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1.) Describe SIPEF’s value chain. Describe the company’s competitive environment using Porter’s five forces model.

SIPEF Value Chain:

SIPEF operates a fully integrated value chain, and does not outsource parts of the production process for its agricultural products.

The value chain for palm oil is as follows:
● Buy land
● Plant palm trees
● Wait 3-4 years for tree maturity
● Cultivate palm oil
● Refine palm oil
● Market & sell palm oil
● Distribute

The rest of SIPEF’s agricultural products follow the same general value chain of buying land, planting seeds, waiting for maturity, cultivation, refinery, sales and marketing, and distribution.

Porter’s Five Forces Analysis:

Threat of new entrants
SIPEF operates in a highly competitive, fragmented market with low barriers to entry. However, the market is characterized by economies of scale, given the need for investments in technology, land, infrastructure such as roads and irrigation, and specialized knowledge to be able to plant and cultivate agricultural products. SIPEF is likely sheltered from competitors given these economies of scale and its substantial infrastructural investments, including owning a total of 72,512 hectares of land. Specifically to palm oil, SIPEF’s largest product, the threat of new entrants is likely high given the need to wait 3-4 years before securing a return on investment while waiting for palm trees to mature.

Threat of substitute products
SIPEF likely has little threat of substitute products, given that few comparable substitutes exist to palm oil, its largest segment. Further, there are few substitutes for specialized products like tropical fruits and plants. Coffee presents a potential threat of substitute to SIPEC’s tea segment.

Bargaining power of customers (buyers)
Given the supply chain dynamics for agricultural goods, large retailers have local and international buying power which allows them to push down the prices of agricultural products for both SIPEF. Further, SIPEF is a highly competitive market where price is set through equilibrium, given that most of SIPEF’s revenue comes from ten customers who have high bargaining power.

Bargaining power of suppliers
SIPEF owns the entire supply chain process for its goods from planting to refinery and distribution, making them less dependent on suppliers and decreasing the bargaining power of suppliers. They do have supply needs in terms of pesticides, irrigation technology, water, and energy. The power and water markets are mostly highly regulated, although SIPEF could be susceptible to shortages in these markets.

Intensity of competitive rivalry
The agricultural commodity market is a highly competitive market that competes on price. It is a highly fragmented indistury where no one company has more than 3% of market share. As a result, competitive rivalry is high. Further, there are low switching costs from customers to switch between producers within the market, and the costs of leaving the market are high given high upfront investments in fixed assets.

2.) How has SIPEF performed in the last three years, particularly sales growth, profit margin, asset turnover, leverage, and return on equity (ROE)?
SIPEF has seen steady growth in the last three years with an outsized gain in 2007 of 27.98%. Revenues were $145.3 million in 2004, $147.7 million in 2005, $163.7 million in 2006, and $209.5 million in 2007. Profit margins were proportional at: 10.3% in 2005, 14.9% in 2006, and 25.2% in 2007. Asset turnover (sales/total assets) was: 62.7% in 2005, 57.7% in 2006, and 60.6% in 2007. Leverage (debt/equity) was: 31.89% in 2005, 41.58% in 2006, and 33.42% in 2007. Return on Equity (net income/equity) was: 10.26% in 2005, 14.55% in 2006, and 20.68% in 2007.

Performance is strong in the majority of these indicators with a decrease in leverage and increase in profit margins, return on equity, and revenue. Asset turnover dipped slightly in 2006 but rose again in 2007, which may result from harvest cycles in crop yields.

3.) How do the answers to questions 1.) and 2.) differ for Ledesma, if at all?
Ledesma’s value chain proposition does not substantially differ from SIPEF’s, given that both produce agricultural commodities that involve planting, growing, cultivating, refining, and distributing agricultural products. No substantial difference in Porter’s Five Forces between Ledesma and SIPEF, apart from potential threat from potential entrance of a competitor in the form of high fructose corn syrup but not in high enough quantities to present a significant threat.

Ledesma’s sales growth has also seen an increase in the period between 2005-2007. Revenues were $294,894 in 2005, $377,545 in 2006, and $462,632 in 2007.
However their profit margins have gone down in this period from 7.03% in 2005 to 5.94% in 2007, part of which could be attributed to the increase in the cost of sales from 60% of sales in 2005 to 67% of sales in 2007.
Ledesma’s asset turnover - like SIPEF’s - has seen an increase in the reported period. In 2005 it was 66.51%, in 2006 it was 87.0%, and in 2007 it was 102.81%. Ledesma’s asset turnover is considerably higher than SIPEF’s that represents a more efficient use of their assets.
Different from SIPEF, Ledesma’s leverage has increased from 24.63% in 2005 to 30.53% in 2007. This could be attributed to the increase in their Non Current Liabilities (Long Term Debt)
Ledesma’s ROE has seen an increase in the reported period however its returns are lower than SIPEF’s. It went from 5.83% in 2005 to 7.98% in 2007.

Overall, Ledesma has seen a healthy sales growth, and has efficient utilization of its assets. However their Leverage has increased, and profit margins have not increased considerably. This could be because of an inrease in Cost of Sales, for which they may have raised some long term debt. 4.) What are some challenges of comparing SIPEF to Ledesma?

● SIPEF’s operations are based around the world, whereas Ledsma’s operations are based only in Argentina
● Ledesma has significantly higher sales than SIPEF.
● SIPEF reports according to IFRS norms. This requires that their biological assets are reported at a fair market value as opposed to cost accounted for depreciation for Ledesma. Given that biological assets form a major part of the asset base of both companies it would be difficult to compare them in the future.

Ledesma: - more diversified
- Lary Hall is the funds manager, conservative but creative investor, Ledesma is larger and more stable company, better utilization of assets, while profit margins are low but there has been a steady increase in profit over the years
- More diversified company not just based on agricultural products
- Less exposed to market conditions - SIPEF has more exposure to fluctuation in market prices of core products because oif their commodity focus

5.) What should Lindsay Cannon do?

Prior to IAS41, SIPEF and Ledesma both used historical cost methodology to value their biological assets. In order to compare Ledesma and SIPEF, we will need to use the adjusted SIPEF’s pre-IAS41 values. If we were to use SIPEF’s current IAS41 methodology, it will not be an apples-to-apples comparison.

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