Following on from the 1st of the series, 3 Misconceptions sent last week, from which we received quite a lot of positive feedback, here in part 2 we address the 2nd most common misconception or misunderstanding we hear about our business model.
#2 The proforma is for 20 years…what happens after this 20-year period?
Do we still receive cashflow or do we need to invest more money?
The industry standard unit of time used to calculate an IRR for agriculture investing is 20 years. This is set as a standard so you, the buyer, can compare and contrast different opportunities.
You will find some companies using a 30-year projection in their marketing. This is a bit of a sneaky trick used to add-on 10 years of the highest production to artificially increase their IRR on paper.
In real life on the farms, after year 20 the coffee trees will not suddenly stop producing coffee cherries. The company will not cease to operate, and your returns will not stop flowing.
Coffee trees are perennial and will produce coffee for 35 or 40 years, but after around 15 years the quality and quantity start to decline.
As we are in the Specialty Coffee business, we only want the highest quality coffee. And as a business, we measure our inputs versus our outputs for profitability.
Most subsistence farmers who do not know their true cost of producing a pound of coffee, simply continue to take what nature gives them each year with no thought of crop rotation.
It is around the 15-year mark that we will start to rotate out around 15% annually of the oldest trees on each of our farms. This way we can steadily renovate the entire farm to maintain coffee quality and without significantly affecting production volumes.
There are a number of ways to do this, and these are the 2 most commonly used.
You can perform a zoca (Spanish term), which means cutting down the tree at the base of the trunk, saving the root-ball. The root-ball will grow another tree and give you coffee in 3 years.
Another way is the “skeleton” approach, here you cut off all the branches, leaving the trunk intact and looking like a skeleton! The branches will re-grow giving you coffee again in a year or two.
With the zoca method, you can perform this 3 or 4 times with one root-ball giving you 3 or 4 cycles of 15 years each.
At the end of this period, if our agronomists and biologists decide that the root-ball is no longer strong enough to support another cycle of high-quality coffee, we simply plant saplings from our nursery in the rows between trees, where they grow in the shade until mature.
At which stage we cut down the old trees, let the material decompose back into the soil, and you have a whole new section ready to repeat the 3 or 4 x 15-year cycle.
The cost of this process is nominal. The labor is a sunk cost and the saplings are grown on our own farms using seeds from our own trees.
So, no more capital required from you, the investor, to perpetuate a legacy investment for you and your heirs.
There really is no reason why the farms cannot continue to produce for generations, just as all the successful wine dynasties do with their vinyards.
To find out more, or to reserve some of the remaining coffee farm parcels, send us an email or you can schedule a consultation call …just Click HERE.
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