Sensitivity Analysis

The prospect of making a large capital investment is daunting for all businesses, regardless of size. There is inherent risk any time a business decides to devote a significant portion of their limited resources to a capital investment or project.

In order to minimize the risk associated with capital investments, businesses rely on financial feasibility studies to provide support for making a wise capital investment which will bring financial benefits to the company in the future. In order to develop these feasibility studies, there are a number of assumptions that must be made:

  • How much will the capital investment be?
  • How much revenue will the investment generate?
  • How much additional operating cost will the investment require?

Once these assumptions have been made, it is critical to perform sensitivity analysis to determine what impact a chance in one or more of these assumptions would have on the overall feasibility of the project.

Soy processing feasibility is often determined by the “crush margin.” In simplest terms, the crush margin is the amount that the meal and oil extracted from the bean are worth, less the cost of the raw bean. A solid sensitivity analysis for a soy processing facility will look at historical and projected future crush margins to ensure that as a soybean, soy meal, and soy oil prices fluctuate the crush margin is high enough to cover the processor’s operating expenses and make the investment in the facility pay off.

The crush margin can vary significantly over time and between parts of the world. To highlight this variation, here is the chart from The Progressive Farmer showing monthly crush margins for the Central Illinois region of the United States.

While the crush margin has averaged $0.67 per bushel, you can see that it has spent significant periods of time above and below that level, leading to periods of increased and decreased profitability for processors.

As you prepare the feasibility analysis for your capital investment, take time to perform a thorough sensitivity analysis so you can feel confident that you’ve got the right revenue and cost structures to make your investment pay off.

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