Building a Future in
Rural Saskatchewan
Down on the Farm
With Primary Producer
And Community-Owned
Integrated Fuel Ethanol-Feedlot Facilities
A Summary Report of a Feasibility Study Prepared by TDI Projects, Inc.
Submitted to Emmet E. Reidy m.e.Management Consultants Inc.
for
The Agriculture Producers Association of Saskatchewan
April 2004
APAS
Canada: Western Economic Diversification
Introduction:
This summary booklet will be of interest to communities and primary producers considering the ownership and operation of Integrated Fuel Ethanol-Livestock Feeding facilities.
The Agriculture Producers Association of Saskatchewan (APAS) engaged m.e. Management Consultants Inc., of Regina to coordinate a major research study to determine the potential benefits to rural Saskatchewan communities of an integrated ethanol-feedlot industry.
TDI Projects Inc., a well-known western Canadian engineering firm, was commissioned to develop the technical and other data pertinent to the research. TDI Projects has 18 years experience in the ethanol industry, implementing new technologies and applying new approaches to agribusiness. Besides its research expertise the company has also been a leader in designing and building integrated fuel ethanol-livestock feeding facilities in the Prairie Provinces.
The research study concludes that Saskatchewan can easily support four or five regional ethanol-feedlot operations, each producing 15 million litres of ethanol annually, integrated with a 20,000 head feedlot finishing 35,000 head per year. The study also provides a template for proposed ethanol-feedlot complexes that can be applied to all agriculture regions of the province. In addition, it proposes a centralized, professional management structure to achieve greater purchasing and marketing efficiencies supporting a network of complexes.
This summary booklet was prepared by Armstrong Communications, Regina.
The Agriculture Producers Association of Saskatchewan strongly recommends that community leaders wanting more information about integrated ethanol-feedlot projects obtain a copy of the full report by TDI Projects Inc. To order a copy, contac the APAS head office:
Regina, SK
S4P 1C8
306-789-7774
www.apas.ca
Why the Interest in Ethanol?
The drive to improve air quality and concerns about climate change are major factors driving the search of renewable and/or alternative energy sources in North America. Security of energy supply is also a major strategic concern in the United States, where 58 ethanol plants were operating in 2002, with another 17 new plants or expansions announced or underway.
Canada's Climate Change Action Plan is the main force behind the drive to reduce air pollution and curb greenhouse gas emissions in our country. The plan includes funding to increase the supply of renewable and alternative fuels, including ethanol and biodiesel. The federal government has also launched a National Biomass Ethanol Program, which will invest in certain capital costs associated with the ethanol plant, to a maximum of 25 per cent. This investment is subordinate debt.
Saskatchewan's Greenprint ethanol strategy is designed to encourage the development of an ethanol industry in the province, bringing both economic and environmental benefits. The province's strategy includes offering a tax break at the gas pump, mandated ethanol blends in gasoline and direct investment in productions. The strategy has created strong interest among producers and community groups in building an ethanol plant in their community.
Integration Makes the Business Case
Each othe three ethanol plants operating in Western Canada- Minnedosa, Manitoba; Lanigan, Saskatchewan and Red Deer, Alberta- have employed the economics of integration. Poundmaker Agventures at Lanigan features a fuel ethanol plant integrated with a feedlot, while the other twoplants are integrated with the production of baking products for human consumption. TDI Projects has analysed the various ethanol-based facilities and concluded that the least capital-intensive option available is a feed mill and ethanol facility, filly integrated with a livestock feeding operation.
Major economic advantages resulting from integration:
- Reduced cost for grain: The value of the co-products derived from the ethanol production process, which are fed to the cattle in the feedlot, effectively reduce the cost of the ethanol feedstock to one-quarter of the market price for grain. Mohawk Oil has stated that the value of the ethanol co-products reduces the cost of the wheat feedstock at Poundmaker to about five cents per litre.
- Competitive feed advantage: The ethanol process enhances the nutritional value of the wt distillers grain that is then fed to the feedlot cattle, producing a 20 per cent advantage compared to a stand-along feedlot of the same size
- Natural gas cost reduced: The nutritionally-rich liquid (thin stillage) from the ethanol is added to the cattle watering system rather than being dried, reducing the amount of natural gas consumed by the operation.
- Reduced Capital Cost: The costs associated with drying, handling and marketing distiller's grain are eliminated, reducing capital costs by 30 per cent compared with wet milling plants.
- An ethanol plant, which converts the starch in wheat to a fuel ethanol product, with an annual production capacity of 15 million litres.
- A grain and cattle feed processing area, with a feed mill, silage storage, straw storage and cattle processing area.
- Systems which add the high protein, wet distillers grain from the ethanol production process to the dry feed ration for cattle, and the liquid from the process (thin stillage) to the cattle watering system.
- A feedlot on a single section of land, capable of handling 20,000 head of cattle.
- Utility buildings, offices, water supply, electrical and natural gas systems, weigh scales and manure disposal equipment
The study indicates that Saskatchewan could support four or five regional ethanol-feedlot complexes. It proposes that these integrated complexes share central management services capable of creating purchasing and marketing alliances to maximize the economic performance of their operations.
Success Factors
There are several key factors which determine whether an ethanol-feedlot complex will be successful. These factors are:
- ethanol markets
- location issues
- regulatory and environmental issues
- financing and investment
- effective business structures
- cattle markets,and
- centralized, professional management
The APAS study outlines these factors more in detail. The following provides an overview of each key factor.
1. Ethanol Markets
The Saskatchewan government's intent to mandate a 10 per cent blend of fuel ethanol with gasoline will create a 160 million litre per year market for Saskatchewan-based ethanol production. Saskatchewan and Manitoba, the two provinces most advanced in encouraging ethanol production, will soon represent a mandated ethanol market of 300 million litres per year.
In addition, the federal government proposes to mandate by 2010 a 10 per cent ethanol blend in 35 per cent of domestic gasoline sales. This represents a domestic market of 1.35 million litres of ethanol. More importantly, this will likely create a 150 million litre per year market in Alberta and British Columbia for Saskatchewan fuel ethanol producers. In the near term, the five proposed regional ethanol-feedlot complexes in Saskatchewan would find ready-and profitable-markets in the United States, where ethanol demand is growing rapidly.
Of the nearby border states of Minnesota, North Dakota, Montana, Idaho and Washington, only Minnesota has actively encouraged ethanol development with a combination of production incentives and construction financing. All but one of the 14 plants in Minnesota are farmer-owned co-ops.
2. Location
The supply region for each ethanol-feeder complex would be about 64 kilometers (40 miles) square. The study also found that each of the eight crop districts in Saskatchewan is capable of providing the grain required for such a complex, and of supplying the feeder cattle for a 20,000-head feedlot. The province's finished cattle market could easily accommodate the combined total of 175,000 head produced each year by five complexes, as this represents only about 12 per cent of the finished cattle marketed in Saskatchewan each year.
The study recommends that proposed locations be analysed using Site Selection Criteria outlined in detail in the report. In brief, these criteria include:
Transportation
The study anticipates that trucking will handle most of the transport to and from the complex. Accessible trucking routes and available trucking firms are important consideration.
Water
Cattle drinking water will require a supply of 727,000 litres per day (160,000 gallons). That's equivalent to daily consumption in a large town such as Tisdale, Rosetown or Biggar.
Energy
Energy supply is not an issue, as Saskatchewan has well-developed electrical and natural gas distribution systems that can be extended to any complex located in Sasktchewan's agriculture zone.
Land
Land requirements include a site for the complex, cropland to produce feed and land for manure application. The feedlot requires most of the land for manure application. The feedlot requires most of the land in an ethanol-feedlot complex, about one hectare for each 300 head of feedlot capacity (one acre per 125 head).
Labour Supply
Creating Jobs for local people is one of the main reasons why communities pursue economic development projects such as an ethanol-feedlot complex. Most agriculture areas of the province have a ready labour supply, and the province's education and training system can provide any additional training that workers might require.
3. Regular and Environmental Issues
Any ethanol-feedlot complex will have to satisfy a wide variety of federal, provincial and municipal legislative and regulatory requirement, which are spelled out in detail in the full report. For example, a proposed complex would be subject to Saskatchewan Environmental Assessment Act. In addition, if the proposed project receives funding from the federal government, it would also be subject to the Canadian Environmental Assessment Act. Intensive livestock operations also need approval from the local municipality before they can proceed.
4. Financing
The total capital cost of an integrated ethanol-feedlot complex producing 15 million litres of fuel ethanol and feeding 20,000 head will be up to $20 million. Besides capable management and a sound business plan, banks, credit unions and other lending institutions will look for owners to invest 50 per cent into the project, or about $10 million, not including the ownership of the cattle for the feedlot. If the National Biomass Ethanol Program invests in the project, that could reduce the owner equity by as much sa $3 million. Approvals under this program must meet a number of conditions. These conditions should be addressed in the business planning process.
The complete report outlines in detail what should be included in a business plan, along with several financing options to consider in preparing a business plan for the project. As part of the decision-making process regarding financing, prospective producer-investors need realistic estimtes of how much of their grain the complex will consume, and the price they can expect to receive. These numbers will help the potential investor estimate the number of years required to pay back the original investment, and any future profit.
5. Business Structures
The structure that investors choose for a business can determine its potential for success. Investors and managers must be clear on the goals and objectives for the business, and apply them in choosing the right structure for the business. Basic business structures include:
- Proprietorship
- Partnership
- Corporation
- Co-operative and
- New Generation Co-operative
- a saving of two or three per cent n the purchase of feedstock (livestock or grain)
- a saving of $17,000 to $35,000 annually on the purchase of chemicals and enzymes
- increased returns of one to two cents per pound on cattle marketed, amounting to $400,000 to $800,000 per year
- estimated capital cost savings of as much as $10 million if five regional facilities are built
- operational savings of approximately $1 million per year for each plant, of $5 million for a cluster of five complexes
- approximately 15,000 person-days of employment to construct each complex, wth $14-$16 million in construction activity
- full-time employment for 45 to 50 people at each complex, representing an annual payroll of about $1 million
- an additional 100 full-time and seasonal jobs created indirectly by each operation
- local supply purchases of about $1 million annually
- increased tax base and taxable expenditures at the local and provincial levels and
- development of well-management, stable, environmentally friendly industries
- one-third of employees got married while working at Poundmaker, and almost one-third started families while employed there
- half of the employees live within 16 kilometers of the complex, and 80 per cent live within 32 kilometers
- more than half of Poundmaker employees (53 per cent) have post secondary education, while 40 per cent have a high school education
- more than half of all employees (52 per cent) are involved in adult sport activities and 46 per cent belong to service clubs
- a whopping 71 per cent of employees are involved in agriculture, and almost half of them own a farm
- Return on Equity Invested of 7.8/1 in Year One, rising to 23.9/1 in Year Five
- Earnings Per Share (with a case value of $1 per share) $1.22 in Year One, rising to $2.60 in Year Five
- Return on Total Assets ratio of 8.4/1 in Year Five
- a steady new domestic market for approximately 51,000 tonnes annually of lower quality, high moisture content and/or distressed off-Board grain
- longer spring planting window for current wheat varieties, and the possibility of planting higher yielding soft white wheat without the fear of early frost
- an assured market each year for 200 acres of farm production for each of 350-400 producer-investors
- reduced dependence on export grain markets
- lower fuel and other transportation costs moving grain to elevators and terminals for export
- reduced dependence on export transportation subsidies
- conversion of grain production to energy and meat production
- potential for increased use of organiz fertilizer in farming practices, and green-feed-for-manure exchanges between the feedlot and producer-owners
- improved rates of gain in beef cattle, with less reliance on growth implants and other synthetic additives
- creation of 45-50 jobs at each complex, with approximately 100 indirect and seasonal jobs created in each region
- an additional $2.25 in regional spin-off jobs created in each region
- potential to attract superior personnel by employing centralized management specialists to support four or five regional complexes
- increased business activity in the region for suppliers of specialized services to local managers
- production of a consistent, quality-controlled beef
- the potential for higher producer returns using centralized management to develop and market value-added "branded beef" with specific characeristics
The full report discusses the advantages and distadvantages of these various business structures. The publication "Choosing the Right Structure for Your Agri-Business" from Saskatchewan Agriculture, Food and Rural Revitalization is another good source of information.
Many organizations are considering the New Generation co-operative option as a means of bringing producers together to invest in larger value-added enterprises. Check with Sask Ag and Food for details of Saskatchewan's Agriculture New Generation Co-operatives (ANGen) program.
6. Cattle Markets
The feasability study concludes that with 2.84 million head of cattle and calves in Saskatchewan, a shortage of supply for five regional foodlots finishing a total of 175,000 head each year is unlikely. An average 926,000 feeder cattle are marketed in Saskatchewan each year: even with five feedlots operating, they would be feeding about 12 per cent of the province's feeder cattle crop in any one year.
The report also indicates there is room for expansion of Saskatchewan's cattle industry. For instance, the 2.84 million herd size in Saskatchewan in 2002 is less than production in Alberta, even though our province's producer land base is 25 per cent larger.
The report argues that the proposed ethanol-feedlot complexes would replace a portion of the province's grain and meat exports with higher-velue meat exports. Employing professional centralized management opens opportunities for producer-owners to achieve higher returns through effective marketing of "branded beef" or other value-added products.
7. Professional Central Management
Using Poundmaker's experience as a guide, the study suggestst he development phase of an ethanol-feedlot complex is the most difficult. It also indicates that securing financing will likely be the most difficult part of the development phase. Theis is why it is vital to assemble a competent management theam within an effective organizational structure, and to prepare a strong business plan early n the development process. These factors will help attract financing and government funding, contributing to the success of an integrated facility.
The report notes that the ethanol plant can operate with a high level of automation. Most of the labour activity and skill requirements will apply to the feedlot operation, which is why a strong management group is important to the success of the complex. The report argues that a central management group can create effective strategic alliances with key suppliers with design, construction, operational and marketing expertise. This centralized management cluster would manage the key functions of four or five regional facilities, with the most significant advantages being in coordinated purchasing and product marketing. While there are no historical data to identify the exact value of these benefits, the study identifies the following benefits based on conservative assumptions:
In addition, the development of direct linkages between primary producers and the consumer marketplace creates opportunities for producers to add value to their production, while meeting the needs of customers who are willing to pay a premium for products offering higher quality and specific nutritional benefits.
A Word About Branded Beef
Growing numbers of producers are finding it attractive to develop and market value-added "branded beef" products with specific characteristics-juiciness, tenderness, marbling, flavour and product consistency-that command premium prices from consumers. Some producers began selling beef from their front porch to get a little more value for their cattle. Customer demand has encouraged them to band together with other producers to organize and control what they market, and how they market.
Branded beef is adding revenue value to several Saskatchewan operations. The Twin Cattle Company of Goodsoil presently enjoys a $.28 per pound premium on 1,000 cattle each year. They are fed out of Strathmore, Alberta, under contract to Cargill.
Besides adding value to their cattle production, producers are finding that being further up the value chain is an excellent way to stay in touch with the customer preferences. The study by TDI suggests that one role of a central management group could be to realize additional value-added returns from branded beef production and marketing. See Section 9 of the full report, pages 112 to 122, for a detailed discussion of the roles, responsibilities, costs and advantages associated with centralized management. See also the APAS position paper on Branded Beef.
Economic Benefits to Communities and Governments
An integrated ethanol-feedlot complex will bring economic and social benefits to communities in rural areas and to Saskatchewan The major eveonomic benefits include:
Community Benefits
While the benefits of an integrated ethanol-feedlot complex are more difficult to predict in terms of community life, a profile of employees at Poundmaker Agventures illustrates the importance of the complex to Lanigan and districts. For example, of the 49 people employed there, two thirds are married, and 60 per cent of those families have children. Almost one in five employees is female, and one-quarter of all employees are related to a Poundmaker shareholder.
Other statistics:
Benefits to Investor-Producers Supplying a Plant
For producers, the major benefits include:
Making the decision to establish a value-added agricultural processing enterprise such as an ethanol-feedlot complex demands a major commitment by the people involved. The Agriculture Producers Association of Saskatchewan commissioned the study referred to throughout this booklet to assist individuals and communities interested in developing an integrated fuel ehtanol-livestock feedlot complex.
If you want more information about ethanol-feedlot projects, APAS recommends that you obtain a copy of the full report. Copies are available in PDF format at the APAS website:
www.apas.ca
AGRICULTURAL PRODUCERS ASSOCIATION OF SASKATCHEWAN
100-2400 College Avenue,
Regina, Saskatchewan, S4P 1C8
Phone: 789-7774
Fax: 789-7779
info@apas.ca