1 Investment Opportunity in Banana in the Valley of the São Francisco River INTEGRATED SUSTAINABLE...

1 www.codevasf.gov.br

Investment Opportunity in Banana in the Valley of the São Francisco River

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 DescriptionThe 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 interaction with potential investors tailoring the analysis to their particular needs (web page: http://www.pensa.org.br).

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


Banana – Global Demand

Global Demand

54.168

56.470

59.307

58.43458.542

50.000

52.000

54.000

56.000

58.000

60.000

2001 2002 2003 2004 2005

1.0

00 t

ons

Source: FAO.

• From 2001 to 2005, global demand growth was 9.49%, corresponding to an increase of 5million tons in volume.

• Last couple of years, despite the low dollar value there has been a real price increase of 4% (FOB).

• Prices can get even higher if the product meet special quality standards and the destine is Europe.

+4,25%+3,48%

+0,18%+1,31%

Why investing in Banana Production and Exports?

Global Demand

54,168

56,470

59,307

58,43458,542

50,000

52,000

54,000

56,000

58,000

60,000

2001 2002 2003 2004 2005

1,000 tons


Why investing in Bananas in the Valley of the São Francisco River?

• No incidence of Chilling;

• No incidence of Sigatoka-Negra;

• Higher yields with irrigation techniques;

• São Francisco River has a high quality water for irrigation;

• Climate conditions favor product standardization;

• Land availability;

• Growth of international demand as well as the internal Brazilian market;

• Increase in the Brazilian competitiveness for USA and Europe

exportation;


Business Model

Strategies for the anchor company:

1. Vertically Integrated Agricultural Production

2. Vertically Coordinated Agricultural Production

Own Production

Vertically coordinated

growers

Anchor Company

Retail

Foodservice

Industries

CONSUMERSPublic Irrigation Project

with Private Management


Coordinated Growers Cooperative Agricultural Anchor Infra Structure Firm

-Producing pineapple contracted with the anchor company, following agreed quality standards;

- Implementing on farm irrigation systems;

- Coordination of small holders;

- Technical assistance;

- Joint use of equipments;

- Joint purchase of selected inputs;

- Representation of small holders;

- The right to use the land will be conceded to selected growers;

- Sustainable contracts with selected coordinated growers;

- Determination of quality standards;

- Packing or industrialization of raw material;

- Marketing;

- Payment of the water to the water management firm;

- Farming on its own area;

-Supplying water for irrigation at the right quality and quantity;

- Maintenance of the common infra-structure for irrigation;

Players’ Role Specification


Standard Sheets for Economic Analysis

BANANA

ECONOMIC VIABILITY ANALISYS

Investments Graphs

Cash Flow

Agricultural Production Packing House

Packing House

PH Results and Cash Flow

Detailed Cost

Results and Cash Flow

Consolidated

Summary Agricultural Input Summary/Inputs Packing House

Agricultural Cost Packing House Cost

Comparative Analysis

Sensivity AnalysisPrices


Assumptions – Agricultural Production

• Land area considered: 600 ha (50% with contracted growers);

• 2 years for total land occupation;

• 20 years of time horizon;

• Dripping Irrigation System;

• Investments (Financing with 100% own capital, conservative scenario);

− Investments : R$ 9,871,000 (US$ 5,335,000.00).

- Operation Costs (R$/year): 5,607,000.00 (US$3,030,000.00).

• Agricultural production average cost: R$4.91/box (18,4Kg) (US$ 2,65);

• Average Yield : 40 ton/ha, for two year cycle;

• Average selling price: R$6.38/box (18.4kg) (US$ 3.44 );

• Exchange Rate: 1 US$ = R$ 1.85;


Assumptions – Packing House

• Operational Capacity: 1,180,124 boxes/year;

• PH will be built during orchards implementation;

• 20-year-long project ;

• Investments (Financing with 100% own capital, conservative scenario);

Packing House (R$): 3,371,000 (US$1,822,000.00).

Certifications (R$): 12,500.00 (US$ 6,756.00).

Operation (R$/year): 11,458,000 (US$ 6,193,000 ).

• Average cost per box of 15 Kg: R$ 9.74 (US$ 5.26);

• Product destination: 90% for exports and 10% for the Brazilian internal market;

• Average selling price : R$12.39/box (US$ 6.59 - external market) and R$ 7.50 /box (US$ 4.05 - internal market);

• Exchange Rate: 1 US$ = R$ 1.85;


Agricultural Production Cost

• At year 0, the crop is implemented.

•From year 1 to 6, costs do not alter significantly.

Agricultural Production Cost per Ha

1. AG INPUTS 2. MECHAN. OPERATIONS 3. LABOR 4. ADMINISTRATIVE AND GEN. EXPENS.

Source: PENSA* Petrolina Juazeiro region is chosen for the financial analysis. Exchange Rate: 1 US$ = R$ 1.85


Agricultural Production - Revenues and Costs

Agricultural Production Revenues X Costs

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Ano

0

Ano

1

Ano

2

Ano

3

Ano

4

Ano

5

Ano

6

Ano

7

Ano

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Ano

9

Ano

10

Ano

11

Ano

12

Ano

13

Ano

14

Ano

15

Ano

16

Ano

17

Ano

18

Ano

19

Ano

20

R$ thous

Costs Revenues


Years 1 to 20


Cash Flow – Agricultural Production

(3,0)

(2,5)

(2,0)

(1,5)

(1,0)

(0,5)

0,0

0,5

1,0

1,5

2,0

2,5

Million R$

Cash Flow (2,6) (2,5) 1,1 1,5 1,5 1,5 1,5 (0,7) (0,9) 1,5 1,9 2,0 2,0 2,0 (0,5) (0,9) 1,5 1,9 2,0 2,0 2,0

Fluxo de

Caixa

Cash Flow – Agricultural Production

• At years 7, 8, 14 and 15 there are reductions on cash flows due to crop and irrigation systems renewing process.

Source: PENSA

Ano 0 Ano 1 Ano 2 Ano 3 Ano 4 Ano 5 Ano 6 Ano 7 Ano 8 Ano 9 Ano 10

Ano 11

Ano 12

Ano 13

Ano 14

Ano 15

Ano 16

Ano 17

Ano 18

Ano 19Years 1 to 20


Revenues and Costs – Packing House

Packing House

Revenues X Costs

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Ano

0

Ano

1

Ano

2

Ano

3

Ano

4

Ano

5

Ano

6

Ano

7

Ano

8

Ano

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Ano

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Ano

11

Ano

12

Ano

13

Ano

14

Ano

15

Ano

16

Ano

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Ano

18

Ano

19

Ano

20

R$ Thous

Costs Rvenues


Years 1 to 20


Cash Flow Packing House

(4,0)

(3,0)

(2,0)

(1,0)

0,0

1,0

2,0

Million R$

Cash Flow (3,5) 0,7 1,1 1,2 1,2 1,2 1,2 0,8 0,7 1,1 1,2 1,2 1,2 1,2 0,8 0,7 1,1 1,2 1,2 1,2 1,2

Ano

0

Ano

1

Ano

2

Ano

3

Ano

4

Ano

5

Ano

6

Ano

7

Ano

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Ano

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Ano

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Ano

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Ano

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Ano

15

Ano

16

Ano

17

Ano

18

Ano

19

Ano

20

• Considering 20 years as the project time horizon, it generates an average cash flow of R$ 1 million.

Cash Flow – Packing House

Years 1 to 20

Exchange Rate: 1 US$ = R$ 1.85


Consolidated Analysis

Revenues X Costs

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

Ano

0

Ano

1

Ano

2

Ano

3

Ano

4

Ano

5

Ano

6

Ano

7

Ano

8

Ano

9

Ano

10

Ano

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Ano

12

Ano

13

Ano

14

Ano

15

Ano

16

Ano

17

Ano

18

Ano

19

Ano

20

R$ thousa.

Costs Revenues

Years 1 to 20

Consolidated Revenues and Costs



Consolidated Cash Flow

(8,0)

(6,0)

(4,0)

(2,0)

0,0

2,0

4,0

Million R$

Cash Flow (6,0) (1,7) 2,1 2,7 2,7 2,7 2,7 0,1 (0,2) 2,6 3,1 3,1 3,1 3,1 0,3 (0,2) 2,6 3,1 3,1 3,1 3,1

Ano

0Ano 1

Ano

2

Ano

3

Ano

4

Ano

5

Ano

6

Ano

7

Ano

8

Ano

9

Ano

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Ano

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Ano

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Ano

13

Ano

14

Ano

15

Ano

16

Ano

17

Ano

18

Ano

19

Ano

20

Consolidated Cash Flow

Source: PENSA

Years 1 to 20



Economic Analysis

Agricultural Productions

Packing House Consolidated

IRR: 15.20% IRR: 14.92% IRR: 14.89%

NPV: R$ 3.531.615NPV: R$ 8,415,236

(US$ 4,548,000)NPV: R$ 11,946,851

(US$ 6,457,000)

Investment AreaInvestments

Implementation (R$) Operation (R$/ano)

Agricultural Production10,800,000

(US$5,837,000.00)5,607,000

(US$3,030,000.00)

Packing House3,371,000

(US$1,822,000)11,458,000

(US$ 6,193,000)



Valley of the São Francisco River X Ribeira Valley (SP)

Total: R$ 54.620

Total: R$ 70.809

Total Cost for the Complete Crop Cycle - R$/ha

29,37537,860

5,693

7,01413,441

18,9616,112

6,975

R$ 0,00

R$ 10.000,00

R$ 20.000,00

R$ 30.000,00

R$ 40.000,00

R$ 50.000,00

R$ 60.000,00

R$ 70.000,00

R$ 80.000,00

FNP – Ribeira Valley Pólo Petrolina Juazeiro

4 – GENERAL EXPENSES

3 - LABOR

2 – MECHAN. OPERATIONS

1- AGINPUTS

Valley of the São Francisco River



Valley of the São Francisco River* X Ribeira Valley (SP)

• This graph shows the yield curve at both places. At the Valley of the São Francisco River the yield peak is reached more rapidly and replanting is needed after 7 years only, 2 more than Ribeira Valley.

25

35

40 40 40 40 40

25

30

35

40 40

20,00

25,00

30,00

35,00

40,00

45,00

Ano 0 Ano 1 Ano 2 Ano 3 Ano 4 Ano 5 Ano 6

To

n/H

a

Vale do São Francisco Vale do Ribeira

Último ano do ciclo no Vale do RibeiraLast Year for Riberira Valley

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

São Francisco Valley Ribeira Valley

To

n/

Ha

Source: PENSA* Petrolina Juazeiro region is chosen for the financial analysis.


Valley of the São Francisco River* X Ribeira Valley

Average Cost per Box – Comparison in R$

Valley of the São Francisco River X Canápolis

2,75 2,63

0,53 0,49

1,26 1,32

0,570,48

-

1,00

2,00

3,00

4,00

5,00

6,00

FNP – Ribeira Valley(R$ 5.12) (US$ 2.76)

Valley of the São Francisco River(R$ 4.91) (US$ 2.65)

4 – GENERAL EXPENSES

3 - LABOR

2 – MECHANICAL OPERATIONS

1- INPUTS



Valley of the São Francisco River* X Ribeira Valley (SP)

Agricultural ProductionRegião IRR NPV

Ribeira Valley 11.37% R$877.01Valley of the São Francisco River 15.20% R$3,531,610



Natural Conditions

Ideal Valley of the São Francisco River*

Temperature 15oC to 35oC 21 -31oC

Precipitation 180 mm/month 500 - 600 mm/year

Luminosity 10,000h/year 2,800 h/year

Altitude 0 to 1000 m 300 m

Production Cycle 14 months 12 months

Soil Depth

> 75cm

>= 90 cm

Soil Texture Argilosa Medium to argilosa

pH 6.5 6.8

Humidity >80% 54 - 67%

Source: EMBRAPA and PENSA* Petrolina and Juazeiro


• Tax Generation ( for a 600 ha projects):

– Total: R$ 1,053,000 (US$ 569,000.00);– Agricultural production : R$ 556,000;– Packing house : R$ 497,000;

• Insertion of Small Holders (300ha, 50% of the total area):– 13 small holders;– Gross monthly profit of R$ 2,500.00;– Farms size of 26 ha;

• Job Generation: 1 worker/ha;

• Agricultural production: 1,500 jobs for an area of 600 ha;Direct jobs: 600.Indirect jobs: 900.

• Packing House: 43 jobs;

Benefits for the Social and Economic Development


• Extra revenues for agricultural input firms : R$ 6,007,000/year (average for 20 years);

• Extra revenues for logistics firms of R$ 1,188,640/year (average for 20 years);

• Potential for value adding activities;

• Diversification of economic activities;

Benefits for the Social and Economic Development


Sensitivity Analysis: IRR – Agricultural Production

4.71 4.81 4.91 5.01 5.11

6.18 12.94% #NÚM! #NÚM! #NÚM! #NÚM!

6.28 18.84% 14.21% -0.56% #NÚM! #NÚM!

6.38 22.38% 19.29% 15.20% 6.68% #NÚM!

6.48 25.17% 22.57% 19.68% 16.01% 9.60%

6.58 27.67% 25.22% 22.75% 20.03% 16.69%

Agricultural Production Cost (R$/box)

Price Received by the PH(R$/box)


10.72 10.82 10.92R$ 11.02 11.12

12.19 13.64% #NÚM! #NÚM! #NÚM! #NÚM!

12.29 20.61% 14.31% #NÚM! #NÚM! #NÚM!

12.39 24.75% 20.86% 14.92% #NÚM! #NÚM!

12.49 28.20% 24.90% 21.11% 15.46% #NÚM!

12.59 31.58% 28.30% 25.05% 21.34% 15.96%

Packing House Cost(R$/BOX)

Price for Exporting(R$/BOX)

Sensitivity Analysis: IRR – Packing House


Responsible Team

CODEVASFDirector of the area of Integrated Development and Infra-StructureClementino de Souza Coelho

Board Assistant of the area of Integrated Development and Infra-StructureAlvane Ribeiro Soares First Secretary of the area of Integrated Development and Infra-StructureGuilherme 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: Frederico Fonseca LopesAssistant Researcher: Helio Afonso Braga de PaivaContributor: Ricardo Kouiti Santos Iguchi

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 AND SUSTAINABLE AGRIBUSINESS PROJECTS

1 Investment Opportunity in Banana in the Valley of the São Francisco River INTEGRATED SUSTAINABLE...

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