pattern TileCorn Price 5.50$ 5.50$ 5.50$ Yield 180 190 195Revenue 990.00$ 1,045.00$ 1,072.50$
Pattern Tile ROI
Pre-Tile Pattern TileRevenue 990.00$ 1,072.50$ Base Rent 180.00$ 200.00$ Farming Expenses 550 550Total Income 260.00$ 322.50$ Owner's Share (30%) 78.00$ 96.75$ Total Lease Pymnt 258.00$ 296.75$
Increase in Lease 38.75$ ROI 7.83%
Spot Tile ROI
Pre-Tile Spot TileRevenue 990.00$ 1,045.00$ Base Rent 180.00$ 200.00$ Farming Expenses 550 550Total Income 260.00$ 295.00$ Owner's Share (30%) 78.00$ 88.50$ Total Lease Pymnt 258.00$ 288.50$
Increase in Lease 30.50$ ROI 7.20%
Grain Storage Considerations
Grain Storage Advantages
» Avoid selling grain at seasonally low harvest prices
» Quicker transportation of grain from the field to storage facilities
» Allows the grower to harvest grain at higher moisture and condition the grain on the farm without receiving a discount from commercial elevators
» Marketing Flexibility
August
September
October
November
December
January
Febru
ary
Marc
hApril
May
June
July
-20
-15
-10
-5
0
5
10
North Carolina Seasonal Corn Basis
Series1
Basi
s $
/ Bu
shel
*USDA-AMS 99-2010 Creswell, NC
$.20 / bushel basis improvement from October to February. High year of $.50 improvement.
Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul $1.75
$1.80
$1.85
$1.90
$1.95
$2.00
$2.05
$2.10
'98-'07 Monthly Average Corn PriceHarvest Low Price
Month
Corn
Pric
e
$.16 per bushel average seasonal carry in the corn market.
USDA 98-07 Average Monthly Corn Price
Grain Storage Returns
» Storage Investment -- $3.50 / bushel˃ Income Improvement (Basis) – Oct. to March -- $.20 per bushel˃ Income Improvement (Market Carry) -- $.16 per bushel˃ Income Improvement (Commercial Charges) -- $.20 per bushel˃ Operating Cost – Interest --($.15) per bushel˃ Operating Cost – Facility Operation --($.15) per bushel
+Net Return $’s / Bushel --($.26) per bushel
+7.5% Return on Investment
Grain Storage Considerations
» New or Used» New Considerations
˃ Location – proximity to Utilities˃ Improved or 80,000 pound road˃ How to elevate – mobile auger or grain leg˃ Drying system – independent dryer vs. in bin drying˃ Necessary CFM – ¼ to 1 CFM per bushel depending on region and purpose˃ Unloading and loading capacity˃ Cost - $2.50 / bushel to $4.00 / bushel depending on region, crop, and
capacity.
» If Used Storage – Cost, condition, sufficient CFM, size, Location & drying capacity
+ Used cost -- $0 to $2.50 per bushel
Storage Design
Questions?