Business considerations

 

Overall business deployment and operational considerations

·        Options for structuring a livestock supply chain

·         Risk management

·        Developing a Business Plan for a slaughtering/meat business in Guam/CNMI

§ including a business plan framework document developed for use with a proposed facility the Marianas

§ including business plan development tools from the University of Hawaii

·        Specific slaughterhouse interest in Saipan: Marianas Meat Harvesting Corporation

·        Specific slaughterhouse interest in Saipan: the As Perdido slaughterhouse facility

 

1.      Options for structuring a livestock supply chain

·         A slaughterhouse/meat business has several basic options for obtaining supplies of livestock (particularly pigs) to be slaughtered:

§        The meat business also owns and manages all livestock production.

§         The meat business purchases the livestock from specific producers under medium- to long-term contracts.

§        The meat business purchases the livestock on the open market, at spot market prices.

§        The meat business serves as a contract slaughter/processing facility, in which the livestock supplier retains ownership and is subsequently responsible for marketing/consuming the meat (also known as a “tolling” operation).

The first option entails the least supply risk, whereas the third option entails the highest supply risk.  The fourth option is a different business arrangement. 

A slaughterhouse/meat business could use a combination of these options.  For example, a business could make arrangements for, say, 60% of its supply to come from independent local producers under long-term contract, 30% of its supply to come from the open/spot market, and 10% from contract slaughtering/processing.

2.      Risk management

Identifying and mitigating risks is a cornerstone of good business.  Key risks that could affect the feasibility of a slaughterhouse/meat business in the Marianas include:

·        Livestock supply risks

§         It would be considered risky to rely entirely on current local animal production for livestock supplies, since (as noted elsewhere) there are numerous uncertainties associated with such a supply chain.  Key concerns include:

·         Are existing non-commercial production operations reliable over the long term? 

·         Would existing producers be willing to sell to a commercial operation rather than continuing to meet the personal consumption needs of the islands’ residents for fiestas and other activities?  

·         To what extent are local non-commercial suppliers price makers vs. price takers? 

·         How could quality control be assured in a small-scale uncoordinated livestock supply chain? 

·         To what extent could relatively small independent producers ensure a reliable supply of feed for confined pig operations and/or access to pasture lands for beef cattle? 

·         To what extent will small independent producers be able to incorporate and implement effective waste management practices and avoid supply disruptions that could result from non-compliance?

·        To what extent would local producers be able to improve the genetics of their herds?  (The existing lack of genetic variability—a result of many years of in-breeding from limited stock on each island—creates some risk regarding disease resistance.  Additionally, modern genetic improvements in livestock supplies in the mainland U.S. and elsewhere have led to optimal meat characteristics of the animals produced for meat products).

§         Engaging local producers under long-term production contracts to ramp up operations for a specific slaughterhouse/meat business would help address these concerns. 

·        Technical risks

§         The basic operational components of a slaughterhouse and further processing activities are well known and are not considered to constitute risk.  However, the layout of the operation and design of the facility must be such that it achieves the design throughput and productivity and meet all facility hygiene, worker safety, and waste management requirements. 

§         A Quality Assurance/Quality Control program should be developed and followed to help ensure effective and consistent slaughtering and processing activities.

·        Food safety risks

§         It is essential that slaughterhouse and meat processing operations maintain hygienic conditions to avoid reduced product quality or, worse, product contamination.  Failure to pass a USDA inspection (or, worse, contamination of meat products) could have major consequences for product marketing and the viability of the business. http://www.pbs.org/wgbh/pages/frontline/shows/meat/safe/

§         To minimize the risk of meat contamination from unsanitary operations, a Hazard Analysis and Critical Control Point (HACCP) plan must be developed and adhered to during all slaughtering and processing activities.  http://www.fsis.usda.gov/Science/hazard_analysis_&_pathogen_reduction/index.asp

·        Economic risks

§         The future cost of live animals is uncertain.  In particular, there are uncertainties regarding feed options, including the landed costs of imported feeds. 

§        The future costs of energy (which affects the production and processing of animals and the transport of meat products) is uncertain. This is particularly applicable to island economies such as the Marianas, in which transport fuels, electricity, and other utilities (e.g., water supplies and wastewater treatment) are directly affected by the volatility of global oil prices.  However, such economic uncertainties are also expected to affect the prices of imported meats, which may provide some opportunities for additional cost recovery through product pricing (assuming that consumers are willing to pay higher prices for meat products, whether imported or locally produced).

§         The costs of inter-island transport options in the Marianas—whether by sea or air—are expensive, and are also directly affected by oil prices. 

§        Reliance on a single USDA inspector poses some economic risk to the business, since a commercial slaughterhouse can only operate when the inspector is physically present (i.e., slaughtering activities cannot proceed if the inspector is sick or otherwise unavailable on certain days).

§         The projected costs of slaughterhouse waste management under island conditions are high and uncertain. 

§         The most attractive option for a business to address these economic risks would be to adjust product prices to maintain an acceptable operating margin, regardless of changes in operating expenses.  However, the price elasticity or responsiveness of meat demand vs. meat prices in the islands is unclear, and additional efforts would be needed to evaluate the potential impact on product sales from changes in product pricing.

·        Market risks

§         There is significant uncertainty in estimating on-island and off-island market penetration by a local meat business.  However, the current market size is very large relative to anticipated local production capabilities of a single slaughterhouse/meat business, which greatly reduces this risk.  For example, a meat business processing 10 cattle per day would equate to only 8% of 2007 beef demand in the Marianas, or a meat business processing 60 pigs per day would equate to only 7% of 2007 pork demand in the Marianas.

§         Another significant uncertainty is product pricing, and ensuring that the business has an acceptable margin to sustain operations.  One strategy for addressing this risk is to enter into a long-term contract with a food wholesaler, under which both parties are incentivized to maintain stable prices and acceptable margins.

·         Weather-related risks

§        The dry season in the Marianas islands can be severe…up to three months without significant rainfall.  This can be the limiting factor in pastured beef production.  There are two possible strategies for addressing this risk: either the herd size cannot exceed levels that can be sustained throughout the dry season, or the meat business that relies on local production will have to reduce output during such dry periods (which would likely be an unacceptable option from a marketing perspective, as demand for meat products is not seasonal). 

§         The Marianas have a high risk of typhoons, some of which can reach catastrophic levels.  The characteristics of a typhoon—high winds and intense rainfall—could effect livestock supplies and the slaughterhouse facility, and could disrupt transport of products to markets.  Strategies for addressing these risks include, for example, designing and constructing all livestock production and processing facilities to code (or better), developing contingency plans and emergency response plans (such as having a back-up electricity generator available for running the cold storage facility), identifying and arranging back-up transport logistics, and purchasing hazard insurance (to the extent available and affordable).

 

3.     Developing a Business Plan for a slaughtering/meat business in Guam/CNM

Click here to download an outline for a business plan prepared by AES for use with a proposed slaughterhouse / meat business in the Marianas. The document is simply a guide and should be modified as appropriate for your proposed project.

Click here to download a business plan development guide prepared by Dr. Linda Cox, Agricultural Economist with the University of Hawaii College of Tropical Agriculture and Human Resources (CTAHR).

Click here to view a powerpoint on preparing a business plan, developed by Dr. Linda Cox, CTAHR.

 

The following business plan basics were adapted by AES from the document “Iowa Meat Processors’ Resource Guidebook – A Guide to Building, Upgrading, or Expanding a Small Meat Processing Facility in Iowa”  (http://www.ncrcrd.msu.edu/uploads/files/133/ncrcrd-rrd189-print.pdf):

·        Would you build a house without a blueprint? Would you drive across the country without a map? A business plan helps you design and lay out your business and gives you a map to follow in growing your business. Business planning is more than just the production of a document, it is the process through which you research, learn about, analyze, and understand your business and your goals. 

·         The business plan should reflect an understanding of all aspects of your operation:

§        Where your supplies of animals will be coming from, who will be buying your meat products, who is your competition, the design of your facility and ancillary operations, your target markets, your operating plans (including SOPs, SSOPs, and HACCP plans), the permits that will be required, your waste management plans, who will own the enterprise, who will operate and manage the enterprise, the projected economics (including product prices and projected revenues, capital and operating costs, and debt servicing), and your financing plans.

 ·         The business plan must be written by the entrepreneur—it is your vision. If you cannot clearly communicate that vision, it needs refinement:

·         The length of the plan may vary substantially…e.g., from five pages to 55 pages, depending on the complexity of products, services, competition, employees, ownership, special marketing challenges or financial projections.

·         A typical misconception among many prospective entrepreneurs is that there is no other way to evaluate the business concept other than just jumping in and seeing what happens.  Business plans allow the entrepreneur to make some assumptions based on market research and test drive the business on paper.  It’s far less expensive to undertake effective planning and analyses than to deal with the consequences of inadequate planning.

Appendix A of the Iowa Guidebook is entitled “Developing A Business Plan.”  A key question and answer posed in this document developed for Iowa is also applicable to the Marianas:  “When is a Business Plan no necessary?  When you can afford failure.  When you feel it’s less important to evaluate the business idea and protect your investment than to spend time evaluating the business proposition.”

In AES’ opinion, preparing a business plan should be predicated on the results of a feasibility study.  In particular, the economic analysis of a feasibility study should indicate that the enterprise will be viable (even if the economic viability is dependent on public sector support for capital and/or operating expenses).  The structure of AES’ feasibility study – and the components of the associated project website – was developed specifically to address the key components of a business plan.  For example, the economic analysis spreadsheet can be tailored for a specific project and parts of the analysis then used for the target markets, economic projections, and financial viability sections of the business plan.

 

4.     Specific slaughterhouse interest in Saipan: Marianas Meat Harvesting Corporation

·        In 2010, an evaluation of a possible private slaughterhouse/meat business plan was initiated by Saipan-based businessman Tony Pellegrino. Mr. Pellegrino owns and manages several companies in CNMI, including a successful shrimp farm (http://www.saipantribune.com/newsstory.aspx?cat=1&newsID=92458). 

·         In March 2011, Mr. Pellegrino announced that efforts to pursue a slaughterhouse/meat business in the Marianas had been put on hold, because he concluded that various risk factors were too high. 

·        Several recent articles regarding the slaughterhouse/meat business initiative include:

§        'Slaughterhouse to bring in economic opportunities to farmers and ranchers', Saipan Tribune, January 18, 2011: http://www.saipantribune.com/newsstory.aspx?cat=1&newsID=106223

§        Local farmers, ranchers urged to commit to slaughterhouse project; Saipan Tribune, January 18, 2011; http://www.saipantribune.com/newsstory.aspx?cat=1&newsID=106362

§        Zoning Board OKs proposed slaughterhouse; Marianas Variety; January 25, 2011; http://www.mvariety.com/2011012433709/local-news/zoning-board-oks-proposed-slaughterhouse.php

§        ‘Slaughterhouse project on hold’, Saipan Tribune, March 1, 2011:  http://www.saipantribune.com/newsstory.aspx?cat=1&newsID=107399

      In April 2011, Mr. Pellegrino announced that the project was again moving forward.

 

·        In July 2011, Mr. Pellegrino initiated an inter-island air cargo company that would facilitate transport of meat products and other agricultural products within CNMI and to/from Guam. 

§         ‘Pellegrino launches cargo airline for local produce,’ Saipan Tribune, July 28, 2011:  http://www.saipantribune.com/newsstory.aspx?cat=1&newsID=110508

 

5.     Specific slaughterhouse interest in Saipan: the As Perdido slaughterhouse facility

·        A slaughterhouse was built on As Perdido Road in Saipan in 1999.  The facility was owned by the Department of Land and Natural Resources (DLNR) and leased to a private company. 

·         However, the company had minimal commercial activity and subsequently abandoned the facility and defaulted on lease payments.  In 2007, USDA filed a notice of “Voluntary Suspension or Voluntary Withdrawal of Inspection Service.”  The current status of the facility is unclear, but it appears to be owned by the CNMI government.  http://www.saipantribune.com/newsstory.aspx?newsID=87869&cat=1

·        In 2010, Congressional Delegate Gregorio Kilili C. Sablan (D-MP) requested $0.5MM from the Federal Government to upgrade and renovate the facility.  http://www.saipantribune.com/newsstory.aspx?cat=1&newsID=98285  According to the request:

§        “The critical project will upgrade and renovate the government slaughterhouse to ensure local ranchers and consumers have a safe, humane and reliable place where local livestock is sold and produced. The old government slaughterhouse needs to be upgraded to current safety codes, to include electrical re-wiring, upgrading of plumbing and water systems and a new septic system. Moreover, shipping costs make food much more expensive in the CNMI and can cause supply disruptions.”

·        Key factors to be considered regarding the renovation of the facility and possible operation by the government of CNMI include:

§        Is it technically / economically feasible to renovate the facility versus building a new facility?  The condition of the facility needs to be evaluated by a qualified third party to determine if it can be effectively renovated and restored to full operational status within the funds requested. 

§         If it is renovated, who should operate the facility?  As a general statement, the private sector is better suited to operate such facilities than government bodies (although it is acknowledged that an island context can distort free market principles).  If the renovation funds are secured, then it is recommended that a qualified third-party assessment be undertaken to evaluate options for operating the facility.