Lone Star Agrisolutions

1. Lone Star Agrisolutions AGEC 489/689 Spring 2008 Consulting for Sleepy B Ranch Cow/Calf Operation

2. Location: Franklin, TX

3. Constituents • Ranch President/CEO - Brad Roberson CONSULTANTS for Lone Star Agrisolutions: • Production Advisor - Brandon Grooms • Cost Efficiency Manager - Casey Munn • Agricultural Economist - Gary Coke • Business Analyst - Maria Afonso • Financial Analyst - Luke Funderburg

4. Sleepy B Ranch • Commercial Brangus Cattle • Cow/Calf Ranch • Cows wean one calf per year (usually) • Calves sold between 600 & 700 pounds • Calves sold through a Private Contract to Stocker Operations

5. Start-Up Assumptions • 200 Bred Heifers purchased for Brood Cows • 5 Bulls purchased • 90% Calf Crop of 180 per year • 1,500 acres of land owned • All machinery owned • $50,000 Beginning Cash Balance

6. Start-Up Costs • 200 Bred Heifers – $802/ Cow, $160,400/ Total • 5 Bulls - $1,800/ Bull, $9,000/ Total • Total Start-Up Cost - $169,400 • Requesting a Loan for 80% of Start-Up Costs: $135,520

7. Yearly Expenditures • Direct Materials - $297/ calf, $53,556/ year • Hay • Range Cubes • Creep Feed • Salt and Meal • Mineral • Textured Sweet Feed • 8 Way Vaccination • Vibrio/ Lepto Vaccination

8. Yearly Expenditures • Fixed Overhead- $2,023/ Year • LA 200 • Penicillin • Equipment Maintenance • Miscellaneous • Depreciation - $4,967/ Year • (Heifer & Bull purchase price – Cull Cow & Bull sale price)/ 7 years • Disbursements for Overhead --$2,943/ Year • Overhead Cost – Depreciation = Disbursements for Overhead

9. Yearly Expenditures • Direct Labor- $922/ Year • Owner feeds/maintains cattle; Hired Labor only for working cattle bi-annually, fixing the fence, etc. • Administrative Costs- $2,825/ Year • Insurance - $1,025/ Year ($5.00/ Head) • Property Taxes - $1,800/ Year ($1.80/ Ac)

10. Total Yearly Expenditures • Total YearlyExpenditures = $55,040/ Year • Direct Materials + Disbursements for Overhead + Direct Labor + Administrative Costs = $55,040 • $55,040 / 180 Calves = $306/ Calf

11. Historical & Forecasted Sale Price Begin Forecasted Prices

12. Economic Assumptions • Condition of the Economy: • Input costs increase yearly due to inflation and increase in demand for feed. • Forecasted Calf prices drop in 2010 and 2012 • U.S. economy is in a recession • Credit crunch makes it harder to obtain loans and find investors

13. Baseline Scenario • Assumptions: • Variable costs and fixed overhead increase 3% per year. • Straight-line depreciation used. • Administrative Costs are the same every year. • Forecasted sale price changes yearly.

14. Shock Scenario • Assumptions: • 10% drop in prices • Selling 170 calves instead of 180 • Direct Materials and Fixed Overhead costs increase 9.5% per year • Condition of the Economy Worsens: • Input costs increase from 3% to 9.5% due to inflation and increase in demand for feed. • U.S. economy in a greater recession

15. Choosing the Required Rate of Return 1) Rfree rate from federalreserve.gov -- current rate for a 5-yr treasury bond 2) Business risk for the cattle industry is huge – the CV for calf prices is .13 3) Since our loan dwindles significantly after the first 3 years, we took our financial risk down to ~1% in the 4th/ 5th year 4) Realistic required rate of return measures between 20-25%.

16. Table of NPV/Net Cash Flows for Baseline and Shock

17. Ratios – Financial Analysis Minimum

18. Ratios – Financial Analysis Maximum

19. Ratios – Financial Analysis Should be Positive

20. Ratios – Financial Analysis The Lower the Better

21. Ratios – Financial Analysis Minimum

22. Sleepy B Ranch • Conclusion • Ratios steadily improving • Average NPV Positive • Operation is feasible even in shock scenario (shock scenario is rather extreme)

23. Lone Star Agrisolutions for Sleepy B Ranch Questions?