Cowee, M., Curtis, K., Harris, T., and Lewis, S. 2008, Financial Potential for Livestock Slaughter and Processing in Nevada, University of Nevada Cooperative Extension

Introduction

In 2006, a survey of livestock producers and meat consumers in Nevada was undertaken in an effort to assess the feasibility of building a livestock slaughter and processing facility in the state. The data collected from these surveys were analyzed in conjunction with current nationwide pricing data for buildings, equipment, livestock and meats to determine the financial costs of building and operating such a facility. This publication presents a brief overview of the financial information generated from the study. For the full study results, please see the University Center for Economic Development technical report UCED 2006/07-13, by Curtis et al., 2007.

This section of the study addresses financial analyses and recommendations for an optimal solution to slaughtering and processing animals. Based on the findings from these analyses, the optimal solution is thought to be two mobile slaughter units and a stationary processing plant. Included here are detailed start-up costs, current slaughter demand, a distributed slaughter schedule to maximize the use of two mobile units and financial forecasts for both the mobile slaughter units and the processing facility.

Mobile Slaughter Unit Background

Mobile slaughter units have been operated in Washington and New Mexico and have been considered in California and Wyoming. The many benefits of a mobile slaughter unit include the fact that United States Department of Agriculture (USDA) certified inspected meats slaughtered at the unit can be sold at local stores and restaurants; livestock is treated more humanely, as transport stresses are minimized or eliminated; and transport costs are negated (Lopez Community Land Trust, 2007).

Mobile slaughter units are currently built by TriVan Truck Body, located in Ferndale, WA. According to Marty VanDriel, the sales manager at TriVan, TriVan’s mobile slaughter units come fully equipped (including all furnishings and equipment) and satisfy USDA inspection and licensing requirements (personal conversation, January 2007). The unit consists of a mechanical/storage unit, slaughter unit and refrigeration unit. Miscellaneous equipment includes knives, saws, scales and other necessary supplies. A semi-truck tractor is necessary to pull the trailer and must be purchased separately, either new or used. It takes approximately 14 to 20 weeks to receive a custom-built mobile slaughter unit from TriVan. TriVan requires 30 percent of the payment at time of order and the balance upon delivery. The approximate vehicle weight is 25,000 pounds.

Existing Slaughter Schedule

The results of the livestock producer survey indicated that the majority of livestock calving in Nevada occurs in the spring. As livestock is typically slaughtered between 18 and 22 months of age, the majority of the slaughter demand would occur in the fall. However, survey respondents expressed their willingness to adjust their calving schedule to regulate excess demand in the fall and allow for year-round operation of mobile units. To accommodate this and encourage winter and spring slaughter demand, variable livestock pricing might be used.

Existing Slaughter Demand vs. Mobile Unit Capacity

Using the survey data, it was found that a grand total of 2,614,440 pounds of meat would be sent to the slaughtering and processing facility on an annual basis (Table 1) with average monthly slaughtering demand ranging from 21,969 pounds in the winter (December through February) to 693,133 pounds in the fall (September through November).

Table 1: Total Seasonal Slaughter Demand

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Cattle slaughtered for beef would provide the majority of the business for the slaughtering unit with 21,969 pounds slaughtered in the winter, 118,885 pounds in the spring, 28,398 in the summer and 479,499 pounds slaughtered in the winter (Table 2). Sheep and lamb would also play a large role in the slaughter facility with 8,275 pounds slaughtered in the summer and 205,375 pounds in the fall. Hogs would be slaughtered to a lesser but still important degree with 820 pounds slaughtered in the spring and 8,260 pounds slaughtered in the fall.

Table 2: Seasonal Slaughter Demand by Livestock Type

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Distributed Slaughter Demand

A mobile unit is only capable of slaughtering 90,400 pounds monthly even if the unit is operating at full capacity and having the meat sent to a processing plant for aging. Based on this figure, even using an evenly distributed monthly slaughter demand schedule, the annual slaughter demand exceeds capacity by 241 percent for a single slaughter unit.

To compare slaughter demand to mobile unit capacity, a monthly slaughter schedule was developed, using the livestock data provided by producers interested in participating in the project. This schedule was based on the assumption that some producers would be willing to alter their slaughter schedule to accommodate the capacity constraints of the units (Table 3). Assuming an average month has 20 work days, two mobile slaughter units are capable of processing approximately 180,800 pounds of meat per month, or 2,169,600 pounds a year. This assessment assumes a total of 240 operating days for each unit per calendar year. Using these figures, slaughter demand would exceed unit capacity by 17 percent. However, as these numbers are conceptual, it is recommended that only two units are purchased at the outset, with an additional unit to be purchased in the future if necessary to meet demand.

Table 3: Monthly and Annual Slaughter Demand and Capacity

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Mobile Unit Operating Costs

Labor Expenses

Two to three employees are needed for each mobile slaughter unit to operate three distinct job responsibilities. These positions include two butchers, two assistants/drivers, and two USDA Hazard Analysis and Critical Control Point (HACCP) inspectors (Table 4). The USDA Hazard Analysis and Critical Control Point (HACCP) regulation requires all slaughter and packaging facilities to develop a plan to identify critical control points for meat safety and to develop specific action plans to ensure food safety. The HACCP inspector is responsible for all meat inspection and supervisory capabilities within the plant. This position can be combined with the on-site butcher position, provided the employee has time to facilitate the necessary paperwork required by the USDA. Annual salaries are in the range of $39,940 to $56,849. A salary of $46,221 was used for this study (Career Journal, 2006). The assistants/drivers would be salaried at approximately $25,376 per year and the butchers would require an estimated annual salary of $30,056 (Business Seminole, 2006). An additional 15 percent of total salary was added to this analysis to account for taxes and benefits.

Table 4: Mobile Slaughter Unit Salaries

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Diesel Fuel Costs

The size of the service area directly affects the fuel and maintenance costs for the mobile unit. The area of interest includes the area encompassing Dayton, Carson Valley, Lahontan, Smith Valley, Mason Valley and Antelope Valley. This is an area with a driving circumference of approximately 200 miles. Washoe Valley and Bridgeport add an additional roundtrip of approximately 40 miles. It is expected that the mobile slaughter units can potentially travel up to 220 miles each day in service.

The fuel cost estimates for the study were based on the assumption that the mobile units would travel 150 miles each day with a fuel efficiency rate of 5 miles to the gallon. At the time of the study, the national average cost of diesel fuel was $2.82 per gallon, so each unit was estimated to have a daily fuel allowance of $100 plus $15 each day for repairs (for a total of $230 per day for fuel and repairs). Diesel fuel costs have increased since the time of this estimate, however, fuel cost increases are offset by “miscellaneous supplies” in the calculation of start-up costs.

Offal Disposal

The survey results showed that 93 percent of respondents have offal disposal facilities. This analysis does not take into account offal disposal costs and assumes the waste remains on the property where the slaughter occurs.

Portable Corral Facilities

Corral facilities are needed on each farm/ranch when using the mobile slaughter unit. More than two-thirds of survey respondents (68 percent) do not have corral facilities available and would need to purchase five-foot portable corral facilities, ranging in price from $250 to $800. Because this is a personal expense that will not apply to all producers, the expense was not included in this analysis.

Mobile Slaughter Unit Start-up Costs

Table 5 lists the start-up costs for obtaining the slaughter units and making them operationally ready. The cost for one mobile unit is $140,000 plus an additional $5,000 per unit for miscellaneous supplies. Each unit will also need a semi-trailer to haul it, which can cost between $20,000 and $90,000, but has been estimated at $45,000 each for this study. There is an estimated $10,325 in sales tax on each trailer using a sales tax rate of 7.375 percent (2006 average for Douglas and Lyon counties and Carson City). For validation and HACCP planning, the cost for each unit is estimated at $4,500 with an additional $2,000 per unit allotted for staff training. Other expenses include auto insurance, supplies and vehicle licensing and loan principal and interest. The total start-up cost estimates then comes to $206, 825 per unit, or $413,650 for two units.

Table 5: Mobile Slaughter Unit Start-up Costs

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Mobile Slaughter Unit Loan

The loan principle amount was calculated at $413,650 for two mobile slaughter units (Table 6). Loan interest is assumed at a fixed rate of 9 percent over a period of 10 years. Monthly loan payments would be $5,239.94 for an annual total of $62,879.28. The interest over the term of the loan would total $215,142.80.

Table 6: Mobile Slaughter Unit Loan Breakdown

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Stationary Processing Facility

Based on survey results, it is recommended that the stationary processing facility be located in an area of Nevada central to member ranches. Producer survey results, location of potential customers and cost of land throughout Northern Nevada indicate that such a viable central location is Silver Springs, approximately 35 miles east of Carson City and 26 miles west of Fallon. This central location accommodates the Lahontan Valley where 28 percent of respondents reside and is 32 miles from Yerington where an additional 13 percent of respondents reside. Silver Springs is also 51 miles from the Carson Valley where 16 percent of the respondents reside.

Stationary Processing Facility Construction Costs

Land

As of January 1, 2006, according to the USDA Agricultural Statistics Board, a measurement of the value of land in Nevada was $1,000 per acre. This represents a 15 percent increase from 2005 (USDA-NASS, 2006). The processing facility will require one acre of land. Land improvements necessary for the facility include road access, water access, sewer lines, phone service, electricity and natural gas. A rough estimate of $20,000 in land improvements is conditional on the location of the land purchased and its proximity to existing services.

Building

A prefabricated building can be purchased from $20 to $30 per sq. foot, excluding delivery, concrete work, site prep, wiring, plumbing and interior design (Sacco, 2007). Such a building would be of steel construction with steel beams, sheeting and fasteners delivered to the site where the building is pieced together. Any interior work would be done after construction is complete. Additionally, snow load requirements must be considered when figuring roofing requirements. This study is estimating the need for a 10,000-sq. foot building, costing between $250,000 and $300,000.

A general contractor would be hired to be responsible for all permitting, architectural review, concrete foundation and the construction of the building. Estimates range from $75 to $100 per square foot to assemble. Using a 10,000-sq. foot building, contractor fees are estimated at $1,000,000 (NCED 2000-adjusted for inflation).

If chosen as the facility location, the Silver Springs building requirements are such that all commercial units must purchase equivalent dwelling units (EDU). All commercial operations are required to purchase 1.5 EDUs, which allow the facility to operate up to 38 sinks and toilets at an estimated cost of $12,369.

Refrigeration units are discussed in the equipment section but must be installed during the building process. Refrigeration costs are included in the building construction analysis so that they may be included in the capital loan figures. Table 7 summarizes the building expenses.

Table 7: Stationary Processing Facility Building Costs

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Furniture and Fixtures

The stationary processing facility would need office equipment, such as a communications system (i.e. telephones) and office furniture (Table 8). Additionally, a computer network, five computers and workstations, and an all-in-one printer/copier/fax/scanner would be necessary (Prices from Dell.com, 2007; OfficeDepot.com, 2007; TelephoneSystems.com, 2007; CSNOfficeFurniture.com, 2007).

Table 8: Processing Facility Furniture and Fixtures Costs

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Stationary Processing Facility Equipment Costs

Refrigeration Units

The refrigerated units are prefabricated units delivered to the site directly from the manufacturer. For optimal storage, two 10 x 30-foot refrigeration (cooler) units are necessary (Table 9). Once meat has been cut, a freezer unit is needed for storage before the meat goes to the buyer. These approximate prices include delivery and installation (Bush Refrigeration, 2007).

Table 9: Processing Facility Refrigeration and Freezer Unit Costs

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Other Processing Facility Equipment: Viscera and Cutting Rooms

Tables 10 and 11 detail equipment required for the processing facility (Center for Economic Initiatives, 2004). While used equipment is readily available, the prices listed below reflect new purchase costs. For the financial analysis, a percentage reduction for total capital expenses was used to provide a financial analysis reflecting actual costs for a combination of used and new equipment. A monthly expense of $100 is used to reflect replacement and repair costs in the financial analysis.

Table 10: Processing Facility Viscera Room Equipment Costs

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Table 11: Processing Facility Cutting Room Equipment Costs

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Processing Facility Start-up Costs

Table 12 outlines the total start-up costs for the processing facility outlined in the previous sections. Building expenses include the cost of material, contractor labor, refrigeration/freezer units, land improvements and sewer fees.

Table 12: Stationary Processing Facility Start-up Costs

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Processing Facility Loan

The processing facility loan principle amount was estimated as $1,505,829, reflecting the total start-up costs to construct and furnish the processing facility (Table 13). This analysis assumes a loan period of 15 years at 9 percent interest. The monthly loan payment amount would be $15,273.12 with combined annual payments of $183,277.44. The interest paid over the term of the loan would be $1,243,332.60.

Table 13: Stationary Processing Facility Loan Breakdown

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Stationary Processing Facility Operating Costs

The financial forecast shows an estimate of annual income, cost of goods and operating costs for the processing facility. Cost of goods is calculated as the price paid to the farmer. Retail revenue is the price received by the processing facility. These include general expenses necessary to process the meat and distribute to retail locations. The financial statement also includes office expenses, such as telephones, office supplies and utilities, transportation and packaging expenses, and maintenance and tool costs. Legal and accounting fees are also included.

Labor Expenses

Salary expenses include a full-time plant manager/butcher, a brand/marketing product manager, an additional full-time butcher and a full-time office employee (Table 14). Additional butchers and seasonal help may be hired as needed based on processing demand determined by the plant manager.

Plant managers are responsible for overall operations, marketing and member services. This position requires formal training in the agribusiness field, meat production experience and a USDA slaughter certification. The plant manager will also be responsible for scheduling and managing the mobile slaughter units. A plant manager usually receives a salary and full benefit package. Plant managers earn approximately $72,100 a year depending on size and location of the facility (Career Journal, 2006).

The job of brand/marketing product manager is to create and implement product marketing activities to develop brand awareness and maximize sales. This individual should have experience marketing a product in a niche market and would report to the plant manager. The median annual salary for brand/marketing product managers is $83,441 (Salary.com, 2007).

For the financial calculations, it was assumed that one full-time butcher would be needed at the processing facility. Butchers earn an annual salary between $17,000 and 42,000, depending on duration and type of experience (Career Prospects, 2007). An annual salary of $42,000 was used for the forecast.

If additional butchers were needed to meet seasonal demand, they would be paid on an hourly basis, typically around $15 an hour in Northern Nevada (approximately $21,440 for 24 weeks per year) with optional benefits (College Grad, 2007). Seasonal labor requires experience, but no formal education.

Office staff would be paid $12 per hour with or without benefits, which equates to an annual salary of $24,788. The office employee should have secretarial and bookkeeping skills, although a certified public accountant (CPA) should be kept on retainer for profit distribution and tax filing. For all salaries, a 15 percent tax and benefits percentage was calculated.

Table 14: Processing Facility Salaries

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Revenue and Cost Projections

Retail Revenue

Retail prices were calculated using a weighted method to take into account the different cuts of beef and varying prices (Cattlemen’s Beef Board, 2006). At the time of the study, retail pricing of cattle was $2.09 a pound (USDA-AMS, 2007); pork was $1.59 a pound (USDA-ERS, 2004); and sheep/lamb was $176.79 a head (American Sheep Industry Association, 2006). Based on results from the accompanying consumer survey, retail prices were increased by 7 percent for pork, 17 percent for lamb, 13 percent for low-value beef (ground beef, chuck, etc.) and 30 percent for high-value beef (steak, sirloin, etc). These prices reflect the higher premium that consumers stated they are willing to pay (Curtis et al., 2007). The figures used to calculate revenue for each livestock/meat type are outlined in Table 15.

Using the premium beef prices, it was estimated that cattle would earn revenue of $1,876.64 per head. The total revenue for beef was calculated by multiplying the price per cattle by the number of animals (168) slaughtered each month for a total of $315,781 a month. The number of cattle was calculated using the survey data of 134,616 total pounds divided by 800 pounds (800 pounds is a lower weight bound on a grass-fed animal, 1000 to1100 pounds would increase the likelihood of receiving a Choice rating).

It was estimated that hogs would earn a per-head premium retail price of $285.10. Revenue for hogs was calculated by multiplying the price per pork and the number of animals slaughtered each month (10) for a total of $2,851 a month. The number of pigs (10) was calculated using the survey data of 1,884 total pounds divided by 200 pounds, which is the average weight of a pig.

Based on a premium per-pound price for sheep/lamb, revenue was calculated at $206.84 per head. Sheep/Lamb revenue was computed at the carcass weight price multiplied by the number of animals per month (296) for total revenue of $61,133. The number of sheep/lamb (296) was calculated using the survey data of 44,332 total pounds divided by 85 pounds (based on a set price for carcass weight at 85 pounds plus, American Sheep Industry Association, 2006).

Table 15: Meat Retail Prices and Estimated Revenue Projections

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Cost of Goods/Wholesale Pricing

The cost of goods represents the wholesale meat prices paid to member ranches for their livestock (Table 16). Traditional wholesale pricing of cattle is $89.99/ctw for an 800-pound cow, which equates to approximately $719.92 per carcass (USDA-AMS, 2007). A study by Acevedo, Lawrence and Smith (2006) found the cost of production for grass-fed beef was higher than beef fed on a traditional diet. Therefore, a sustainable price of $1.30/lb was used for this study. This price is paid on total carcass weight, not dressed weight. Beef was calculated at approximately $1,040 ($1.30/lb) for carcass weight at 168 cattle a month for a total monthly cost of goods of $174,720 for cattle (National Cattlemen’s Beef Association, 2003). Annual cost of goods for cattle is $2,096,640.

Traditional hog pricing is $40.20/ctw for a 200-pound pig, which comes to approximately $80.40 per carcass (USDA-ERS, 2004). Based on previous consumer willingness to pay studies for wholesale grass-fed pork and lamb, wholesale prices for these products were increased by 20 percent over traditional wholesale pricing, therefore hogs were calculated at approximately $0.48 per pound. Based on given carcass weight and 10 pigs a month, total monthly cost of goods for hogs came to $965 and an annual cost of goods of $11,578.

Traditional pricing for sheep/lamb is $95.50 for a carcass weight equal to and exceeding 85 pounds (American Sheep Industry Association, 2006). With the mentioned 20 percent premium, sheep/lamb was calculated at $1.35 per pound. With an estimated 296 sheep/lamb a month, the monthly cost of goods for sheep/lamb comes to $33,922 or $407,059 per year.

Table 16: Meat Cost of Goods

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Overview of First Year Financials

All of the costs and revenues previously mentioned are summarized in the following tables to show how the first year operating profit was calculated. Table 17 outlines the processing facility revenue of $2,041,893.85. Subtracted from this figure are the processing facility salaries (Table 18) and mobile slaughter unit salaries (Table 19) for total salary deductions of $510,399.20 and processing facility (Table 20) and mobile unit expenditures (Table 21) for total expenditure deductions of $517,879.17. This leaves a first-year operating profit of $1,013,615.48.

Table 17: Processing Facility Revenue

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Table 18: Processing Facility Salaries

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Table 19: Mobile Slaughter Unit Salaries

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Table 20: Processing Facility Expenses

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Table 21: Mobile Slaughter Unit Expenses

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Table 22: First Year Operating Profit Calculation

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Conclusion

The results of this study found that the optimal solution for a slaughtering and processing facility in Nevada is to have both a mobile slaughter unit and a stationary facility. In order to meet expressed slaughtering demand, two mobile units would be necessary. Based on the location of interested respondents and potential consumers, Silver Springs is considered to be the best location for the stationary processing facility. While this project would require a great deal of start-up capital, the projected expenses and revenues forecast that the entire operation could be profitable from the outset.

References

Acevedo, N., J.D. Lawrence, and M. Smith, (2006). “Organic, Natural and Grass-Fed Beef: Profitability and Constraints to Production in the Midwestern U.S.” Publication of Iowa State Value-Added Agriculture Extension.

American Sheep Industry Association, (2006). “Weekly Market Summary for Week Ending January 12, 2006.” Online. Available at Weekly Market Summary for Week Ending. Retrieved January 2007.

Bush Refrigeration, (2007), “Walk In Coolers and Freezers.” Online. Available at Walk In Coolers and Freezers. Retrieved January 2007.

Business Seminole, (2006). “Average Salary by Occupation – 2006 Estimates.” Online. Available at Average Salary by Occupation. Retrieved January 2007.

Cattlemen’s Beef Board by the Cattlemen’s Beef Association, (2006). “Wholesale Pricing Chart: Choice Grade Sub-Primals.” Online. Available at Wholesale Pricing Chart:. Retrieved January 2007.

Career Journal, (2006). “Meat-and-Poultry-Company Executives at Large Companies.”. Online. Available at Meat-and-Poultry-Company Executives at Large Companies. Retrieved January 2007.

Career Prospects, (2007). “Butchers”. Online. Retrieved January 2007.

Center for Economic Initiatives, (2004). “Plant Requirements to Set Up a Meat Processing Plant.” Online. Retrieved January 2006.

College Grad, (2007). “Food Processing Occupations.” Online. Available at Food Processing Occupations. Retrieved January 2007.

CSN Office Furniture, (2007). Online. Available at CSN Office Furniture. Retrieved January 2007.

Curtis, K., M. Cowee, A. Acosta, W. Hu, S. Lewis and T. Harris, (2007). “Locally Produced Livestock Processing and Marketing Feasibility Assessment.” University Center for Economic Development Technical Report UCED 2006/07-13.

Dell Online Store, (2007). “Servers, Storage & Networking”, “Desktops”, “Printers, Ink & Toner.” Online. Available at Servers, Storage & Networking. Retrieved January 2007.

Lopez Community Land Trust. Online at Lopez Community Land Trust. Retrieved January 2007.

Nevada Commission on Economic Development (NCED), (2000). “Construction/Lease Costs, Comparison of Western Industrial Real Estate Prices.” Online. Available at Construction/Lease Costs. Retrieved January 2007.

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USDA-AMS, (2007). “National Daily Direct Slaughter Cattle – Negotiated Purchases – Summary. Wednesday, February 7, 2007.” Online. Available at National Daily Direct Slaughter Cattle. Retrieved February 2007.

USDA-ERS, (2004). “Beef and Pork Values and Price Spreads Explained.” Electronic Outlook Report – LDP-M-118-01. Online. Available at Beef and Pork Values and Price Spreads Explained. Retrieved December 2006.

USDA-NASS, (2006). “Land Values and Cash Rents 2006 Summary.” Online. Available at Land Values and Cash Rents 2006 Summary. Retrieved January 2007.

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