A study commissioned by the National Pork Producers Council tallies the real cost of a 2,500-head/day packing plant. Further analysis reveals - with some value-added processing - operating the plant could prove profitable.
Call your banker and get out your checkbook. That's assuming you want to invest in a small producer-owned, pork packing plant.
The cost to design and build a 140,000-sq. ft. plant, including standard packing industry equipment, with the capacity to slaughter 2,500 hogs/day is estimated at $33,663,764.
Since late 1998's $8/cwt. hog prices, many producer groups have considered building processing facilities and marketing their own pork.
The National Pork Producers Council (NPPC) checkoff-funded study, completed by the Stellar Group, based in Jacksonville, FL, sought to find the real costs of such plants. The group has designed and built numerous packing plants, including Smithfield Foods' Tar Heel, NC, plant and the new Maple Leaf Foods plant in Brandon, Manitoba.
The engineers began their work last spring and recently revealed the specifications for the plant.
Major Assumptions Joe Bove, vice president of the Stellar Group, outlines the assumptions used to identify the costs of design and construction of a typical plant.
"A northwest Missouri location was used for code purposes, and all building materials meet USDA requirements," he says.
In their model, the engineers assume the plant would be built on a 20-25 acre site with utility services already available.
They estimate a total of 16-18 months to build the plant - five to seven months of permitting and design work and 11 months of actual construction.
They estimate the annual consumption of water at 90 million gal., electrical use at 17 million kilowatt-hours and natural gas at 650,000 therms (a therm is 100,000 British thermal units or Btu). The wastewater system should be able to handle as much as 400,000 gal./day.
The plant plan includes holding pens adequate to hold hogs for a minimum of eight hours, including water misters to reduce stress and the incidence of pale, soft and exudative (PSE) meat.
The estimated work force in the plant is 129 workers, working five days a week, 7.5 hours/day. That figure does not include management, sales and office staff.
The anticipated yield is 71.7% to primal cuts and 22.7% offal.
Additional Costs The base estimate of $33.6 million includes extra space for value-added processing, such as deboning and Cryovac packaging of hams, loins and picnics.
The addition of a "quick chill" system, which can reduce the temperature of the hog carcass from 105F to 45F in 90 minutes before it goes into the standard cooler, costs another $4.5 million.
Likewise, the base cost does not include wastewater treatment systems some communities may require. The cost range engineers offer is $800,000 to $1.8 million, depending on the requirements.
The base price estimate does not include the cost of land for the plant site.
Computer Model From the engineering study, NPPC is developing a computer modeling program that will allow producers to input their own figures, including hog weights, price/cwt., percent of yield and product prices.
Producers could also input their utility, marketing and packaging costs. And, the program has an option for producers to analyze value-added processes they may be considering.
"This study provides accurate costs and a tool for producers to make decisions on packing plant investments," says Jeff Ward, NPPC director of producer education.
"The objective here was not to create a final definitive answer on whether or not a small pork packing operation makes sense, but to create a structure for producers and lenders to put in their own numbers and see what happens," explains Michael Richard, marketing consultant for NPPC. To that end, Richard used the program to illustrate the profitability of such a plant.
Using the northwest Missouri location, USDA's 10-year average hog prices and weights for Missouri, five-year average product prices from the Urner Barry "yellow sheet" and local utility and labor costs, Richard demonstrates a positive return for the packing plant.
Calculated on a 10-year basis, the plant could return 12% to 18% on the investment if it sold boneless hams, loins and picnics in Cryovac packaging.
Richard stresses that the return he showed during the seminar should not be used as a benchmark for producers.
"By no means is this a definitive answer. Any financial model is not the end-all and be-all. It is a tool," he says. "Producers must put in their own costs - for utilities, labor, taxes, price for hogs, sale prices for meat."
Value Proposition Another key issue in producer-owned packing is the product offered to the marketplace, says consulting economist Dennis DiPietre.
"You have to put together a package that will bring to the market something that is not there now, that is not being made available by the competitive environment, which is driving the meat business," he says.
Producers also need to be aware that a specialty market for one specific-sized component of the hog may not be profitable, since the plant also must sell the rest of the carcass, perhaps at a discounted price.
Program Available The modeling program for a 2,500 head/day packing plant is a Microsoft Excel spreadsheet program available on CD-ROM from NPPC for $50 plus tax. A similar program for an 8,000-head/day plant will be available soon.
For more information or to order, phone Jeff Ward at (515) 223-2633 or e-mail email@example.com.