AFRE 435 Team 4 Final Report

Krueger Farm

Alec Matthew Morris, Soohyun Jung, Nick Hart, Ameer Hisham Abdelrahman, Luis Rodriguez

December 5, 2021

Team Reports

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Expectations: All teams are expected to submit a report on their business. Below is an
outline and description of what sections should be included as well as an approximate
page length suggestions and guidelines (your reports can be longer if that what it takes
your team to communicate). Overall, the report should be about 20-30 pages (again,
more is okay). Importantly, this is a quality exercise. Therefore, each section should
be thoughtful, well written, and include the appropriate information. If a discussion is
required or necessary to explain information, make sure to include that. Here, a
“discussion” is a written section that explains in more detail what is occurring. Much of
your discussion in different sections will include assumptions and assessments you
make in terms of your analysis. If you only include tables with numbers, the reader will
have no idea what this means leaving too much for interpretation. So, make sure you,
the report writer, are the ones doing the interpretations and making the assumptions.

Other important details:

1. Include page numbers
2. Make sure all fonts are the same type thought out and size are consistent
(use 12-point font).
3. Make sure the font type is reasonable, like Times New Roman, Calibri, or
Arial. If it is hard to read, do not pick that font type.
4. Check carefully for spelling mistakes and grammar issues—the report
needs to be readable and understandable.
5. When you include tables or figures, make sure to:
a. Name the table or figure (e.g., Table 1. Business SPELL Ratios,
2021)
b. Include a table number of figure number (in the example above, this
is the “Table 1.” Part)
c. Include a source for the tables at the bottom (e.g., source: Spartan
Dairy 2021 CFS)
6. Make some type of clear delineation of your sections, such as including a
header in bold. You can use the outline below to determine your different
section headers. For example:

INTRODUCTION

Spartan dairy is...

Team Report Outline

Cover page (first page of report)

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· One page

· Include a title of the report

· Include the business name, all team member first and last names, and the date
report was submitted or completed

· Use and include an image that represents your business

Each section below should appear in the order in which it is shown below, including the
Executive Summary.

Executive Summary (Ameer)

· This should be about a quarter page in length

· It can be in bullet point form

· It should pick the highlights from each section, I. Introduction – VI. Financial Goals:
“How Much” Analysis, providing an overview of the report. For example, each bullet
point could be 1-4 sentences in each section. Note that some section highlights may
need to be longer than others, AND, it should include your overall assessment of
results.

· A reader should be able to look at the Executive Summary and get a big picture
view of the report and findings.

· Write this section last, after all others are completed.

I. Introduction (Ameer)

· In 7-10 sentences, briefly lay out what it is you are doing in this report.

· You can describe each section and what they will contain.

II. Business background (Ameer)

· This can be a separate section or part of the introduction.

· This will be about 7-10 sentences

· Describe the operations.

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 o What is produced (e.g., dairy, crops, etc.)
o Number of livestock (we have 74)
o Number of acres of land
o How long it has been in business (make up a time)
o Where it is located
o Legal structure
o How is compares in terms of size to other operations
o Some of this will be “creatively constructed” details

III. Data and Basic Financial Information (Nick)

· Explain your raw data sources (i.e., P&L statement and balance sheet)

Near the beginning of the semester, Krueger Farms was given an Excel

spreadsheet with raw data sources like the balance sheet and P&L statement. Let us

first understand the purpose of a balance sheet. A balance sheet is a summary of a

company's assets, what the company owns, and liabilities, what the company owes.

From knowing this information you can use the formula assets minus liabilities to

calculate your owner’s equity. Now let's look at Krueger Farm’s asset portion of the

balance sheet.

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As shown in Krueger Farm’s balance sheet there are beginning balances from 12/31/18

and ending balances from 12/31/19. The balance sheet highlights Krueger Farm’s

assets in the form of current, intermediate, long-term, and nonfarm assets. Under

current farm assets we see cash and checking balance, accounts receivable, prepaid

expenses and supplies, growing market livestock held for sale, other current assets,

and a few other types of current assets. When running a dairy farm you are going to

need equipment, vehicles, and to breed your livestock these are examples of

intermediate assets that we see in our balance sheet. Lastly, we look at how farmland,

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buildings on your land, and improvements to those are long-term assets in the balance

sheet. You add all these together and plus your nonfarm assets and you see Krueger

Farm’s total assets.

Next, we will look at the liabilities and equity side of the balance sheet.

For liabilities, it is very similar to the asset side where there is a beginning and ending

period and also current, intermediate, long-term, and nonfarm liabilities. We can see

from looking at the image above that there are no examples of intermediate, long-term,

or nonfarm liabilities. We also see that some of the types of current liabilities for the raw

balance sheet are accrued interest, accounts payable, current notes, and government

loans. When you take the total assets minus the total liabilities you will get your owner’s

equity or also known as Retained earnings.

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 Discuss any errors, omission/missing items or other issues with the data

This is where the first error that stood out was that the total assets minus total

liabilities did not match the retained earnings at the end of the balance sheet.

· Briefly discuss (3-5 sentences) the process for constructing the CFS

· Give an overall view of each statement.

o Income statement:
§ How much they made
§ Their expenses
§ Taxes
§ NAIT and addition to Retained earnings
o Balance Sheet:
§ Total assets, total liabilities and total equity
§ Briefly identify and discuss anything that stood out to you (note: at
least one thing needs to stand out to you)
o Cash flow:
§ Net Cash Flow from Operations
§ Net Cash Flow from Investment
§ Net Cash Flow from Financing
§ Briefly identify and discuss anything that stood out to you (note: at
least one thing needs to stand out to you)

IV. Financial Condition: “What Is” Analysis

· In 2-3 sentences set up this section by briefly explaining what the ratios will tell us.

· Include a table of your ratios, industry comparison, and your rankings

· For each category of ratio, include a subsection with a brief discussion:

o Solvency – what did you pick, discuss logic behind ratios selected (2-4
from each group) – why you picked them, how did they compare, how did

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 you rank it, and what is your general assessment (this is your
interpretation) of how the firm is doing given this set of ratios.
o Profitability – what did you pick, discuss logic behind ratios selected (2-
4 from each group) – why you picked them, how did they compare, how
did you rank it, and what is your general assessment (this is your
interpretation) of how the firm is doing given this set of ratios.
o Efficiency – what did you pick, discuss logic behind ratios selected (2-4
from each group) – why you picked them, how did they compare, how did
you rank it, and what is your general assessment (this is your
interpretation) of how the firm is doing given this set of ratios.
o Liquidity – what did you pick, discuss logic behind ratios selected (2-4
from each group) – why you picked them, how did they compare, how did
you rank it, and what is your general assessment (this is your
interpretation) of how the firm is doing given this set of ratios.
o Leverage – what did you pick, discuss logic behind ratios selected (2-4
from each group) – why you picked them, how did they compare, how did
you rank it, and what is your general assessment (this is your
interpretation) of how the firm is doing given this set of ratios.

· Summarize the business strengths and weaknesses based on your discussion

above.

V. Opportunities and Threats: “What If” Analysis

Our team will be analyzing the farm’s opportunities and threats by doing a “What

If” analysis. We determine the possible external changes and analyze how these

changes will affect the farm's financial condition. We will be comparing the farm’s

SPELL ratios to industry ratios.

3 scenarios that our team selected are following:

1. What if the firm depreciated its livestock? (Depreciation change)

2. What if the cost of seed decreased by 15%? (Opportunity)

3. What if the feed cost increased by 20%? (Threat)

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 The first scenario which is depreciation change was given by the professor and

our team assumed a depreciation rate of $297.5 per head per year. As shown in table

#?, this depreciation would be added to the Breeding livestock depreciation cost which

was $0 before. For the second scenario, we decided to assume that there is a decrease

in the cost of seed by 20%. We picked seed because the seed purchase accounts for a

high percentage of farm expenses. Now the supply chain in the seed industry is affected

because of the pandemic. (Henke, 2021) Therefore, we assumed that the current price

of seed would be higher than in the past. We predict that the seed price will decrease as

the pandemic is over. The last “What if” analysis scenario is about the purchased feed

cost from COGS. We assumed that there is an increase in the feed cost by 3%. Covid-

19 has also affected feed price. (Peel, 2021) We believe that it is important to prepare

for a higher price in feed because commodity prices tend to fluctuate a lot and it is hard

to predict them. Since purchased feed cost takes up the most cost in COGS, it is

important to consider how to minimize the cost and get ready for price change.

The farm owns 74 cows total and we assumed a depreciation rate of $297.5 per

head per year. We created a new cell for calculation. The function is =74*$297.5 and it

is equal to $22,015. Since the depreciation increased, there’s also a change in taxes

paid. Taxes paid changed from $5,850 to $4,618. As the depreciation increases, taxes

paid decrease.

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 Table #? Before implementing depreciation value

Table #? After implementing depreciation value

For the second scenario, we modified the sidebar calculations on the Exogenous

Variables page from CFS. The original seed cost was $14,620 and we multiplied it by

0.85 which is -15%. It is equal to $16,813. As in the second scenario, we modified the

sidecar calculations. The original purchased feed cost from COGS was $87,350. We

multiplied it by 1.2 which is +20% and it is equal to $104,820.

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 Table #? “What if” Analysis Ratio Comparison Table, 2021 (Source: CFS 2021)

We will be focusing on Solvency and Profitability ratios since there’s not much

change in efficiency, liquidity, and leverage ratios. The first thing to look at is the Times

Interest Earned (TIE) ratio. TIE is basically about how many times can the firm pay its

interest costs using the firm’s operating profits. A healthy firm’s TIE ratio exceeds 1,

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which means the firm is able to pay its interest costs using its current income. After the

first depreciation change was applied, TIE ratio decreased by 2.3 from 3.51 which

means it became harder to meet its long-term debt obligations. However, since the

farm’s TIE ratio still exceeds 1, this change won’t cause serious business problems

regarding debt obligations. The second scenario’s TIE ratio increased by 3.63 from 2.3

which means the farm is able to pay its interest costs 3.6 times using their profits. Even

though the third scenario is a negative change, TIE ratio is 2.55 which still remains

above 1. The farm’s overall TIE ratio remains excellent in every scenario even when we

compare them to the industry ratio which is 1.16. For Debt Service Ratio (DRS), The

first scenario doesn’t change DRS. However, the second and third scenarios made

changes in DRS, from 1.64 to 1.68 and 1.34. However, after the scenarios were

applied, DSR still remains above 1 which means that the farm is able to make principal

and interest payments using EBIT plus depreciation.

Profitability ratios look at a farm’s ability to generate profits from its assets or

equity. The first thing to focus on is the profit margin. It measures the proportion of each

dollar of cash receipts that is retained as profit after interest is paid but before taxes are

paid. The profit margin decreased by 6.09% from 11.75% in the depreciation scenario

because EBT decreased. Since the scenario 2 is the opportunity, the profit margin

increased by 12.32% which means more percentage of sales has turned into profits.

The last scenario is the threat scenario and it drags down the profit margin ratio. The

next thing to look at is Return on assets (ROA). ROA measures the number of profits

generated by each dollar of assets. A higher ROA ratio is desired and ROA from the

depreciation scenario is 3.91% which is still above the industry ratio. Scenario 2’s ROA

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ratio increased by 6.17% from 5.97%. The last scenario’s ROA decreased by 4.34%.

However, even though all the scenarios are applied, Krueger’s return on assets ratios

are still relatively higher than the industry ratio. This is a good sign for the farm. The last

thing to focus on is the Return on equity (ROE). ROE ratio measures the amount of

profit generated b each dollar of equity after interest payments to debt capital are

subtracted but before taxes are paid. To improve ROE, there must be an improvement

in EBT. ROE decreased by 3.95% from 7.61% after the depreciation changed. The

second scenario’s ROE increased by 7.97%. And the last scenario’s ROE decreased by

4.70%. Like other ratios, the farm’s overall ROE is still greater than the industry ratio.

Based on the farm’s ratios, we conclude that Krueger farm’s financial statement

is relatively stable and after the what if scenarios implemented, the ratios still remain

better than the industry ratios. Opportunities for Krueger farm can be an increase in milk

price or a decrease in feed price or depreciation so that can improve revenue or

decrease expenses. However, the biggest threat is the fluctuation of prices of raw

materials and the outbreak of diseases like Covid-19 which can affect the supply chain

globally. As we explained earlier, feed purchase accounts for the most percentage of

farm expenses and its price depends on the price of commodity and supply chain

condition.

VI. Financial Goals: “How Much” Analysis

In this section, we will be discussing different scenarios which impacted our

coordinated financial statement to see what our business would need to do to return

certain numbers. Our group wanted to see how much we would need to change to see

a better return on our assets as well as what we would need to do to have a more

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favorable TIE ratio. Our financial goal for the “How Much” analysis was to see an

increase in return on assets up to 7%. The second goal of our analysis was to see how

much we need to keep on dairy milk to get a TIE ratio of at least 2.5. We selected to

change the return on assets because we felt that was a weak point of our operation. If

the business was to get a better return on assets then we would be more profitable in

the long run. We chose to investigate the TIE ratio to improve our overall business

strategy and obtain better profitability. To get our desired numbers first we needed to

calculate how much we need to change certain aspects of our business. We did this by

changing soybean income from cash to a total of $41,304. This change brought the

change necessary to match a 7.0% return on assets which was favorable for our farm.

When it comes to the TIE ratio our goal was to get to a ratio of 2.5. We were able to

successfully do this by figuring out that dairy milk production should be at least

$266,265. By maintaining this number for dairy milk production we are able to get a TIE

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ratio of 2.5 which was very favorable for our company.

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 As shown by the table above when developing scenarios to decide what would

benefit our business the most, we looked into what we struggled with. As you can see

by our original TIE ratio we were much above our desired ratio number. We were able

to figure out that by having a dairy production of at least $265,265 we would be able to

decrease our TIE ratio and make things more efficient for our farm. When we changed

this we have a decrease in the overall production of dairy/milk but we have a more

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favorable ratio. Now in order to increase our return on assets we needed to change

aspects of our P&L statement. Our original return on assets was at 5.97%, We wanted

to increase this number to around 7.0% to get a higher return. To do this we would need

to increase our soybean income by $41,304 in order to see a 7% return on assets. After

doing this we see an increase in gross cash farm income.

A pro of changing the variables to see a 7% return on assets is that it would

make the business more profitable overall. With a higher return on assets, we would be

able to produce more and see more money come back to the farm. For the TIE ratio, we

needed to maintain a minimum ratio of 2.5 in order to keep the business running

smoothly. To do this we would need to maintain the production of dairy milk to at least

$266,265 to keep this number. A pro of this would be that our business would continue

to run smoothly. A con of this would be that we already have a TIE ratio larger than 2.5

so it is not necessary to make changes quite yet in our business. Another weakness of

changing the TIE ratio to make it smaller would be that we have a lower margin

between earnings before taxes and earnings before interest and taxes.

References

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https://www.agriculture.com/podcast/successful-farming-radio-podcast/2022-seed-
prices-going-up

https://www.beefmagazine.com/beef/rising-feed-prices-impact-cattle-markets

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