Manager: Requirements Of Employment

SASKATOBA SWINE INC.

A Feasibility Study of Contract Hog Feeding in Saskatchewan

Prepared by:

Kyle Dyok Melissa Fuchs Brandy Street Jenay Werle

Comm 492. 3 Agribusiness Venture Management College of Commerce and Agriculture University of Saskatchewan Saskatoba Swine Inc.

Executive Summary This feasibility study outlines the development and feasibility of a contract hog feeding operation. The barn space will be rented out to Elite Swine Inc. as finishing space for their nursery pigs. Saskatoba Swine Inc. will be part of a production pyramid with Elite Swine Inc. and Maple Leaf Foods.

Introduction As the hog industry continues to expand, intensive livestock operations are looking for ways to cut costs while still producing a quality product. One way for large companies to expand their production without expanding their capital expenditures is to rent barn space owned by other businesses, such as Saskatoba Swine Inc. (SSI). SSI will enter into an agreement with Elite Swine Inc. (ESI), in which ESI will pay SSI for housing and managing their grower/finisher pigs. All direct animal expenses, such as feed, medication, veterinarian fees, disposal costs, etc. will be covered by ESI. SSI will be owned by local shareholders, so community investors will directly benefit from this operation.

The Human Resources Plan SSI will have a manager and two production technicians. The manager will have previous hog experience, accounting and office administration skills, and communications skills. The manager will be responsible for many tasks such as record keeping, quality control, and following protocols set out by ESI. This person will also be responsible for preparing payroll and managing small purchases for the business. The manager will make $35,000 to $40,000 annually, which includes a benefits package in addition to the salary.

The technicians should have previous animal experience, preferably with hogs. They will be responsible for many tasks such as maintenance of animal health and barn cleaning. Lagoon and yard maintenance is also a responsibility. The technicians will make $20,000 to $25,000 annually with a benefits package in addition to the salary.

Comm 492 College of Commerce and Agriculture, University of Saskatchewan I Saskatoba Swine Inc.

The management team will consist of SSI’s manager working with and ESI service representative and ESI veterinarian. The elected board of directors will oversee the management team, and be responsible for the hiring/firing of an appropriate barn manager.

A bonus program is also in effect, and sponsored by ESI. The manager and technicians will receive additional cash bonuses for above average production.

The Operations Plan The SSI site will be located near Fleming, Saskatchewan. Myles Fuchs, who has initiated the first step in the project development of SSI, chose this location.

SSI will rent out barn space for 10,000 grow-finish hogs. Animals will be transported to the facility at 50 lbs (22.7kg) and will leave the facility at market weight (to be determined by ESI). SSI intends to begin production on July 1, 2003. By January 1, 2004, the barns will all be at maximum capacity and in full operation.

A complete production cycle for one barn takes 21 weeks. Therefore, slightly more than 2.4 cycles/barn/year should be completed. Upon entrance to the barn, the pigs will be weighed and sorted by sex and by size. They will undergo a diet change from a grower to a finisher ration at week nine and will begin to be weighed weekly starting at week 15. This is done so that those hogs that have reached market weight can be shipped and will not be overfat at the end of the production cycle. All hogs will be shipped by week 20 so the following week can be devoted to washing and disinfecting the barn. It should be noted that the lagoon will be emptied on a semi-annual basis. Figure 1 shows the production flow chart for SSI.

Comm 492 College of Commerce and Agriculture, University of Saskatchewan II Saskatoba Swine Inc.

All animals into barn (~ Sort animals by Count animals 50 lbs each) sex and by size

Grower diet Wash and disinfect entire barn Finisher diet

All animals out of Weighing barn by week 20

Market weight pigs tattooed and shipped Non-market weight pigs wait one week Semi-annual sale of manure from lagoon

Figure 1. Flow chart of barn production cycle

Capital Expenses Table 1 shows the major capital expenses for SSI. Total building costs are estimated at $3,111,284, comprised of the land cost, building expenses and equipment.

Capital Budget Table 1 shows the capital budget summary for SSI.

Table 1. SSI capital budget summary Capital Budget Summary for Saskatoba Swine

Land $ 20,000 Building Expenses $ 2,133,074 Equipment $ 958,210 Net Working Capital $ 119,690

Total Capital Required $ 3,230,974

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The Marketing Plan SSI has chosen ESI as the hog supplier, as they have a proven track record and stability in the hog industry. The initial contract made with ESI will be for a five year term, at the end of which the contract is resigned or renegotiated. SSI revenues will be independent of the hog market prices as the monthly rental fee is fixed within the 5-year contract. ESI will set out production procedures to be followed by SSI in the raising of their hogs.

The byproduct of hog production, the manure, will be marketed to farmers in the area surrounding SSI. The sale of manure as fertilizer is very important, as it partially subsidizes the disposal of the manure, which is a necessary cost of doing business. The amount of land required to use up a year’s production of manure is 979 acres (Appendix B). The total area of land required for long term sustainable manure application is 2,938 acres for a three year rotation. There is an adequate land base surrounding the barn to handle these requirements. (Bill Henley, SAFRR)

It is also important that SSI markets itself to the community in order to create acceptance of the impending facility. An information night will be held in hopes of accomplishing this and alleviating any negative issues that may arise from the community members.

The Financial Plan SSI will have two sources of financing. First, a chartered financial institution will grant SSI a loan of $2.3 million for start up and operation costs. Second, 90 Class A Shares will be offered to the community and other eligible individuals at $10,000 a piece, totaling $900,000 in share capital. The shares are all voting shares that will be used to vote on the members making up the board of directors. The board of directors, consisting of 5 elected shareholders, will govern SSI. In summary, the investor equity portion will equal 28%, or $900,000, and long term debt equity of 72% or $2.3 million.

Comm 492 College of Commerce and Agriculture, University of Saskatchewan IV Saskatoba Swine Inc.

Base Case In the base case scenario, the cash flows are steadily increasing in both the cash after operations and year end net cash increase or decrease. The internal rate of return of 7.3% proves that the business is a feasible investment opportunity, with a fairly low amount of risk Key Variables Barn Rental $ 536,370 Wages $ 75,000 Manure Sales $ 20,669

Net Present Value $17,203 Internal Rate of Return 7.3%

Year 2003 2004 2005 2006 2007 Net Profit Margin -38% -10% -2% 5% 9% Net Income ($111,048) ($53,636) ($12,319) $25,969 $53,196 Net Cash from $5,773 $221,482 $131,518 $114,730 $116,631 Operations End of Year Cash $466 $121,671 $146,244 $146,918 $141,908 Dividends Paid $ - $ - $71,671 $96,244 $96,918 Year 2008 2009 2010 2011 2012 Net Profit Margin 20% 19% 22% 23% 25% Net Income $123,630 $121,470 $135,035 $147,322 $158,524 Net Cash from $167,573 $115,674 $138,463 $148,705 $159,287 Operations End of Year Cash $179,750 $157,066 $147,971 $139,305 $130,756 Dividends Paid $91,908 $129,750 $107,066 $97,971 $89,305

Best Case Scenario In order to derive a best case scenario, the key critical value, or contract price, was changed to show the accumulation of five years worth of inflation. This results in a 15% increase in the contract price of the barn in year six, which also increases the internal rate of return to 11.5%. This new IRR makes the investment more attractive as it is a high rate of return for such a low risk investment. Dividend payments still begin in year three (base case) but nearly double from $71,671 to $136,653.

Key Variables

Contract Price $ 536,700 Wages $ 66,000

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Manure Revenues $ 45,407

Year 2003 2004 2005 2006 2007 Net Profit Margin -26% -3% 4% 10% 12% Net Income ($81,325) ($17,986) $25,598 $59,110 $73,243 Net Cash from $35,113 $257,124 $104,446 $109,954 $103,538 Operations End of Year Cash $29,805 $186,653 $184,154 $180,051 $161,948 Dividends Paid $ - $ - $136,653 $134,154 $130,051 Year 2008 2009 2010 2011 2012 Net Profit Margin 23% 25% 27% 28% 30% Net Income $154,562 $170,379 $182,727 $193,722 $203,821 Net Cash from $176,221 $135,888 $137,245 $147,414 $158,184 Operations End of Year Cash $208,437 $205,967 $195,654 $185,697 $176,044 Dividends Paid $111,948 $158,437 $155,967 $145,654 $135,697

Worst Case Scenario In the worst case scenario, the barn rental remains at the beginning contract price without renegotiations and the wages increase to the maximum amount allotted for them. It is assumed that no costs will be recovered relating to manure sales. The required rate of return is not met in this scenario and net income does not show a positive amount until year six of production. In this case, there would be difficulty obtaining investor support and the project would not be feasible.

Key Variables Barn Rental $ 536,700 Wages $ 100,000 Manure Sales $ -

Net Present Value ($454,471) Internal Rate of Return -1.7%

Year 2003 2004 2005 2006 2007 Net Profit Margin -54% -19% -12% -6% -1% Net Income ($145,564) ($103,174) ($64,694) ($32,509) ($6,602) Net Cash from ($27,678) $171,966 $150,836 $119,924 $115,312 Operations

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End of Year Cash ($32,985) $38,704 $82,595 $88,462 $82,133 Dividends Paid $ - $ - $ - $32,595 $38,462 Year 2008 2009 2010 2011 2012 Net Profit Margin 3% 6% 9% 11% 14% Net Income $14,775 $32,844 $48,395 $62,051 $74,313 Net Cash from $122,988 $131,432 $140,450 $150,175 $160,347 Operations End of Year Cash $75,390 $68,464 $61,356 $54,059 $46,570 Dividends Paid $32,133 $25,390 $18,464 $11,356 $4,059

Conclusion SSI is an economically feasible enterprise. The internal rate of return for the base rate is 7.3%. This enterprise is low risk, and the IRR of 7.3% is the realm of other higher risk ventures, such as stock market investments. The external rate of return is 4.9%, which includes salvage value of the facility.

Manure marketing is an issue as it is essential that SSI dispose of this byproduct. By selling the manure to local farmers, they are receiving a value-added fertilizer product at competitive pricing to fertilizer dealers. SSI would also benefit from the sale of manure, as it is a cost of doing business and its sale would help subsidize this cost.

Dividend payments may also be of concern to potential investors. SSI’s dividend policy comes into effect in year three. The dividend policy is set up so that when cash from the previous business year exceeds $50,000, the excess will be paid out to the shareholders as dividends.

Comm 492 College of Commerce and Agriculture, University of Saskatchewan VII Saskatoba Swine Inc. Feasibility Study Saskatoba Swine Inc.

EXECUTIVE SUMMARY...... I

1.0 BUSINESS PROFILE AND PLAN SUMMARY...... 5

1.1 PURPOSE OF PLAN...... 5 1.1.1 Mission Statement...... 5 1.1.2 Industry Background...... 5 1.1.3 Project Background...... 5 1.1.4 Elite Swine Inc...... 6 1.1.5 Short Term Objectives...... 6 1.1.6 Long Term Goals...... 7 2.0 HUMAN RESOURCES PLAN...... 7

2.1 ORGANIZATIONAL STRUCTURE...... 7 2.2 STAFFING...... 7 2.2.1 Production Manager...... 8 2.2.2 Finishing Hog Technicians...... 8 2.2.3 Board of Directors...... 9 2.3 HEALTH AND SAFETY...... 9 2.4 BONUS PROGRAM...... 10 3.0 OPERATIONS PLAN...... 11

3.1 RESTRICTIONS FOR INTENSIVE LIVESTOCK OPERATIONS...... 11 3.2 DEAD ANIMAL MANAGEMENT PLAN...... 12 3.3 SITE PLAN...... 12 3.3.1 Landscape...... 14 3.3.2 Lagoon...... 14 3.4 BARN PLAN...... 14 3.4.1 Description of Barn Plan...... 16 3.4.1.1 Utility Room...... 16 3.4.1.2 Gates...... 16 3.4.1.3 Scale...... 16 3.4.1.4 Load-Out Area...... 16 3.4.1.5 Office and Lunchroom...... 16 3.5 PRODUCTION CYCLE...... 16 3.5.1 Average Business Day...... 17 3.5.2 Average Business Week (beginning week 15)...... 18 3.5.3 Average Business Month...... 18 3.5.4 Semi-Annual Duties...... 18 3.5.5 Business Year...... 19 3.6 OPERATIONS BUDGET...... 19 4.0 MARKETING PLAN...... 21

4.1 MARKETING TO HOG SUPPLIERS...... 21 4.2 MANURE MARKETING...... 21 4.3 MARKETING SSI TO THE COMMUNITY...... 23 4.3.1 Informing the Community of the Impending Facility...... 23 4.3.2 Community Meeting Agenda...... 24 4.3.3 Employee Moral and Community Activity...... 24 4.4 MARKETING SITUATION ANALYSIS...... 25 4.4.1 SWOT Analysis...... 25 4.4.1.1 Internal Analysis...... 25 4.4.1.2 External Analysis...... 26 5.0 FINANCIAL PLAN...... 26

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5.1 SOURCES OF FUNDING...... 26 5.1.1 Dividend Policy...... 27 5.2 OPENING BALANCE SHEET...... 28 5.3 SUMMARY TABLES...... 28 5.4 BASE CASE RESULTS...... 29 5.5 WORST CASE RESULTS...... 30 5.6 BEST CASE RESULTS...... 31 5.8 SENSITIVITY ANALYSIS...... 32 5.9 BREAKEVEN ANALYSIS...... 34 5.9.1 Net Income Break-even Analysis...... 34 5.10 CONTINGENCY PLAN...... 35 6.0 CONCLUSION AND RECOMMENDATIONS...... 36

7.0 REFERENCES...... 38

APPENDIX A...... I

APPENDIX B...... II

APPENDIX C...... III

APPENDIX D...... IV

APPENDIX E...... V

APPENDIX F...... VI

List of Figures

Figure 1. SSI site plan...... 13 Figure 2. Diagram of the SSI barn plan...... 15 Figure 3. Flow chart of barn production cycle...... 17

List of Tables

Table 1. Salary comparison between ESI rates and Saskatchewan standards...... 7 Table 2. Major capital expenditures for SSI...... 19 Table 3. SSI working capital...... 20 Table 4. SSI capital budget summary...... 20 Table 7. Cost of manure disposal at different stages of operation...... 31 Table 8. Comparison of critical values...... 33 Table 10. Net income break-even analysis...... 34 Table 11. Cash flow break-even analysis...... 34 Table 12. Economic break-even analysis...... 35

1.0 Business Profile and Plan Summary 1.1 Purpose of Plan 1.1.1 Mission Statement Our mission is to produce top quality hogs in an efficient and humane manner, while maintaining an environmentally sound practice, and creating economic benefits.

1.1.2 Industry Background Overall world consumption of pork and export opportunities continue to rise. Canada has a good reputation for lean, clean-cut pork. Both provincial and federal governments are supporting the expansion of the hog industry by working to maintain and develop new markets. Saskatchewan is recognized as a land of opportunity when it comes to intensive livestock agriculture expansion. When compared to other provinces within Canada, Saskatchewan has relatively low costs of hog production, because of large land areas at low cost and low cost of feed grains.

Currently, Saskatchewan produces approximately 300,000 tons of pork annually, and the industry is growing. However, the concept for producing hogs at a large scale is relatively new. In order for packing plants, such as Maple Leaf Foods, to operate their plants at full capacity to reach maximum efficiency, more hogs are required.

1.1.3 Project Background Myles Fuchs has asked for an independent feasibility study to assess the cost of a 10,000 head finishing hog site. The site, which would consist of five 2000 head barns, would be located 1/8 of a mile from Myles’ farm. Myles operates a grain, hay and livestock farm south of Fleming, Saskatchewan.

Should this project proceed, Elite Swine Inc. (ESI) would provide an Indexed Production Partnership document to Saskatoba Swine Inc. (SSI) outlining the terms of the agreement. Income from the five barns would be derived from contracting “pig space” to ESI.

Monthly income will be received on a per barn basis regardless of hog performance, market risk or number of pigs housed. Performance Driven Efficiency Payments will be awarded to SSI for barns that surpass required performance standards outlined by ESI.

A secondary source of income would come from the manure sales, which would be generated semi-annually. Due to increasing prices of fertilizer, Myles is seeking a more economical source of nutrients. The hogs will generate manure that can be used as an alternative to commercially produced nitrogen fertilizer. This will benefit area farmers, as they will receive a value added fertilizer product without any application costs.

1.1.4 Elite Swine Inc. ESI is a wholly owned subsidiary of Maple Leaf Foods Inc. ESI has a well-earned reputation as an industry leader. The ESI management program has attracted a number of highly qualified, capable and dedicated independent producers. The ESI Management program is the largest program of its kind in Canada. Through the management program, ESI coordinates the production of over 50,000 sows which are capable of producing over 1,000,000 market hogs annually. ESI coordinates its management program to meet the needs of the independent producer.

1.1.5 Short Term Objectives  Create community acceptance  Achieve a turnover of 2.4 cycles/barn/year  Obtain $900,000 in equity capital prior to construction of the operation  Provide competitive salaries to employees  Support local tradespersons by contracting barn maintenance  Achieve an IRR of at least 7%  Create a sustainable market for hog manure

1.1.6 Long Term Goals  To maintain economic profitability  To maintain an internal rate of return (IRR) of 7% or better  To renegotiate the contract after 5 years to account for inflation  To explore potential expansion opportunities  To provide an environmentally and economically sound value added commodity  To maintain high quality hog production

2.0 HUMAN RESOURCES PLAN 2.1 Organizational Structure 2.2 Staffing For a 10,000 head hog production system, the production team is critical. The employees hired will not only have a job, but a career. The best/feasible number of employees is three. This includes a production manager and two production technicians. These are full time jobs generating $85,000 annually in salaries. Employees will also be receiving a benefits package, which will include health, dental, and life insurance. The benefits package is above and beyond the salary.

The salary estimates for SSI are based on figures provided by ESI. The following table compares ESI salaries to the Saskatchewan Industry Average for annual salaries.

Table 1. Salary comparison between ESI rates and Saskatchewan standards Salary ESI Saskatchewan Hog Industry Manager: Starting 35,000 35,000 Maximum 52,000 Technicians: Starting 20,000 17,000 Maximum 27,000

Both ESI and the Saskatchewan Hog industry salary quotes do not include the benefits package. The benefit package that SSI is providing to employees is above and beyond annual salaries. Benefit packages will equate to $400 per month per employee, the cost of which is covered by SSI.

2.2.1 Production Manager The manager plays a vital role in production, keeping the entire production system working smoothly. Some traits such as basic accounting skills/office administration, team working skills, pig experience, and communication skills are a must for employment. The manager will be asked to perform such tasks such as ordering feed and medication, record keeping, quality control, the ability to follow protocol and detection of signs and symptoms of health hazards, and anything else which may cause a decrease in production. The production manager must also be able to prepare payroll and manage small transactions such as purchasing tools, and other supplies needed for the barns and production. Outside maintenance is just as important as inside. Outside maintenance will require regular lagoon checking, and outside fan maintenance. The production manager will start at a salary of $35,000 annually. This wage will increase annually with inflation.

2.2.2 Finishing Hog Technicians Hiring requirements for the technicians are similar to manager requirements. The applicant must have experience with animals, preferably with hogs. They must be able to understand and follow production protocols. The technicians’ daily tasks include the treatment of sick animals, maintaining health records, cleaning of pens and the entire barn. Lagoon and yard maintenance is also a responsibility of the technicians. Technicians must develop an understanding of the production system as a whole. Salaries start at $20,000 annually, increasing annually with inflation.

The production technicians will discuss any question or problems with the manager. The manager, if unable to answer the question, or if he/she is unsure of how to handle a situation, is to direct all concerns to an ESI service representative or the ESI Veterinarian.

Employees are evaluated on performance, attitude, and job satisfaction. New employees are started on a three-month probation period. At the end of the three months the employees are evaluated. If the evaluation outcome is positive, the employee is eligible

Comm 492 College of Commerce and Agriculture, University of Saskatchewan 8 Saskatoba Swine Inc. for a raise. After the three month probation period, an employee evaluation is done every six months. The ESI service rep will do this employee evaluation. The evaluations are key in maintaining positive work relationships. If something isn’t running smoothly, or if any concerns arise, employees have the opportunity to express their thoughts and feelings.

2.2.3 Board of Directors The Board of Directors will be made up of 5 elected shareholders. Annual general meetings will be held, at which time new board members can be voted in if needed. It is the responsibility of the board to monitor the performance of the management team, specifically the barn manager. Annual expenses assumed by board meetings and the shareholder meeting are expected to total approximately $2000 annually.

2.3 Health and Safety

Health and safety issues are a rising concern with intensive livestock operations (ILO).

SSI would like to maintain a good relationship with its employees as well as neighbors.

All employees are required to have completed a Workplace Hazardous Materials

Information System (WHMIS) and First Aid course prior to entering the hog facility.

H2S training is not required before entering the hog barns, however, this course must be taken within three months of hiring as H2S gases are a serious concern in the hog industry. Canadian Quality Assurance (CQA) must also be taken. CQA addresses safety issues and concerns in the quality of food production. Producers are provided with a set of documented standards call the “Good Production Practices” which must be followed in daily production protocol. ESI will provide educational courses for employees to take such as an Introduction to Pig Husbandry course and a Finishing Hog Manager course.

These courses will help employees better understand and follow protocol to maximize production efficiency.

To ensure the safety of our employees, hearing tests and lung tests are required annually. Employees will be required to wear earplugs and dust masks in the barns. New research on health care standards will be met and complied with.

2.4 Bonus Program The supplier sets out a bonus program. The bonus program gives payments to SSI for production performance. The majority of this money is paid to the employees, though some of it does go to the corporation itself. ESI and Maple Leaf Foods set forth the “Performance Driven Efficiency Program”, which provides an incentive to the employees to manage production to the best of their ability and set high production goals. The ESI “Performance Driven Efficiency Program” is available in Appendix C. The qualifying criteria to receive bonuses are: 1. Greater than 80% shipped in the ideal with range; 2. Greater than 30.55 kg/sq ft/year, and feed &/kg of gain better than the last 10 batch avg.

The payment received from the bonus program will be added to the annual salary employees receive.

Another important aspect to any company is building high employee moral. SSI will maintain employee moral by providing limited funds for employee activities, such as family Christmas parties, barbecues, etc. More detail is given in the marketing plan under marketing SSI to the community.

3.0 OPERATIONS PLAN 3.1 Restrictions for Intensive Livestock Operations The province of Saskatchewan regulates the construction of Intensive Livestock Operations through Saskatchewan Agriculture and Food and Rural Revitalization (SAFRR). A workbook and application form (see Appendix D) must be completed and submitted, and must include a wide variety of information such as a geotechnical report, manure storage summary, dead animal management summary, site location, stocking densities, etc. The completed Application for the Approval of Plans is returned to SAFRR. From here it is distributed to any other agency that would be affected by the introduction of this ILO to the area. SaskWater, Saskatchewan Environment and Resource Management (SERM), Saskatchewan Highways and Transportation, Saskatchewan Health, Saskatchewan Municipal Affairs and Housing, railway companies, wildlife organizations, regional parks and resort areas are examples of the other agencies that may be affected by the introduction of an ILO to the area. The information requirements for approval are:  Animal Inventory  Annual Manure Production  Engineering Consultant Report (see Appendix E)  Earthen Manure Storage Dimensions and Design  Manure Management Projections, including land required for application, method and rate of application, and a list of available land for application.

Approval is granted only if all of the following conditions are met:  The requirements and regulations set out in the Agricultural Operations Regulations are met; and  There is no risk of ground or surface water pollution by the ILO.

While the Approval of Plans is a standard requirement to build in Saskatchewan, each individual RM will have it’s own regulations that must be adhered to. The RM of Maryfield No. 91 has no zoning bylaws set out for the construction of ILO’s at this time. However, there are some amendments that have been proposed. They are outlined below.

 The RM must approve any expansion of existing facilities  The RM must approve the introduction of new species into any existing facility  ILOs must follow separation distances suggested by SAFRR  Maintenance of any new roads will partially become the responsibility of the ILO

The RM may apply special standards for screening, fencing and reclamation of the site upon closure.

3.2 Dead Animal Management Plan SSI plans to render its dead animals. The dead animals will be picked up by truck on a regular basis and taken to the rendering plant in Brandon, Manitoba. The cost of this activity is the responsibility of ESI.

3.3 Site Plan The SSI site was chosen based on a preliminary assessment by ESI, which proved favorable to building the barn in that area. The nearest hog facility, a sow barn, is located approximately 20 miles away.

SSI is situated near Myles Fuchs’ farm, in an agricultural community. The closest neighbors, other than Myles, are approximately half a mile away. There are three neighboring farms plus the town of Fleming within a two-mile radius. A facility with an open manure pit must be situated no less than 400m, preferably 600m from the public (SAFRR). The facility will be situated within these guidelines. Each of the five barns is located approximately 400 ft (121.9m) from each other to ensure proper biosecurity (i.e. prevent cross contamination of infectious agents from barn to barn). A 260 ft by 520 ft (24.2m x 48.3m), 9 million US gallon (34,095,000 L) capacity lagoon is encircled by the five barns. A perimeter road travels around the site and connects to each of the five barns, as well as the lagoon. This allows semi-trucks easy access to the barns and the lagoon. Upon entrance to the site, there will be a gate with security locks restricting access to the site as well as a large sign stating that no trespassers will be allowed, only authorized personnel may enter. The entrance to each barn will also have a similar sign stating that biosecurity is in effect.

The lagoon will be located approximately 2625 ft (800m) from a ravine. Contamination should not be an issue, as the capacity of the lagoon has been calculated to allow a 6.6ft (2m) distance from the slurry to the rim of the lagoon to prevent overflow. According to a soils map, there should be sufficient clay content (20%) to prevent any leeching of slurry contaminants to the ravine or ground water sources. This clay content will be absolutely determined by the geotechnical report. A shelterbelt surrounds the entire site in order to reduce wind and thus, reduce odors and noise from traveling. Figure 1 is a diagram of the site plan.

Figure 1. SSI site plan A well will be drilled to provide water to the barns. A reservoir will be constructed as a water source for the barns so that the well will not be depleted of its water. Natural gas and 3-phase power will be available to the site.

3.3.1 Landscape The site is well sheltered by an established stand of trees and shrubs. The shelterbelt will reduce the odor and gas emissions from travelling far distances. The quarter of land slightly slopes downward to a ravine. The ravine is approximately 800 m from the lagoon. Due to the design of the lagoon this distance is more than adequate. The site is located a ¼ mile from a major grid road and 1½ miles from highway 1. This will be advantageous for transportation of animals and travelling for employees.

3.3.2 Lagoon The lagoon must be constructed according to strict environmental regulations. The capacity must be large enough to handle 400 days worth of manure. This equates to 8,992,800 US gallons.

The lagoon site must undergo a geological evaluation. An engineering consultant report must be submitted along with the application to build. This report thoroughly describes the site, and provides the proper construction parameters that must be followed.

3.4 Barn Plan Each of the five barns will be built the same, with the exception of the barn that houses the office. Recent studies have found that to maximize meat production over a given floor area, a producer should allow 0.36m2 (3.87 ft2) per finisher pig weighing 92.3 kg (203.5 lbs). But, while this area is economically efficient, it is not humane. Therefore, the dimensions of our barn will be 204 ft by 92 ft (19.0m x 8.6m), totaling 18,768 ft2 (1744m2). This allows each hog 6.25 ft2 (0.58m2) of space.

There will essentially be two distinct areas: the housing area, and the weigh room area. The housing area of a barn will consist of two rooms. Each room will have 24 pens, split into two rows of 12. Each pen will contain one feeder and waterer, and will house 42 grow-finish hogs. This totals just over 1,000 hogs per room, or 2,000 hogs for the entire barn. This area of the barn will also be lined with air inlets/outlets and exhaust fans in order to aid in ventilation and temperature regulation. The weigh room area of the barn

Comm 492 College of Commerce and Agriculture, University of Saskatchewan 14 Saskatoba Swine Inc. will contain a utility room, a bathroom/shower area, a weigh scale, mobile gates to control hog movement at weighing, and a load-out area where semi trucks can pull up to load the hogs. Figure 2 is a diagram of the barn plan for each of SSI’s five barns.

C E W E

A utility room B gates C scale D shower/bathroom E load-out F office/lunchroom G aisle way H hog pen J feeders/waterers

ROOM A ROOM B

Figure 2. Diagram of the SSI barn plan

3.4.1 Description of Barn Plan 3.4.1.1 Utility Room The utility room contains the furnace and water heater for the barn. A small amount of storage is available to store extra equipment and tools needed for general maintenance and upkeep.

3.4.1.2 Gates The gates are mobile and will be used to control movement and separation of the animals during weighing and sorting periods.

3.4.1.3 Scale The scale will be approximately 1 m X 3 m (3.3 ft X 9.8 ft) and will be used for the weighing of hogs upon entrance to the barn and weekly beginning at week 15 of the production cycle.

3.4.1.4 Load-Out Area The load-out area will be utilized when loading or unloading the hogs from a semi truck. The gates allow separation of pigs to aid in sorting, weighing, tattooing, and tagging at this time.

3.4.1.5 Office and Lunchroom An office and lunchroom area are provided in each barn so that workers may complete paperwork and may make use of the area for coffee and lunch breaks. Since the workers will always shower into the youngest barn, a bath and shower is provided off of the lunch room area. A shower area is also important in case of an outbreak of disease in a barn, in which case a worker may need to shower into more than one barn in a day.

3.5 Production Cycle A clean and sanitized barn will be filled with young pigs weighing approximately 23 kg (50 lbs) each. Upon entering the barn, the animals will all be counted and sorted into pens by sex and by size, to reduce competition among the hogs. Initially they will be fed a pre-formulated grower diet but will switch over to a finisher diet at approximately week nine. All feed costs are covered by ESI and feed will be supplied by the Souris Feed Mill in Souris, Manitoba. The hogs will undergo weekly weighing starting at week 15 of their production cycle. Those animals reaching market weight (determined by ESI) will be shoulder tattooed and shipped. The pigs not reaching market weight will be sent back to their pen and weighed again the following week. All of the remaining animals will be

Comm 492 College of Commerce and Agriculture, University of Saskatchewan 16 Saskatoba Swine Inc. shipped on week 20, regardless of weight or condition. The empty barn will then be washed and disinfected by hired pressure washers from the community. If production is carried out as planned, one production cycle will occur every 21 weeks. This totals slightly more than 2.4 cycles/barn/year. Figure 3 shows a flow chart of the production cycle of the barn.

All animals into barn (~ Sort animals by Count animals 50 lbs each) sex and by size

Grower diet Wash and disinfect entire barn Finisher diet

All animals out of Weighing barn by week 20

Market weight pigs tattooed and shipped Non-market weight pigs wait one week Semi-annual sale of manure from lagoon

Figure 3. Flow chart of barn production cycle

3.5.1 Average Business Day On any day, the employees will arrive at the barn at 8:00 am and shower in to the main barn. Unless there has been an outbreak of disease in a certain barn, employees will always shower into the main barn and start work at the youngest barn. The workers will always enter a disease contaminated barn last, regardless of pig age. They will begin by checking feeders and waters to ensure they are in good working condition. Minor maintenance will be carried out by the technician. Any dirty pens will be cleaned and sick pigs will be treated and recorded. Technicians will also be responsible for entering treatment records into the computer. The employees will continue this procedure in each of the five barns, beginning at the youngest barn and working their way up to the oldest barn. After all work has been completed, the employees may shower out and go home.

3.5.2 Average Business Week (beginning week 15) After the daily chores have been carried out, the employees must weigh the barns containing pigs at week 15 (or higher) of their production cycle. This procedure includes tattooing and marking (or separating) any market weight pigs. The market weight pigs will be shipped. All remaining pigs will be shipped on week 20. The manager must enter the shipping records into the computer. The barn will be empty for one week in order to be cleaned and disinfected. At week 21 (week one of the new production cycle), the barn will be refilled.

3.5.3 Average Business Month Feed orders will be entered into the computer system as needed. At the end of each month, the manager is responsible for entering records of treatments, dead animals, tours/visitors, and veterinary visits into the computer system. Hired maintenance and pressure washing, minor monthly expenditures, and rent that is received on the barn should all be entered at this time. Payroll is to be tabulated and performance evaluations that are due should be completed and entered into the system.

3.5.4 Semi-Annual Duties The lagoon should be emptied semi-annually. Any sale of manure should be made note of at this time, including the contract date and purchaser.

3.5.5 Business Year Any information required to prepare financial statements will be compiled and submitted to SSI’s accountant on a yearly basis. Financial statements and a yearly report can then be prepared.

3.6 Operations Budget SSI will be renting out its barn space to the hog supplier at a price of $536,700 for all five barns. This number was supplied by ESI. Construction of the barns will begin on July 1, 2003 and they will be filled by January 1, 2004. From there on, they will run at maximum capacity (i.e.- 10,000 head of hogs).

In order to secure financing, 28% of the total capital required must be in the form of equity capital. A loan can then be secured from a lending institution for the remaining 72%. This remainder will be a mortgage that is termed over 5 years and amortized over 15 years at an initial rate of 6.65% (Bob Johnston, CIBC). The major capital expenditures are outlined below (Table 2).

Table 2. Major capital expenditures for SSI. Land Costs: $ 20,000

Building and Equipment Costs BarnCosts: Structure $ 1,800,000 Power Installation $ 50,000 Natural Gas Installation $ 21,000 Barn Equipment $ 850,000 Site Development $ 50,000 Manure Storage $ 200,000 Well Water System w/ Culverts $ 45,000 Legal and Permit Fees $ 5,000 Sasktel $ 1,074 Road Construction $ 16,000 Tractor $ 50,000 Office Furniture $ 3,210

Total Capital Cost $ 3,111,284

The total working capital that is required by the operation is minimal. There has to be enough cash on hand so that inter-monthly payments can be made without disruption. SSI will have a revolving line of credit in the amount of $50,000 with an interest rate set at the prime rate. There will be accounts receivable of one-twelfth of the annual expected revenues at year end. Also, accounts payable that total half a month’s wages, plus any outstanding bills such as SaskPower and SaskEnergy would be covered by this line of credit. Table 3 shows SSI’s working capital.

Table 3. SSI working capital

Working Capital

Cash $ 50,000 Accounts Receivable $ 44,725 Accounts Payable $ (24,965)

Total Net Working Capital $ 69,760

Taking into account the working capital and the building expenses, the total required capital required to make the operation production ready can be estimated.

Table 4. SSI capital budget summary. Capital Budget Summary for Saskatoba Swine Inc.

Land $ 20,000 Building Expenses $ 2,188,074 Equipment $ 903,210 Net Working Capital $ 69,760

Total Capital Required $ 3,111,284

4.0 MARKETING PLAN 4.1 Marketing to Hog Suppliers When looking for a customer to fill the barn space, SSI has looked for a corporation with a proven track record in the hog industry, as well as stability in the industry. Stability is a vital role because SSI wants to secure a long-term contract that has a span of five years and be renewable with little re-negotiation.

The supplying corporation, ESI, is looking for a company that will follow the procedures outlined by ESI. These procedures would include the basics in animal health and well being. This will be one of SSI’s biggest selling points as SSI is committed to excellence, which is shown by the courses that are required within the job description.

Revenues are independent of the hog market prices, as SSI will enter into a fixed 5 year contract with ESI. The corporation will receive payment on a contract price for renting the barn space to the supplier. ESI will endure the market ups and downs, but these market fluctuations will not effect the price SSI will receive.

4.2 Manure Marketing Manure is a byproduct of hog production, and it can benefit farmers when used as fertilizer for their fields. SSI must market its hog manure to the farmers in the areas surrounding the barn. Manure disposal is a part of the cost of doing business. The revenues generated from the sale of the manure will subsidize this cost. Therefore, marketing of the hog manure is very important.

The manure that is produced within the barn will be marketed to the farmers that live within a two mile radius of the barn. This area surrounding the barn equates to 8,040 acres, less any residences and farmyards. The amount of land required to use up one year’s worth of manure is 979 acres. (SAFRR) Manure is applied to the land in a rotation that ensures application occurs no more than once every three years. Application rate is dependent on the type of crop grown and the nitrogen required as recommended by a certified agrologist after soil testing has been done. The total area of land required for long term, sustainable application of manure for this operation is 2,938 acres. (SAFRR) This land must be secured from area farmers before the construction of the barn commences. Interested farmers must complete and sign a consent form pledging their land for manure application. This consent form is found in Appendix F.

Competition is not a major concern with the marketing of hog manure. It is general practice for hog producers to establish themselves a minimum of two miles away from other hog facilities. At this time, there are no other hog facilities within a 20 mile radius of the proposed SSI site. The construction of any rival hog facility within SSI range of application is unlikely. Cattle manure may be perceived as a potential threat to the sale of the product. However, at this time there is only one other cattle producer, other than

Myles Fuchs, in the target area. SSI would have an exclusive manure fertilizer market within its target area.

The only other competitors in the fertilizer market at this time are large fertilizer companies. The manure generated by SSI will be priced at the current nitrogen value, yet it will be attractive to farmers because they will be given phosphorus and potassium along with the nitrogen at no extra cost. Application of the manure is also provided free of charge, which creates further incentive to use manure fertilizer instead of commercial fertilizer. The method of application will be direct injection, as this is the best way to utilize nutrients and reduce odor. Table 5 illustrates the manure application costs.

Cost to Producer Expenses/Acre Producer Applied * Saskatoba Applied Wheat crop/ Black Soil Zone Fertilizer Nitrogen $21.11 $21.11 Phosphorus $4.50 $4.50 Custom Work & Hiring $6.00 $0.00

Total Costs with N applied $27.11 $21.11 Total Costs with P and N applied $31.61 $25.61

* Producer applied cost provided by Ken McLeod of Moosomin, SK.

Table 5. Manure application costs. 4.3 Marketing SSI to the Community

In order to become a successful and thriving hog operation, SSI has to market itself to the community as well as to hog suppliers. SSI must assure the town of Fleming and surrounding farmers that hog production can be beneficial. Informing the community of how hog production can boost the economy, create jobs, and bring new people to the area are all important in marketing for acceptance. In return, it is hoped that the community will show support by investing in the company.

Currently there is no competition for SSI because there are no other similar facilities in the surrounding area. However, the community will compare SSI to other producers so SSI must be ready to address all negative issues.

The production facility will be in a well-sheltered area. This prevents any odors from traveling and decreases noise pollution as well. Pests such as rodents and insects will be controlled regularly and appropriately.

4.3.1 Informing the Community of the Impending Facility The possibility of the proposed hog production facility will be discussed with area residents to create an understanding and acceptance of the business. An acknowledgement form (Appendix E) will be distributed to allow farmers to give their input and acknowledge that they have been contacted by Myles. Afterwards, an information night will be held to discuss key issues and answer any questions the community members may have.

Before the information night takes place, information packages will be sent out to those who are invited to attend (i.e. potential shareholders). These packages will describe what issues will be discussed and what is going on in the industry. Two hundred people are expected to attend. Current investors of ESI operated barns may speak at the information night to answer any questions and address any concerns the attendees may have. Coffee, doughnuts, and pop will be supplied at this event. Total costs (including advertising) are expected to be approximately $650.00.

4.3.2 Community Meeting Agenda 1. Hog Production System as a whole - Farrow to Finish - Manufacture - Maple Leaf – Canada, Japan, World 2. 10,000 Hog Production Site - Building criteria 3. Environmental Issues

- Government of Saskatchewan guidelines and regulations - What pro-active measures are being taken - How SSI are meeting these regulations - Odor control - Water testing and analysis 4. Community Activity - Investment opportunities 5. Manure Application - Application process - Sale of manure - Crop benefits 6. Question from public

4.3.3 Employee Moral and Community Activity To increase community interest and acceptance, a grand opening of SSI will be held. It is expected that approximately 200 people will attend this event. One or two guest speakers may also attend to inform the community of the impacts a hog barn has on the surrounding area. Coffee, doughnuts, and pop will be supplied. Total costs for this event, including advertising, are expected to be $300.00. A community barbecue will be held during the summer to maintain community interest. Approximately 200 people are expected to attend and an entire pig will be barbecued for the event. Total costs (including advertising) are expected to be approximately $700.00.

4.4 Marketing Situation Analysis 4.4.1 SWOT Analysis The SWOT analysis below outlines the major points relating to SSI’s operation. There is a lot of marketing that must be done in order to gain investor support for SSI. With an operation like this one, there is a low risk and low return investment situation because the prices will not reflect the market prices. Investors will see that they have little risk in a time where the stock markets are in a period of extreme volatility. Along with this volatility comes a rate of inflation that could be very detrimental to the operation as a

whole. If there is a sharp rise in the inflation rate, the operation could experience a cash shortage. This could happen if the costs of utilities take a sharp upward swing. That is why there is a revolving line of credit at the disposal of SSI. This line of credit will only be charged interest on what is outstanding.

4.4.1.1 Internal Analysis

Strengths  Reducing risk by not allowing market fluctuations to affect production.  Local involvement (investing and working).  There is always a guaranteed income.  Trained employees committed to excellence.  Modern technologies.  SSI is needed to complete an ESI production pyramid. - ESI has built a 3000 head sow barn which requires are finishing facility to rear the pigs it produces. Transportation cost will be low from ESI because of the SSI location being within 30 miles of the sow barn. Weaknesses  Low return on investment.  Asset specific investment.  Loss of money due to manure sales.  Inflation in costs without the contract income reflecting the changes.

4.4.1.2 External Analysis

Opportunities  Possible expansion to another site.

Threats  Over saturation in the market place.  Upon completion of initial contract, ESI has the option to not renew.

 Environmental policy changes. 5.0 FINANCIAL PLAN 5.1 Sources of Funding There will be two sources of funding needed to establish SSI. These sources will be coming from long-term debt equity for 72%, with the remaining 28% coming from investor equity. The debt financing will be obtained from a large chartered financial institution or a local Credit Union. Will have a revolving line of credit to cover miscellaneous monthly expenses if necessary.

In order to obtain the required amount of equity financing from investors, SSI will be offering 90 Class A shares for sale to the public for $10,000 a piece. These shares are all voting shares that are used to vote on the Board of Director positions. Shares will be offered according to the guidelines of the Saskatchewan Securities Commission. SSI sees this offering as a way to have the company involved in the economic development of the area. A strong selling point for the shares is that they are a relatively low risk investment with a return that is comparable to the returns that are being received by stock investors in markets such as Toronto and New York. The other selling point is that the investors would be investing in a community based company.

The debt financing will fund the majority of the capital requirements for SSI. The source of the capital will be coming from a major chartered bank. A representative from the Canadian Imperial Bank of Commerce was contacted and asked about the requirements to securing such funding as well as the interest rate that corresponds with the amount based on the risk of the venture. The bank viewed the venture as being relatively low risk. This meant that SSI could secure financing at the rate of 6.65% for a five-year term amortized over fifteen years. The debt ratio is proposed to be 72% debt. Debt security will include things such as land and buildings, with the possibility of personal guarantees from investors for a per capita portion of the long term debt.

In summary, the financing for SSI will come from two sources; the investor equity portion that will equal 28% or $900,000 and long-term debt of 72% or 2.3 million dollars.

This will provide the adequate capital to have the business operational by covering the capital expenditures as well as having some working capital available.

5.1.1 Dividend Policy The dividend policy will pay out any cash balance that is in excess of $50,000. This policy is in line with the goals of the business, as there should be just enough cash on hand to allow smooth operation, while being able to cover any costs that might arise during the month before any income has been received. This will allow investors to gain the maximum return for the investment that was made.

5.2 Opening Balance Sheet

SSI Opening Balance Sheet July 1st, 2003

Assets: Current Assets Cash $ 93,716 Total Current Assets $ 93,716

Fixed Assets Land $ 20,000 Buildings $ 2,183,074 Equipment $ 903,210 Total Fixed Assets $ 3,106,284

Total Assets $ 3,200,000

Liabilities:

Long Term Liabilities Bank Debt $ 2,300,000

Shareholder's Equity: Share Capital $ 900,000 Total Shareholder's $ 900,000 Equity

Total Liabilities and Shareholder's Equity $ 3,200,000

5.3 Summary Tables All financial results and analysis are based on the financial model of SSI, which can be found in Appendix E.

The following table illustrates the variables that had the most potential to fluctuate. The contract price that is established for the rent of SSI’s facilities had the most effect on IRR with the least percentage of change. The other variables were deemed less critical, as they could sustain a large percent change before a difference in IRR was noted.

Table 6. Critical Variables Critical Value Base Case IRR = 7.0% Allowable % Change

Contract Price $ 536,700 $ 494,598 8% Wages $ 75,000 $ 112,995 50% Manure Revenue $ 20,669 $ 14,262 30%

5.4 Base Case Results Key Variables Barn Rental $ 536,370 Wages $ 75,000 Manure Sales $ 20,669

Year 2003 2004 2005 2006 2007 Net Profit Margin -38% -10% -2% 5% 9% Net Income ($111,048) ($53,636) ($12,319) $25,969 $53,196

Net Cash from $5,773 $221,482 $131,518 $114,730 $116,631 Operations End of Year Cash $466 $121,671 $146,244 $146,918 $141,908 Dividends Paid $ - $ - $71,671 $96,244 $96,918 Year 2008 2009 2010 2011 2012 Net Profit Margin 20% 19% 22% 23% 25% Net Income $123,630 $121,470 $135,035 $147,322 $158,524 Net Cash from $167,573 $115,674 $138,463 $148,705 $159,287 Operations End of Year Cash $179,750 $157,066 $147,971 $139,305 $130,756 Dividends Paid $91,908 $129,750 $107,066 $97,971 $89,305

Examining the base case financial performance of SSI concludes that this is a feasible business venture, mainly because of the internal rate of return of 7.3% and an ERR 4.9%.

In addition, operation and total cash flows are steadily increasing. In years one and two there are net losses, but by year three these losses have been recouped while at the same time SSI begin to pay dividends.

5.5 Worst Case Results Changing SSI’s main critical variables resulted in the following scenario. The barn rental would remain at the beginning contract price without renegotiations, the wages would increase from $20,000 to $30,000 for technicians, and $35,000 to $40,000 for the manager. SSI also assumed that there will be no recovery of any costs that are related to the manure sales. Key Variables Barn Rental $ 536,700 Wages $ 100,000 Manure Sales $ -

Net Present Value ($454,471) Internal Rate of Return -1.7%

Year 2003 2004 2005 2006 2007 Net Profit Margin -54% -19% -12% -6% -1% Net Income ($145,564) ($103,174) ($64,694) ($32,509) ($6,602) Net Cash from ($27,678) $171,966 $150,836 $119,924 $115,312 Operations End of Year Cash ($32,985) $38,704 $82,595 $88,462 $82,133 Dividends Paid $ - $ - $ - $32,595 $38,462 Year 2008 2009 2010 2011 2012 Net Profit Margin 3% 6% 9% 11% 14% Net Income $14,775 $32,844 $48,395 $62,051 $74,313

Net Cash from $122,988 $131,432 $140,450 $150,175 $160,347 Operations End of Year Cash $75,390 $68,464 $61,356 $54,059 $46,570 Dividends Paid $32,133 $25,390 $18,464 $11,356 $4,059

In the worst case scenario, SSI will not meet the required rate of return, by a substantial amount. Positive net income does not occur until the business is in its fifth year, however there is a positive cash flow ending the second year. Unfortunately there will not be dividends paid to investors until the end of the fourth year. If this were in fact the base case, the project would become infeasible due to the low rate of return. There would also be difficulty in gaining investor support.

5.6 Best Case Results

Key Variables

Contract Price $ 536,700 Wages $ 66,000 Manure Revenues $ 45,407

Year 2003 2004 2005 2006 2007 Net Profit Margin -26% -3% 4% 10% 12% Net Income ($81,325) ($17,986) $25,598 $59,110 $73,243 Net Cash from $35,113 $257,124 $104,446 $109,954 $103,538 Operations End of Year Cash $29,805 $186,653 $184,154 $180,051 $161,948 Dividends Paid $ - $ - $136,653 $134,154 $130,051 Year 2008 2009 2010 2011 2012 Net Profit Margin 23% 25% 27% 28% 30% Net Income $154,562 $170,379 $182,727 $193,722 $203,821 Net Cash from $176,221 $135,888 $137,245 $147,414 $158,184 Operations End of Year Cash $208,437 $205,967 $195,654 $185,697 $176,044 Dividends Paid $111,948 $158,437 $155,967 $145,654 $135,697

Adjusting the key critical value, which is contract price, produced the best case scenario. The ESI contract price was increased at year 6 in order to reflect the accumulation of 5 years worth of inflation, which at a rate of 3% per annum, amounts to a 15% increase in the contract price in year 6. As a result, the IRR increased to 11.6 % from 7.3%. The new IRR value would make investment more attractive, as that is a reasonably high rate of return for such a low risk investment. Dividend payments will begin in year 3 as they did in the base case, but the dividend amount nearly doubles from $32,595 to $136,653. 5.7 Manure Base, Best, and Worst Projection Table 7. Cost of manure disposal at different stages of operation % Capacity Price 33% 66% 100% Worst $ - $ 20,295 $ 40590 $ 61,500 Base $ 21.11 $ 54,675 $ 47,850 $ 40,818 Best $ 52.25 $ 44,607 $ 27,715 $ 10,311

The previous table shows the difference between the amount of manure that is produced at different percentages of capacity, with the corresponding prices that can be obtained. The prices show the best, worst and base case assumptions. The best case scenario requires pricing competitively with granular fertilizer prices. The capacity is the amount of manure that would be expected at different production levels.

5.8 Sensitivity Analysis Contract price has shown to be the most significant critical variable in the SSI financial model. This variable was examined through net income, cash flow, and economic breakeven analysis. Economic break-even was found when NPV=0.

The sensitivity analysis can best be shown by the graph below. The three critical variables that were chosen are contract price, wages, and manure sales. The options that were compared between the base case, best case, and worst case for each are as follows:

Sensitivity Analysis

10.0% Base n r u

t 8.0% e Best R

e 6.0% t Worst a R

n 4.0% r e t n I 2.0%

0.0% Barn Rental Wages Manure Sales Combined Effect

-2.0% Critical Variables Figure 4. Comparison of sensitivity of critical values

Table 8. Comparison of critical values Base Best Worst Contract Price Standard contract Standard contract Standard contract with 10% increase with 15% increase with no increase in in year six. in year six. year six. Wages Figure provided by Base case minus 9% Base case plus 15% ESI (Manager) (Manager) Base case minus Base case plus 50% 15% (Technician) (Technicians) Manure Sales Value of nitrogen at Cost of commercial No revenue gained commercial prices fertilizer and application

SSI has chosen the critical variable to be the contract price, due to the low allowable percentage change for operation at an economic breakeven. Economic breakeven occurs when the net present value (NPV) is equal to zero. This is also where the base rate internal rate of return (IRR) equals the critical internal rate of return, set at 7.3%. Contract price accounts for the largest revenue draw within the corporation. Any variation would cause dramatic swings in IRR. If contract price were to decrease upon renegotiations, IRR would be negatively affected. However, this situation is highly unlikely because of ESI demand for SSI’s pig space.

With the remaining two variables, manure sales and wages, the allowable percentages to take the base case to economic breakeven point (NPV=0, IRR=7%) were 30% and 50% respectively. Therefore, manure sales and wages impacted less on the bottom line of the corporation than the contract price.

According to economic breakeven, whereby all costs are covered while still retaining some operating cash flow, SSI determined that a maximum of $112,995 could be allotted to wages. This, of course, would not be realistic. Beginning wages will be at or above industry average, though the corporation will need to adjust the wages according to labour and skill availability.

5.9 Breakeven Analysis 5.9.1 Net Income Break-even Analysis Table 10. Net income break-even analysis Net Income Break-even Varying Contract Price

Year Net Income Cash Contract Base Case Price 2003 $ - $ 93,006 $ 758,797 $ 536,700 2004 $ - $ 238,968 $ 589,276 $ 536,700 2005 $ - $ 162,114 $ 546,674 $ 536,700 2006 $ - $ 123,971 $ 510,414 $ 536,700 2007 $ - $ 90,916 $ 483,963 $ 536,700 2008 $ - $ 62,451 $ 461,663 $ 590,370 2009 $ - $ 37,191 $ 442,531 $ 590,370 2010 $ - $ 1,525 $ 425,754 $ 590,370 2011 $ - $ (55,211) $ 410,381 $ 590,370 2012 $ - $ (131,810) $ 396,358 $ 590,370

The results of this analysis shows that cash balance can withstand a 54% drop in contract price before reaching a negative balance. This cash flow deficit can be attributed to the continually increasing net income within the base case.

Table 11. Cash flow break-even analysis Cash Flow Break-even Varying Contract Price Year Net Income Cash Contract Base Case Price 2003 $ (111,607) $ - $ 535,583 $ 536,700 2004 $ (185,759) $ - $ 404,578 $ 536,700 2005 $ (105,154) $ - $ 445,499 $ 536,700 2006 $ (71,276) $ - $ 441,580 $ 536,700 2007 $ (38,226) $ - $ 447,417 $ 536,700 2008 $ (10,168) $ - $ 452,513 $ 590,370 2009 $ 14,846 $ - $ 457,826 $ 590,370 2010 $ 37,518 $ - $ 463,272 $ 590,370 2011 $ 58,483 $ - $ 468,863 $ 590,370 2012 $ 78,246 $ - $ 474,604 $ 590,370

The effect of varying the contract price to keep the cash flow at zero was examined. The result was that in the first six years there was a net loss reported, gradually reducing towards the seventh year. Net income becomes positive as a result of contract renegotiations I year six. This renegotiation accounts for a percentage of missed inflation that is found within the base case. Table 12. Economic break-even analysis

Varying Contract Price

NPV $0.00 IRR 7%

Year Contract Price Base Case

2003 $ 494,171 $ 536,700 2004 $ 513,860 $ 536,700 2005 $ 511,958 $ 536,700 2006 $ 509,870 $ 536,700 2007 $ 507,572 $ 536,700 2008 $ 558,718 $ 590,370 2009 $ 556,503 $ 590,370 2010 $ 554,131 $ 590,370 2011 $ 551,530 $ 590,370 2012 $ 548,528 $ 590,370

The economic breakeven point was found where NPV of the investment was equal to zero. Using the discount rate of 8% SSI have found that the contract varies, particularly within the first five years. This pattern can be attributed to a varying expenditure as well as the decline in the depreciation and interest payments. Depreciation and interest payment amounts decrease with time.

5.10 Contingency Plan SSI is extensively protected from outside influences, such as fluctuation in market prices, disease outbreaks, etc. The corporation will receive payment on the pig spaces regardless of whether or not they are occupied. However, this protection only extends to the end of each five year term, at which time the contract is up for renewal.

In the event that the contract with ESI is not renewed following a five year term, SSI has limited options. They are as follows:

1. Enter into a similar contract with a different company. The incidence of hog operations is on the rise in Saskatchewan, and with it comes the need for these types of facilities. 2. SSI could take on a new role as a production company, rather than a housing provider. Pigs could be purchased to fill the empty barn, thereby utilizing the

facilities. With this option comes increased risk, as SSI would now be subject to market risk, commodity prices, and other miscellaneous expenses that were previously the responsibility of ESI. 3. In the event of a major disease outbreak, such as foot and mouth disease, or a severe market crash, neither of the previous two options may be available. In this instance, the barn could sit unoccupied for a few years, and production startup could be attempted at a later time, depending on market or health status. 4. If the previous scenario were to occur near the end of the facility’s life cycle, reclamation of the site may be the only option. This would involve dismantling each barn, and filling the lagoon, which would cost upwards of $180,000. However, the site has intrinsic value that can be capitalized on. The area will have been previously approved for intensive livestock production, and equipped with gas, power, water availability, and good site accessibility. As the hog industry grows, this approval may become difficult to acquire. Therefore, the property could be sold as an old site, and the construction of a new barn on the existing foundation would best utilize the property.

6.0 CONCLUSION AND RECOMMENDATIONS SSI would be feasible business venture. The IRR for the base case scenario is 7.3%, making it a good investment for a low risk venture. It is expected that investors will begin receiving dividends by the third year of operations. It is believed that SSI will be able to bring new economic opportunities and provide new jobs for the community of Fleming. Area farmers will also benefit from the comparably inexpensive source of fertilizer available from SSI.

Over the course of this study, SSI has encountered several concerns with constructing a contracted hog feeding barn. First of all, it is estimated that the barns will no longer be in service after a period of 20 years. Therefore, the site may have to undergo reclamation costs or be sold to other intensive agriculture operations for reconstruction to meet new industry standards.

Manure marketing is an issue because it is essential that SSI dispose of the manure in some way. By selling the manure, local farmers, are receiving a value-added fertilizer product at competitive pricing to fertilizer dealers. SSI would also benefit from the sale of manure as it is a cost of doing business, and its sale would help subsidize this cost.

In order to be attractive to potential investors, SSI must prove that it is an environmentally sustainable operation. The sheltered area surrounding the SSI site prevents odors from travelling and decreases noise pollution. Before being constructed, the area for the lagoon will be tested to ensure proper clay content of the soil to prevent leaching of lagoon contents into water supplies. If the clay content is not sufficient, a liner would have to be placed in the lagoon to prevent this leaching. Emptying of the lagoon will occur semi-annually to prevent over filling and thus, overflow of lagoon contents.

Dividend payments may also be of concern to potential investors. SSI’s dividend policy comes into effect in year three. The dividend policy is set up so that when cash from the previous business year exceeds $50,000, the excess will be paid out to the shareholders as dividends.

The external rate of return in this venture is at 4.9% with the salvage value added in at the end of the ten years. This is what the investor will actually realize on the investment. This is different than the IRR because it is taking away the amount that SSI keeps in order to run the day to day business.

7.0 REFERENCES Abacus Signs. Saskatoon, SK. Personal communication. November, 2002.

Baskerville, Heather. ESI. Brandon, MB. Personal communication. October, 2002.

Bergen, Barry. ESI. Brandon, MB. Personal communication. October, 2002.

Baudry, Guy. ESI. Brandon, MB. Personal communication. October, 2002.

Eister, Susan. ESI. Brandon, MB. Personal communication. October, 2002.

Fuchs, Myles. Fleming, SK. Personal communication. September-December, 2002.

Henley, Bill. Saskatchewan Agriculture and Food and Rural Revitalization. Saskatoon, SK. Personal communication, October, 2002.

Johnston, Bob. CIBC: Account Manager. Humboldt, SK. Personal communication. September-December, 2002.

Kaastra, Shepp. ESI. Brandon, MB. Personal communication. October, 2002.

Ransom, Jeff. CIBC: Agriculture Division. Winnipeg, MB. Personal communication, September-December, 2002.

Redeckop, Doug. ESI. Brandon, MB. Personal communication. October, 2002.

RM of Maryfield. Maryfield, SK. Personal communication. September-October, 2002.

RM of Moosomin. Moosomin, MB. Personal communication. September-October 2002.

Saskatchewan Agriculture and Food and Rural Revitalization, Agricultural Operations Section. Manual for developing a manure and dead animal management plan. March 2000. Available online: www.agr.gov.sk.ca Accessed: October 2002.

Saskatchewan Agriculture and Food and Rural Revitalization, Inspection and Regulatory Management. Establishing and managing livestock operations. July 2001. Available online: www.agr.gov.sk.ca Accessed: October 2002.

Sask Energy. Saskatoon, SK. Personal communication. November, 2002.

Sask Power. Saskatoon, SK. Personal communication. November, 2002.

SaskTel. Saskatoon, SK. Personal communication. November, 2002.

Swanson, Darren. Community Pork Ventures. Outlook, SK. Personal communication, November, 2002.

T. L. Penner Construction. Kola, MB. Personal communication. November, 2002.

Williams, Dr. R. D. University of Saskatchewan. Personal communication. September, 2002.

Wright, Marten. Community Pork Ventures. Outlook, SK. Personal communication, September-December, 2002.

APPENDIX A

Financial Model

Comm 492 College of Commerce and Agriculture, University of Saskatchewan i Saskatoba Swine Inc.

APPENDIX B

Consent Form for Spreading Manure

Comm 492 College of Commerce and Agriculture, University of Saskatchewan ii Saskatoba Swine Inc.

APPENDIX C

Performance Driven Efficiency Payment

Comm 492 College of Commerce and Agriculture, University of Saskatchewan iii Saskatoba Swine Inc.

APPENDIX D

Application for Approval of Plans

Comm 492 College of Commerce and Agriculture, University of Saskatchewan iv Saskatoba Swine Inc.

APPENDIX E

Reporting Requirements for Engineering Consultant Reports

Comm 492 College of Commerce and Agriculture, University of Saskatchewan v Saskatoba Swine Inc.

APPENDIX F

Acknowledgement Form

Comm 492 College of Commerce and Agriculture, University of Saskatchewan vi