Dear Sir or Madam,
In the course of 2017, we decided to set up greenhouses for growing fruit and vegetables in addition to our investments in orange plantations. Originally, the idea was born out of a desire to make use of fallow land on our plantations in La Colmena, which is not suitable for growing citrus trees for various reasons. At first, we planned to build two greenhouse units, which was later increased to four units. We also offered an opportunity to participate in the operation of greenhouses to external investors.
Regarding our potential customers (including connections to 27 supermarkets for our citrus harvest), we were approached with the request to expand the production of red and yellow peppers, tomatoes and cucumbers even further. Our citrus plantations are currently in top shape, with a generous harvest of the best quality to be expected. Accordingly, our target clientele assumed that they can also expect to purchase other fruits and vegetables of correspondingly high quality (otherwise only available via expensive imports) from us in the future. We were very happy to comply with this request.
On the advice of our agricultural engineers, we decided to build the vegetable greenhouses on Plantation III in Nueva Italia, rather than on Plantation I in La Colmena, as originally planned. The new areas in Nueva Italia are only 20 km from Paraguay’s largest fruit and vegetable wholesale market and just 35 km from Asunción city center. While it is of secondary importance whether our oranges, limes and mandarins come from La Colmena or Nueva Italia, for tomatoes, peppers and cucumbers it is very essential, since the frequency of purchase and delivery is much higher compared to citrus fruits. Sometimes, customers are even supplied several times a day (!) with a small truck.
Agriculture is particularly scale-sensitive; the larger a farm, the more profitable it is. In particular, the concept of fixed cost digression and but also the discounts granted by important suppliers during continuous purchase of large quantities. Another important factor which affects the prices that can be achieved on the market (and thus the profitability of the project), is whether potential customers can be assured of a continuous, permanent supply throughout the whole year, or whether they only be supplied at certain times.
After the customer side had reacted so overwhelmingly positive to our planned project, we were then able to ascertain an equally strong encouragement on the part of the investors. Currently, investors from Germany, Austria, Switzerland, the USA, Canada, Japan and Hong Kong are participating in the project, and the strong demand for this investment offer continues unabated.
This results in an expansion of the current greenhouse project in Nueva Italia (Plantation III), so it can now hold 50 units. On Plantation IV – also in Nueva Italia – we will probably also integrate a greenhouse project.
On the greenhouse-planned area of Plantation III, hard work is currently underway (Q2 2019) – a separate driveway has been built, a drainage system has been installed, the soil has been dug up and fertilized, and the entire area has been fenced in and is now completely parceled. We are especially pleased about the unusually high yield of our deep well. As is usual with such projects, we have constructed a 150 meters deep well for our own water supply, but the water was already gushing from a much shallower depth. We were also very pleased with the very good water quality. Our water resources are so large and productive that we will probably also build a bottling plant for mineral water on the site.
The first greenhouse units are on their way to Asunción and we expect delivery and installation within the next weeks. About 70 people will find well paid jobs on this plant – the immediate proximity to the small town of Nueva Italia (approx. 18,000 inhabitants), which is only 1.5 km away from the plantation, and Asunción (2.5 million inhabitants), 35 km away, also helps us.
ECONOMIES OF SCALE for our greenhouses – Comparison 1 greenhouse, 25 greenhouses and 50 greenhouses
Economies of scale affect the profitability and the stability of future returns. The table below compares our original figures for a single unit with those for a complex of 25 or 50 units. This approach allows our operating costs to be significantly reduced.
When taking our original calculation for a planting cycle as a reference, we have assumed a total of US$37,500 in personnel costs (per year) and a total cost of US$62,128 for a single GH unit (per cycle). Initially, we had only estimated one plant-harvest cycle per year.
Although a large greenhouse complex (> 25 units) requires much more highly qualified personnel than a small farm of 1-4 units (and above all, we know the importance of the need for professional management), the personnel costs per unit decrease significantly from the original US $ 37,500 to just US $ 17,040 per year.
The total costs per unit also decrease significantly with a larger complex. In addition to the high decrease in personnel costs, volume discounts must also be taken into account. Initially, we assumed the discount factor to be only 5% (in Paraguay, up to 15% volume discounts are regularly granted for large orders).
The greatly reduced total costs not only increase the earnings prospects, they also increase the crisis resistance of the project. Due to our cost efficiency, we should be able to achieve our return targets with ease, even with lower production figures and/or lower average prices.
Another important aspect in our current consideration is the planting cycle. It takes about three months for all the preparatory work for planting peppers to be completed, and another three months for the peppers to be ready for harvest. Harvesting will take another few weeks, so we expect seven months per plant-harvest cycle. Of course, the farm will still be active for the remaining five months of the year. If we annualize the yield of the harvest cycles, we assume that we can represent between 1.25 and 1.75 cycles per 12-month period. This has an impact on the annualized return.
STRESS TEST – Comparison of 25 and 50 units when changes of the variables “harvests per year”, “harvest in kg” and “price per kg” occur.
The following overview shows a stress test of our project. The table shows the payable yield in US$ per greenhouse unit, depending on the price per kg in US$, the plant-harvest cycle and the associated production in kg (or tons). We have performed this analysis for the first full year of operations.
Of course, we are aiming to do everything we can to optimize our operations so that two full cycles per 12-month period will be possible. At present, however, we expect only 1.5 cycles internally. At the Asunción wholesale market, we had observed prices for red and yellow peppers (Moron/ Locote Rojo and Moron/ Locote Amarillo, respectively) from US$ 1.80 to US$ 2.10 in recent years, but the development of the US$ against the Paraguayan national currency (PYG) has a stronger impact here than with citrus fruits, for example. We have therefore applied our stress test for a price channel between US$ 1.60 and US$ 2.20, in which we are most likely to roam in the coming years. A Paraguayan inflation of 3-4% per year should also be mentioned, since it would cause prices and costs to rise. Therefore, an indexation of our figures at 2% p.a. appears to be a conservative-cautious correction of future price developments.
Renegotiated payment system
As part of our project expansion, we renegotiated the remuneration system with the persons responsible on site (management). We have significantly reduced the fixed component and we used a pay which is mainly based on profit sharing instead. Through the partner company HortiPar S.A., which is used for local management in Paraguay, the responsible persons are remunerated with a moderate fixed salary and 15% of the pre-tax profit. The remuneration components as well as the Paraguayan tax rate of 10% are already included in the figures shown above.
This pay system is a great motivation for all important decision makers to maximize the return generated for our investors as much as possible. Cost awareness, discount negotiations and, of course, quality and quantity considerations are always addressed in the interest of the investors.
Overall, we are looking forward to the first operating year of our greenhouse project with great confidence. Further growth of our group should contribute to further optimization of all key components, which is why we regard the very good figures shown above only as a minimum expectation.
We are very pleased to start this interesting, lucrative project together with you. Thank you very much for your confidence in our company!
We are always at your disposal for any questions you may have.
Best regards from Paraguay,
Dipl.-Kfm. Carsten Pfau
General Partner & Managing Partner