1 Investment Opportunity in Poultry in the Valley of the São Francisco and Parnaíba Rivers INTEGRATED SUSTAINABLE BUSINESS PROJECT

1 www.codevasf.gov.br

Investment Opportunity in Poultry in the Valley of the São Francisco and Parnaíba

Rivers

INTEGRATED SUSTAINABLE BUSINESS PROJECT


Project Team

PRESIDENT OF THE REPUBLIC MINISTER OF NATIONAL INTEGRATIONLuiz Inácio Lula da Silva Geddel Vieira Lima

CODEVASF DIRECTORY

President: Orlando Cezar da Costa Castro

Cabinet Chief: Manoel Geraldo Dayrell

Director of the area of Integrated Development and Infra-Structure: Clementino Souza Coelho

Executive Secretary: José Eduardo Borella

Director of the area of Irrigation Companies Management: Raimundo Deusdará Filho

Executive Secretary: Frederico Calazans Machado

Director of the Area of Hydrografic Basins Revitalization: Jonas Paulo de Oliveira Neres

Executive Secretary: Silas Macedo

Executive Manager of Strategic Administration: Alexandre Isaac Freire

Executive Secretary of Administrative Management and Logistic Support: João Honório Carvalho Ramos


Agenda

• Introduction

• Business Model

• Profitability Analysis

• Irrigation Projects (CODEVASF)


INTRODUCTION

• Project DescriptionThis project is a governmental initiative, aiming to attract investments to the Valley of the São Francisco and Parnaíba Rivers (Web page: http://www.fundace.org.br/pins).

• PENSAAgribusiness Intelligence Center. PENSA researchers are responsible for the business models proposition, economic and marketing analysis and for the interaction with potential investors tailoring the analysis to their particular needs (Web page: http://www.pensa.org.br).

• CODEVASFSão Francisco and Parnaíba Develoment Company, which the mission is to develop economically and socially the Valley of the São Francisco and Parnaíba Rivers (Web page : http://www.codevasf.gov.br).


Poultry: An Opportunity

• Brazil is the third largest producing country and the first exporting country of poultry in the world.

• According to ABEF (Brazilian Poultry Exporter Association), there was an increase in Brazilian exports of 35% from 2004 to 2005.

• Poultry strengthen small holder production. It is a non- seasonal activity that generates wealth for the grower.

• Poultry industry generates surpluses for the country. It demands high quantities of grain and corn.


Poultry at the Valley of the São Francisco River

• Water available for implementing the poultry houses, slaughterhouses and all the

needed infra structure;

• The Brazilian Northeast state capitals are equally distant from the target production

area (West of Bahia State);

• Grain supply is located in the region;

• Good quality water available;

• Energy available;

• Qualified labor available;

• Contaminants absence on the surroundings;

• Good road conditions for shipping to all over the Brazilian Northeastern and Center-

West.


Business Model

Sourcing Strategies:

1.Vertically Integrated Production

2.Contracted Poultry Raisers (quasi-integration)

Vertically Integrated Poultryhouse

Contracted Poultry Raisers

Contracted Poultry Raisers

Processing PlantProcessing Plant

RetailersRetailers

WholesalersWholesalers

Food Service

CONSUMER


Inputs ProcessingPlant

Distribution Channels

Regional Consumer

National Consumer

Suppliers•Chicks

• Feeding • Vet Products

Poultry raisers(20.000 poultries /

Cycle)

Anchor Firm(21.000 poultry /day)

• Chicken •Production of poultry

food

Contract for buying the poultry

Contracts for delivering the poultry

Financing Organizations(Banks)

Coordinating Agents (CODEVASF; AIBA)

PENSA

Poultry Production

Input delivery guaranteed

Contract for buying input

Contract for feeding the poultry


Implementation of Poultry Houses

Year 0 Year 1 Year 2 Year 3 Year 46 6 10 12 14

Total 6 12 22 34 48

Number of Poultry Houses


Poultry Plant Processing Capacity

• One-day chicks – to supply the contracted poultry raiser: $0.44/chicken; $0.44/chicken; • Poultry Food – to supply the poultry raiser: $2.03/chicken;$2.03/chicken; Vet products – to supply the poultry raiser: $0.02/chicken;$0.02/chicken;• Chicken – bought from the poultry raiser: $0.35/chicken;$0.35/chicken;

Processing Plan Processing Plan

Poultry raiserPoultry raiser

• Manure: $0.05/chicken;$0.05/chicken; 27% cost 27% cost

Other costs27%

Poultry Food

52%

chicks11%

Vet Products

1%

Purchased Chicken from the poultry raiser

9%


Corn Demand and Land Availability

• Assumptions:– 1 poultry house demands

411,000 kg of corn/year.– 1 ha of corn yields 3,600 kg

per year.

• Conclusions:– 1 poultry house demands

an annual production of 115 ha of corn.

– The proposed model is composed of 48 poultry houses that will demand corn out of 5,520 ha yearly.

~1ha

1 poultry house = 1 ha

1 poultry house demands 115 ha of corn

48 = 5,520 ha of corn


Quasi-Integration Assumptions

• Needed area for building the poultry houses: 9,612m²;

• Warehouse dimensions: 11.4m x 147m = 1,676m²;

• Poultry house capacity : 20,000 chickens;

• Density : 12 chickens/m²;

• Average mortality: 4%;

• Number of poultry raisers: 48;


Quasi-Integrated Production

Year

Profit per Producing Unit

(with one family member) (with two family members)

1 17,031.07 21,971.07

2 19,125.86 24,065.86

3 20,032.55 24,972.55

4 20,817.13 25,757.13

5 21,492.40 26,432.40

6 22,069.92 27,009.92

7 22,560.11 27,500.11

8 22,972.37 27,912.37

9 23,315.17 28,255.17

10 23,596.14 28,536.14

11 23,561.34 28,501.34

12 23,103.31 28,043,31

13 22,665.62 27,605.62

14 22,251.80 27,191.80

15 21,860.55 26,800.55

16 21,490.64 26,430.64

17 21,140.91 26,080.91

18 20,810.25 25,750.25

19 20,497.63 25,437.63

20 20,202.06 25,142.06

Annual Annual AverageAverage 21,529.8421,529.84 26,469.8426,469.84

The family profit is generated from:

a) Selling chicken to the processing plant;

b) Selling the manure for agricultural fertilizing;

c) Number of family members who work in the poultry house;

Regarding (c), family may employ one or two family members:

1. own farmer plus a hired assistent (with one family member);

2. own farmer plus a family member (with two family member);

* All calculations in the proposed business model considered the use of one family member.

The family profit is generated from:

a) Selling chicken to the processing plant;

b) Selling the manure for agricultural fertilizing;

c) Number of family members who work in the poultry house;

Regarding (c), family may employ one or two family members:

1. own farmer plus a hired assistent (with one family member);

2. own farmer plus a family member (with two family member);

* All calculations in the proposed business model considered the use of one family member.


• * These two people should be at the poultry house throughout the year.

• **Just needed for the chick reception and for the chicken shipment to the processing plant.

Labor for the Poultry House

Description Labor R$/chick % costs

Labor* 02 0.07 31%

Labor for shipping** 15 0.03 11%

TOTAL 17 0.10 42%


Vertically coordinated

poultry raisers

- Raise the poultry following quality standards defined by the anchor company; - Follow the contract according to what has been agreed with the anchor company;

Anchor Company

- Establishment of special production requirements;- Technology transfer to the poultry raisers; - Poultry Food, chick and vet product supplies;- Purchase the agreed quantity from poultry raisers;- Product logistics from the poultry farm to the processing unit; - Poultry processing; - Establishment of Marketing channels;

AIBA (Bahia Irrigating Growers

Association )

- The association will help promoting the poultry in the region and attracting potential growers;- Help intermediating contacts with the financial organizations (banks) to make available special funds for the poultry raisers;

Players’ Role Definition


Poultry Raiser Assumptions

• Area is smaller than 1 ha inside a farm of 7 ha;

• Technologic level : medium;

• Poultry house investment: R$ 151,704.08;

• Poultry house capacity : 20,000 chicken;

• Production cycle : 42 days (plus 12 days for sanitary protection);

• Price received by chicken : R$0.35;


Processing Plant Assumptions

• Product will be marketed in Brazil;

• Marketing Channels: 80% retailing and 20% wholesaling;

• Processing capacity: 21,000 chickens/day;

• Input costs (animal food, chicks, vet products): R$2.49/chicken;

• Investment: R$11,058,329.00;


Future Exporting Routes

• Future logistic route options for investors interested in production exportation:

– Salvador port, using the east-west railroad and FCA;

• Construction of the first part of east-west railroad is planned to debut in 2009.

– Itaqui Port, using road and railroad;

• The white railroad is already under construction and must be concluded in 2011.

Carajas Rail Road

Centro-Atlantica Railroad

North-South Railroad

East-West Railroad (Forectas)

North South Rail Road (forecast)

Hidrovia


Benefits for the Social and Economic Development

Source: Pensa

Input Firms

• 27,676 tons of food . Yearly.

• 6.55 million chicks per year.

• Total expected revenues: R$ 16. 17 million.

Poultry Production(Local Poultry Raisers)

• 48.

•Average net profit generated at the poultry production level: R$ 1.03 million.

Processing Plant(Anchor)

•Investments: R$ 11.06 million.

• Total capacity 50,000 chickens /day.

• Effective capacity : 21.000 chickens / day.

•Annual turnover (from the 3o. Year on: R$ 33.3 million.

•500 direct jobs.

• 2,000 indirect jobs.

* Considering the internalization of only one sallary by the colonist.

20 www.codevasf.gov.brSource: Pensa

EXTRA REVENUES FOR LOGISTIC FIRMS

Stage R$Poultry Food and Chick suppliers to the poultry

house339,531.01

Poultry house to the processing plant 210,318.31

Marketing Channel Distribution 583,571.76

TOTAL 1,133,421.09

TAX GENERATION

Federal Taxes 3,973,797.24

State Taxes 5,710,339.90

City Taxes 12,094.61

TOTAL 9,696,231.76


21 www.codevasf.gov.brSource: Pensa

• Production Diversification;

• Value-adding activities through agro-industrialization;

• Potential increase in animal protein consumption in the region;

• Introduction of a new partnership production model, with quasi-integration

contracts;

• Reduced poultry costs:

– Cost per kilo without the quasi-integration project: R$1.60;

– Cost per Kilo with the quasi-integration project: R$1.18;

- 26%- 26%



Standard Economic Analysis

Poultry production Processing plant

POULTRY

Processing Cost

Summary Inputs

investments

Graphs

Cash Flow

Detailed Production Cost

Cash Flow

Input Production

Consolidated Cash Flow

Consolidated analysis

I nP u T s Production Cost

Simulations


Revenues X Costs: Processing Plant

Source: SigConsult / PENSA

Revenues X CostsProcessing Plant

0

100

200

300

400

500

600

700

dez/01 dez/02 dez/03 dez/04 dez/05 dez/06 dez/07 dez/08 dez/09 dez/10 dez/11 dez/12 dez/13 dez/14 dez/15 dez/16 dez/17 dez/18 dez/19 dez/20

MIll

ion

R$

Months Gross Accumulated Revenues (R$) Overall accumulated costs (R$)


Detailed Planned Turnover

Source: SigConsult / PENSA

P roduc t Mix T urnover

C hiclen back2,89%

B reast fillet2,14%

F rozen C hiken49,71%

B aking C hiken2,70%

C hicken wings1,55%

Outros1,90%

C hicken B reast8,22%

R efrigerated C hiken2,17%

almost ready C hicken11,28%

C hicken 7,28%

"B anda de F rango"10,15%


Processing Plant Capacity

Source: Pensa

Total capacity. Part of it is not ready for freezing purposes. Installed capacity with freezing equipment. Installed capacity with freezing equipment minus expected losses. Current capacity used by the firm.

Total capacity. Part of it is not ready for freezing purposes. Installed capacity with freezing equipment. Installed capacity with freezing equipment minus expected losses. Current capacity used by the firm.

50

30

21

9

0

10

20

30

40

50

60

Installed Installed (with freezers) Effective Used

SLaughter Capacity

Thousand chickens/day


Net Present Value Evolution of an Individual Poultry Raiser

Source: Pensa

Retorno Investimento

Net Present Value

R$ (200,000.00)

R$ (150,000.00)

R$ (100,000.00)

R$ (50,000.00)

R$ -

R$ 50,000.00

R$ 100,000.00

R$ 150,000.00

R$ 200,000.00

jan/01

jan/02

jan/03

jan/04

jan/05

jan/06

jan/07

jan/08

jan/09

jan/10

jan/11

jan/12

jan/13

jan/14

jan/15

jan/16

jan/17

jan/18

jan/19

jan/20


Processing Plant Net Present Value Evolution

Source: Pensa

Retorno Investimento

Accumulated NPV(21,000 chickens per day).

(20,000,000.00)

(10,000,000.00)

-

10,000,000.00

20,000,000.00

30,000,000.00

40,000,000,00

50,000,000.00

jan/01se

t/01

mai/02jan/0

3se

t/03

mai/04jan/0

5se

t/05

mai/06jan/0

7se

t/07

mai/08jan/0

9se

t/09

mai/10jan/1

1se

t/11

mai/12jan/1

3se

t/13

mai/14jan/1

5se

t/15

mai/16jan/1

7se

t/17

mai/18jan/1

9se

t/19

mai/20


Financial Analysis

• IRR poultry production (20 years): 19.76%;• NPV poultry production: R$ 175,094.94;

• IRR processing plant (20 years): 31.13%;• NPV processing plant: R$ 38,104,650.46;


Sensitivity analysis – Poultry Farmer

0.1897 0.2134 0.2371 0.2609 0.2846

80% 90% 100% 110% 120%

0.28 80% 17.87% 15.64% 13.43% 11.21% 8.97%

0.32 90% 21.09% 18,82% 16,59% 14,38% 12,18%

0.35100

% 24.37% 22.04% 19.76% 17.53% 15.32%

0.39110

% 27.74% 25.33% 22.98% 20.70% 18.46%

0.42120

% 31.23% 28.72% 26.29% 23.93% 21.63%

Poultry house cost – R$/chicken

Price received by poultry

farmerR$/chicken


Sensitivity Analysis - Processing Industry

Processing Industry Cost – R$/chicken

Average Revenue

R$/chicken

Proportion of sales to retailers or wholesalers 3.1091 3.4978 3.8864 4.2750 4.6637

Retail Wholes. 80% 90% 100% 110% 120%

5.22 90% 10% 65.86% 49.89% 35.36% 22.26% 9.95%

5.09 80% 20% 61.01% 45.33% 31.13% 18.28% 5.66%

4.95 70% 30% 56.20% 40.83% 26.96% 14.26% 0.79%

4.82 60% 40% 51.44% 36.40% 22.83% 10.11% -5.55%

4.68 50% 50% 46.74% 32.03% 18.72% 5.69% #DIV/0!


Feeding Cost for the Processing Unit – R$/chicken

Average Revenue

R$/chicken

1.6219 1.8247 2.0274 2.2301 2.4329

80% 90% 100% 110% 120%

4.07 80% 12.85% 5.56% -3.39% #DIV/0! #DIV/0!

4.58 90% 29.17% 22.16% 15.40% 8.60% 1.03%

5.09 100% 45.98% 38.35% 31.13% 24.29% 17.74%

5.59 110% 63.66% 55.41% 47.54% 40.06% 32.99%

6.10 120% 82.03% 73.27% 64.83% 56.74% 49.02%

Sensitivity Analysis - Processing Industry


Risk Considerations

• Price Risk:

Poultry price : according to local agents, the minimum price a local chicken farmer

would receive is R$0.28/chicken (20% lower considered in the financial analysis);

Inputs: international corn demand (biofuel);

Processing Plant: chicken consumption in the Brazilian northeast is growing fast

and the prices might go up;

• Credit risk:

Interest of “Banco do Brasil” and other regional banks for the project;

• Operational Risk:

Investors who were contacted are knowledgeable on poultry industry;


Considered Irrigation Projects at Codevasf


Barreiras Norte

• Started in 1999;• Location: Barreiras (BA);

• Total irrigable area : 2,093 ha; – 758 ha for small holders.– 1,335 ha for medium growers.

• Production:– The main crops cultivated are mangos and bananas (65% of the

project).– Other crops are corn, manioc, beans, and pastures. – There are 1,500 ha to be explored inside the project.


São Desidério/Barreiras Sul

• Started in 1978;• Location: Barreiras (BA);

Characteristics: • Irrigable land : 2,238 ha;

– 2,099 ha for small holders.– 139 ha for medium grower.

• Production: Mango, coconuts, corn and manioc are the most produced crops;

• There is an area of 770 ha to be exploited inside the project;


Responsible Team

CODEVASF

Director of the area of Integrated Development and Infra-Structure

Clementino de Souza Coelho

Board Assistant of the area of Integrated Development and Infra-Structure

Alvane Ribeiro Soares

First Secretary of the area of Integrated Development and Infra-Structure

Guilherme Almeida Gonçalves de Oliveira

PENSACoordinator: Prof. Dr. Marcos Fava NevesExecutive Manager of the Project: Luciano Thomé e CastroExecutive Manager of the Project : Ricardo Messias RossiExecutive Assistant of the Project: Vinicius Mazza da SilvaExecutive Assistant of the Project : Marina Darahem Mafud

Technical TeamResponsible Researcher: Fabio Matuoka MizumotoAssistant Researcher: Camila Dias de SáContributor: Ciro Orihuela Masili

Translation: Central de Traduções


For further Information:

E-mail: [email protected]

Mail Address:Av. Pres. Vargas, 2001- Conj. 143/144, Jardim AméricaRibeirão Preto - SP - CEP: 14.020-260Tel.: +55 (16) 3911 6088

INTEGRATED SUSTAINABLE BUSINESS PROJECTS

Documents

1 Investment Opportunity in Poultry in the Valley of the São Francisco and Parnaíba Rivers INTEGRATED SUSTAINABLE BUSINESS PROJECT