Agricultural Finance And Risk Management - Drought Hedged Case Study - Management Assignment Help

Assignment Task

AGRICULTURAL FINANCE AND RISK MANAGEMENT – MAJOR ASSIGNMENT
1. Why is Climate Change a threat to global food security and what are the ways stakeholders are managing the situation? – 25 marks
(700 words with 5 references. At least 2 academic journals)

2. What are the tenets of Australian Drought Policy and what are the ways the Australian farmers and governments are managing the risks? – 15 marks
(300 words with 3 references. At least 1 academic journals)

3. Crystal Investments is currently engaged in the planting of wheat with irrigation facilities in place. It is expected that they will harvest 3 tonnes per hectare of wheat over an area of 2000 hectares. Variable expenses are $50 per hectare and all other expenses estimated to be $300,000. The price of wheat was estimated to be $300 per tonne. The appropriate cost of capital is 5.0%. An initial capital outlay of $4,000,000 was expected for the project with a working capital of $100,000 to be refunded at the end of the project horizon which is five years from now. The capital outlay includes irrigation infrastructures for the farm and an additional plot of land to the company’s land portfolio. The five year investment horizon was set because management expects that interest rate will be low for the next five years given the RBA cash rate of 25 basis points due to the COVID pandemic. 

You were saddled with the responsibility of evaluating the project under two scenarios. The first scenario is a no drought no hedging scenario while the second is a drought with hedging scenario. 

Scenario 1: No drought no hedging

3.1.1 Using the Net Present Value and Internal Rate of Return, should this project be accepted? (10 marks)
3.1.2 If the cost of capital changes by 2% (plus or minus) should Crystal go ahead with the project? (5 marks)
Scenario 2: Drought Hedged
It was assumed that if there is a drought, the volume of water will increase variable costs by $50,000 each year. Although, prices were expected to increase due to shortage of supplies due to drought, an offsetting effect could ensue because of possible increased productions from other countries and the stock of wheat available globally. Consequently, management has decided to buy wheat options to compensate the farm for any possible shortfall in prices over the project life. The premium per tonne of wheat is estimated to be $15 per tonne.  

3.2.1 Which type of options would you recommend? (5 marks)
3.2.2 The Strike Price of the options purchased is set at $270 per tonne ($30 below the current floating reference price of $300). Calculate the NPV and IRR if wheat price is $250 per tonne. (5 marks)
3.2.3 What will these values (NPV and IRR) be if wheat price is $320? (5 marks)
3.2.4 Calculate the NPV and IRR if the contracts are at the money. (5 marks)
3.2.5 What would you recommend based on these analyses (5 marks)

4 Video presentation with PowerPoint – 10 marks

5 Written presentation with graphs and tables explaining the results using NPV and IRR under changes in cost of capital and the hedging conditions stated above (300 words). – 10 marks

Note: 
Your video presentation needs to have at least two people in attendance. These two people will represent the management team of Crystal Investments. They will pose two questions to you. The first person asks you why you reckon that agriculture is a good sector to invest in given the climate change and food security issues. You are expected to respond to this question with the knowledge of climate change and food security. In essence, justify your consideration of the sector with the recent trends in global demand for food from your one-thousand word report in Section 1 of the major assignment.
The second person will ask you about your knowledge of Australian agricultural finance and risk management. In particular, he/she is interested in what you think about the tenets of Australian Drought Policy and your understanding of agricultural risk management in Australia.
Hints:
Make it clear to the team that you have submitted a written report on the project to the finance team. Your project appraisal using the results from capital budgeting should be presented in the first fifteen minutes of the 30-minutes presentation using not more than ten PowerPoint slides containing some graphs of your results of NPV and/or IRR under the different scenarios. The first question should be posed and answered in about seven minutes to show case your knowledge of climate change and global food security. The second question should be posed and answered in five minutes and you need to show case your knowledge of Australian Drought Policy and agricultural risk management. The last three minutes could be spent at your discretion. Your report and presentation need to feature the response of the RBA to COVID pandemic and how these relate to the issues at stake.
 

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