Could Morgan Co. support a food hub?
story and infographic by kathryn schiliro
photo by jesse walker
The viability of Morgan County housing an area food hub was brought up for discussion among roughly 40 local farmers and producers at a Town Hall-style meeting– hosted by the Chamber of Commerce, Madison-Morgan Conservancy and Cattlemen's Association, among others– on Thursday, Jan. 31.
The Morgan County commissioners requested and funded a food hub feasibility study by the University of Georgia's Center for Agribusiness and Economic Development (CAED)– this UGA outreach program works with small producers around the state on issues like feasibility and marketing; they also produce the annual Farm Gate Value Report– last May. The entry-level study, presented to those gathered by the CAED's Dr. Tommie Shepherd, was meant to gauge interest, from both producers and buyers, as to whether a meat-processing food hub in Madison– there's an "overwhelming interest in livestock," Shepherd said– would be viable for the area. Results were shared with the commissioners at their January meeting prior to this meeting of local producers on Jan. 31.
The study started with Town Hall meetings in Madison, Athens (aimed at producers as far north as Gwinnett County) and Monticello (aimed at producers as far south as Macon), at which producers present were surveyed about their interest in a food hub-type processing facility.
The CAED also surveyed area customers within a 100-mile radius of Madison they felt would be interested in buying product from this local facility; those buyers surveyed included grocery stores– from high-end stores with a focus on locally grown food, like Whole Foods and Earth Fare, to chains like Publix and Kroger, to Bell's, Quality Foods and Piggly Wiggly– restaurants, assisted care facilities and country clubs.
On the buyers' end, there is interest. Of those surveyed, 96 percent expressed at least some interest– in fact, 19 percent expressed being very interested.
When it comes down to cost, though, 54 percent of buyers were willing to pay for the new product if it was the same price they were currently paying, but 46 percent would only consider purchasing the product if it was at a price lower than what they were currently paying.
Buyers have to take into account the potential cost of moving from one supplier to another, especially given the current supplier might be providing the buyer's business with items other than meat, Shepherd explained.
Demand shows that buyers were most interested in beef, then pork, then goat and lamb– and some buyers will only want specific cuts of meat, Shepherd said.
Traceability was of greatest concern to customers– "There's a lot of concern in food safety right now," Shepherd said– followed by compliance with farm labor requirements, liability insurance and a farm food safety plan, which goes hand in hand with traceability; there was little concern by those buyers surveyed with Good Agricultural Practices (GAP) or Hazard Analysis & Critical Control Points (HACCP) certifications.
Further, there's a proven positive association with "Locally Grown" and "Family Farmers;" "Pasture-Raised" is preferred to "Grass-Fed;" and the time and distance to market is considered an indicator of freshness and quality, according to the report.
Dollars and Sense
The total development cost of a processing facility comes to $738,050.
The CAED estimated a 5,000-square-foot building (this is the smallest a facility like this could be, Shepherd said) at $551,050– 3,650 square feet of that being non-refrigerated at a cost of $77 per square foot, and the other 1,350 square feet being refrigerated at a cost of $200 per square foot– $125,000 in equipment, $6,000 each in land and site preparation, and a $50,000 contingency would do the trick for this "high-end processing facility," based on similar facilities.
Loans, according to the study:
• A 20-year mortgage loan of $470,440, at 5.5 percent annual interest, means monthly payments of more than $3,236, an annual total of $38,833.
• A 10-year equipment loan of $120,000, at 7 percent annual interest, means monthly payments of $1,393, an annual total of $16,720.
• A two-year working capital loan of $50,000, at 9.5 percent annual interest, means monthly payments of $2,296, an annual total of $27,549. A capital loan would provide funds for employees, electricity and money to work with.
• A five-year, $30,000 loan for a refrigerated truck, at 7 percent annual interest, means monthly payments of $594, an annual total of $7,128.
One attendee asked about adding poultry processing to the facility.
Shepherd responded that that would take "a whole different assembly line."
"A livestock processing facility is number one in capturing the most interest here," Shepherd said.
There are two options the study explored as far as how the facility operates, individual and plant ownership...
With this option, the producer retains ownership of the livestock product. The facility is simply a means to have the livestock processed and the producer would then take responsibility for distribution of his/her finished product. The plant would charge a flat kill fee– an estimated $40 per cow, $25 per hog, $20 per goat or lamb– plus a basic processing fee of about 30 cents per pound.
With this model, total expenses come to more than $491,000 the first year.
Estimating 1,000 cows, 200 hogs and 145 other animals, like goats or lambs, are slaughtered the first year, revenues would total almost $309,000, which means net income would be negative to the tune of almost $183,000.
The break-even level comes with 1,108 cows, 300 hogs and 200 other animals being slaughtered from the second year on, according to the survey.
The second year would show a decrease in total expenses to $357,000, an increase in total revenues to more than $350,000, but a net income that's still in the red by $6,500.
Finally, from the third year on, total expenses level to more than $329,000 per year, total revenues stay at the previously mentioned more than $350,000, but the net income moves into the black at $21,000 annually.
With the plant ownership model, the facility would take ownership of the animal upon delivery, at which time producers would be paid market price, based on the Farm Gate Value Report. The plant would then sell the finished product at wholesale price.
Expense is a bit higher here, as there are additional costs, like the purchase of the previously mentioned refrigerated delivery truck and the salaries for the truck driver, maybe $25,000, and a sales manager, maybe $45,000.
The first year, total expenses– including operating expenses, the cost of animals and other expenses– come to more than $1.636 million. With $1.36 million in revenue from beef, $18,300 in revenue from pork and $64,250 in revenue from the slaughter of other animals, total revenues from year one come in at more than $1.4 million.
Net income for year one– negative more than $191,000.
In the second year of operation, total cost decreases to more than $1.627 million; from year three to year five, total cost drops again to $1.6 million; and from year six on, total cost comes to $1.59 million.
Revenues level out starting in year two. Funds from beef increase to $1.51 million, pork to more than $27,000 and other animals to more than $73,000 annually. Total revenue from the second year on comes to more than $1.6 million annually.
Net income, then, is still in the red in year two to the tune of $17,000. Net income become positive beginning year three. From the third to fifth year, net income is more than $10,000; from year six on, net income comes to almost $18,000 annually.
Bear in mind, these numbers are also based on the same amount on animals going through the facility as in the individual ownership model: 1,000 cows, 200 hogs and 145 other animals the first year, and 1,108 cows, 300 hogs and 200 other animals from the second year on.
The Good and the Bad
The Individual Ownership Model would be most profitable, but that's only if it's run at capacity. However, there's no supply of livestock dedicated to the facility; it's simply a means to an end for producers to sell their product on their own and there's no guarantee of the amount of product that would go through the facility month to month, meaning it's much more uncertain whether the facility will make the revenues it needs to operate. While there are no costs associated with sales, marketing or delivery, as with the Plant Ownership Model, there's little opportunity to develop a brand. Brand development would be up to each individual producer, which would pit small farmers against each other.
"Ten or 20 [small producers] all competing against each other would drive the price down," Shepherd said.
The Plant Ownership Model would consolidate the products from area farmers under one brand, which would mean having the volume to go after large-scale customers, like supermarkets, and a controlled, non-fluctuating supply chain. However, there's a higher cost associated with this model– the sales manager and truck driver's salaries, for example.
A hybrid model of the two could prove to be the best idea, Shepherd suggested. From Plant Ownership, bring together "small producers of 'boutique' products into one brand" and use the opportunity to develop and market one brand to an established supply chain. Producers would set aside a certain amount of their livestock for the plant. And from Individual Ownership, continue to be open for farmers to use the facility for a "kill fee."
Where do we go from here?
There's been a 3 percent decrease in the number of cows in Georgia– from 590,000 in 2012 to 570,000 in 2013, according to a Feb. 1 U.S. Department of Agriculture livestock news release. The number of beef cows is down 4 percent– 512,000 in 2012 to 490,000 in 2013– but the amount of milk cows is up 3 percent– 78,000 in 2012 to 80,000 in 2013.
It is questionable whether there are enough cattle being raised to be beef cows rather than dairy cows in the 100-mile range to support the proposed facility, and whether producers would be willing to raise beef cows as opposed to dairy cows. The operations of raising beef cattle are quite different than dairy cattle.
Shepherd encouraged a hybrid model.
"If you have something where you did have the volume dedicated to it and you only make a small amount from the kill fee model, I think that would be a little safer," Shepherd said.
The study is still incomplete, Madison-Morgan County Chamber of Commerce President Bob Hughes said. "In the meantime we're exploring with some folks in the business and there desires about where to take it from here," he said.
There's certainly interest in opening such a facility, Hughes said, but it's going to up to private entrepreneurs to take it from here.
"We've got several large beef producers and people that have interest… They're looking at it," Hughes said. "They will need to go do a more in-depth financial analysis."
"We need someone who's ready to put capital at risk."
Printed in the February 28, 2013