ROI and Payback Periods

On : June 5, 2020
By : Rowan Jayasuriya

When considering any investment, a farming business will consider the return-on-investment (ROI) and payback periods as a key consideration. Fodder Storage assets (Hay Sheds) are no exception. The return on investment (ROI) is defined as what % of your investment in year 1 is recovered in extra revenue by the end of year 1. The payback period is the number of years it takes to recover 100% of your investment. From that point onwards, the asset is fully paid off and the incremental profits contribute in its entirety to the bottom-line year in year out.

The following example illustrates what those calculations could look like for a typical farmer considering a Hay Shed. It is for illustration purposes only. Various factors including each person’s tax position will determine the exact benefits. As you would with any capital asset purchase, please seek your own expert tax advice that takes into account your personal circumstances.

Harvest video

Example only:

Darling Downs Straw**

Fodder in 1000 bale shed

Fodder in 2500 bale shed

Fodder left in Paddock – 1000 bales

Fodder left in Paddock – 2500 bales

Explanation

Sale proceeds @ $275 per tonne* on November 30, 2018

$123,750

$309,375

$123,750

$309,375

Fodder sold as it is cut has small differences in quality if it is sold within a short period of time

Sale proceeds @ $400 per tonne* on May 1^st of the following year

$180,000

$450,000

$126,000

$315,000***

During scarcity, prices for stored hay could be up to 15 - 45% higher.
Note: The volume of fodder matter deteriorates for Fodder Left in Paddock

Difference

+$56,250

+$140,625

+$2,250

+$5,625

Increase in $’s when Hay sold when the glut is over

Cost of 1000 bale and 2500 bale Hay Shed fully installed

$75,000

$120,000

Typical cost of a shed kit + installation in Victoria

Return on investment (ROI)

75%

117%

The % of your investment paid off by the end of Year 1 with increased revenue

Payback Period without depreciation allowances

Less than 16 months

Less than 11 months

How many months it takes to pay off the shed with the excess funds generated by storing fodder in a shed

Payback period including 25% depreciation allowance**

12 months

Less than 8 months

Subject to the taxation effects in place at the time, the payback period could reduce to less than 8 months.

Potential Additional Revenue

$7650

$19,125

$17 per tonne paid by exporters to hold Hay on farm if you sell to major Exporters

* Source: AFIA Hay Report Pricing (May 2015)
Refers to Darling Downs Straw for the example
* 30% drop in volume (fodder matter) – Source: Minimizing Losses In Hay Storage, US Study Dr Don Ball

Note 1: Covid 19 related special incentives including the $150,000 instant asset write off has been ignored for this article.

There are many other factors you should consider beyond the straight relationship between ROI and Payback periods. The quality of the asset (will it be standing in 35 years’ time, will it rust, will it leak, will it require regular maintenance, is it made using Australian steel for peace of mind and how competent are the installers who erect your Hay Shed are worth considering when making your decision). The process of selecting a supplier and comparing quotes can be a complex task.

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