Impact Of Covid-19 On Canada's Agriculture Assignment

Assignment Task

Valuation is an important topic area for both accountants and financial specialists to understand.

As you will see, corporate valuation is part science and part educated guesswork. Since nobody knows what the future will bring, it is impossible to value cash flows that stretch out to infinity with a high degree of precision. Regardless, the attempt to understand the drivers of value is of great importance.

To make this a more meaningful assignment, the scenario presented is based on current real-world events.

The agriculture industry in Canada has been impacted by the COVID-19 pandemic. Due to the health guidelines issued by the Government of Canada, more people are choosing to stay at home. As a result, many people have turned to backyard birdfeeders for enjoyment which has unexpectedly increased demand for sunflower seeds 10-15% this year. Canadian farmers have needed to adapt to this change in consumer demand. Crops have grown and prices have increased. Sunflower seeds have increased in price from $0.25/lb to as much as $0.40/lb (range: $0.10/lb-$0.15/lb increase).

In 2020, Canada was poised to see its largest sunflower crop in years if environmental conditions cooperated. Sunflower crops increased to 365 km2 in 2020 from 200-245 km2 in previous years. Farmers were being asked to increase sunflower yields 10% (or slightly more) in 2021 to meet the increase in demand. According to Statistics Canada, Canadian farmers intended to seed 104,400 acres of sunflowers in Spring 2021, which would be up 36% over 2020 and represent the largest acreage base for the crop in a decade.

The Manitoba Crop Alliance, an amalgamation of 5 provincial commodity associations, became operational August 1, 2020. Mandatory check-off amounts from the sales of sunflowers, wheat, barley, corn, and flax remained the same post-merger.

The majority of Canadian sunflower crops are found in Manitoba. Farmers produce sunflowers primarily for domestic end-users. Historically, sunflowers have been produced for confectionary  (80% roasted snack seeds, 1?king with shell, 3?king without shell), birdfeed (4%; a smaller variety of seed), vegetable oils (8%) and animal consumption (4%). Canadians produced 63Kt of sunflower seeds for the 2019-2020 growing season. Per unit prices are forecast to be higher in the 2021-2022 and 2022-2023 growing seasons, while yield is forecast to decline.

For this assignment, you will be taking the role of a professional advisor, assisting your client in making a strategic business decision based on the results of your valuation. It is now 2022. Your client is a grain supplier from Manitoba who owns 100% (100 Class A voting common shares, 100 Class B non-voting common shares, 1,000,000 Redeemable preferred shares) of an incorporated private farm (Sunny Days Farm Ltd.) that grows sunflowers, wheat, barley and flax on 2,400 acres of farmland. Adjacent to the farmer’s farmland is a production facility that sits on 20 acres of land. All land and buildings are fully-owned through inheritance of the farm through generations of the family. The production facility is running at 70?pacity.

The production facility is able to convert harvested grain to a sellable product within a day. During the 2020-2021 growing season, the farmland was allocated at 25% per each of 4 crops: sunflowers, wheat, barley, and flax. Current rate of return is 12%. The farmer currently has $120,000 cash in the bank. The client’s succession plan is to hand over the company to his/her son in 5 years while maintaining a percent ownership in the farm to fund his/her retirement annually with $40,000 pre-tax. The farmer’s son is actively involved in the farming operations and is a reasonable choice to run operations after her parent’s retirement.

The neighbour is selling 500 acres of adjacent farmland for $2,800/acre (firm) cash on the transaction date. The neighbouring farm’s soil is ready for crops and the soil nutrients are suitable to grow wheat or flax. Your client is considering purchasing the land to increase production of sunflowers for birdseed.

Your client has been approached by a fellow farmer in the local community who is interested in sharing the production facility for his own harvest, starting next year. If new systems are installed to the production facility to allow for more efficient production, it will cost $200,000 in upgrades. The more efficient systems will result in 11% pre-tax cost savings of grain processed for each year thereafter.

The farmer has legal contractual agreements for the next 3 years with grain distributors to supply the following percentage of annual production: 80% sunflower seeds (at standard mix), 60% wheat, 55?rley, and 30% flax. The remaining crop is sold through the Manitoba Crop Alliance at fair value. Corporate tax is 21%.

Neighbour's Land

1. Should the farmer buy his neighbour’s adjacent land to grow crops? If so, what crop should the farmer grow on the land? Why?
2. Assume the farmer decided to buy the neighbour’s land. How should he fund the purchase of his neighbour’s land? What are his options? Be specific.
3. When will the farmer break even if he buys the neighbour’s land?

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