Pound-Maker Agventures Ltd

Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ____________College of Agriculture & College of Commerce, University of Saskatchewan1 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______TABLE of CONTENTSLIST OF TABLES AND FIGURES 4EXECUTIVE SUMMARY 7Introduction 7 Operations 7 Human Resources 8 Financial 8 Marketing 8 Sales Revenue 9 Finance 9 Summary 101.0 INTRODUCTION 112.0 INDUSTRY OVERVIEW 122.1 Pea production in Saskatchewan 122.2 Pea perceptions 13 2.3 Pea production 13 2.3.1 Advantages of pea production within Saskatchewan 132.3.2 Disadvantages of pea production within Saskatchewan 14 2.4 Dehulling peas 14 2.5 Properties of a pea seed (compared to CPS wheat) 142.6 Buying Peas 15 2.7 Estimated Sales Volume and Revenues 153.0 OPERATIONS PLAN 163.1 Existing facilities 16 3.2 Incorporation of pea fractionation 17 3.3 Fractionation process 17 3.4 Equipment for operations 18 3.5 Dehuller 19 3.6 Cleaner 19 ______College of Agriculture & College of Commerce, University of Saskatchewan2 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______3.7 Pin mills 20 3.8 Air classification 21 3.9 Pelleter 22 3.10 Timeliness of operations 224.0 MARKETING PLAN 234.1 Marketing Objectives 24 4.2 Marketing Budget 24 4.3 Situation Analysis 24 4.3.1 SWOT Analysis 24 4.3.1.1 Strengths 244.3.1.2 Weaknesses 244.3.1.3 Opportunities 24 4.3.1.4 Threats 24 4.3.2 Market Fundamentals 24 4.3.3 Opportunity for peas 26 4.3.4 Industry growth 274.4 Competition 27 4.5 Customers 28 4.6 Product 28 4.6.1 Colour 28 4.6.2 Size 29 4.7 Sales and Profit Objectives 29 4.7.1 Sales Objectives 29 4.7.2 Profit Objectives 30 4.8 Channels of Distribution 31 4.9 Pricing policy 314.10 Selected markets and product/service mix 32 4.11 Selling and advertising 335.0 HUMAN RESOURCES 335.1 Job Descriptions 335.1.1 General Manager 34 5.1.2 Operations Manager 34 5.1.3 Purchasing Manager 35 5.1.4 Process operators 35 ______College of Agriculture & College of Commerce, University of Saskatchewan3 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______5.1.5 Maintenance 35 5.1.6 Electrician 36 5.1.7 Accounts Manager 36 5.1.8 Administration 37 5.2 Training programs 37 5.3 Lines of Authority 38 5.4 Present and future costs of employees 396.0 FINANCIAL 406.1 Financial Budget 41 6.1.1 Debt financing 41 6.1.2 Equity investment 42 6.2 Dividend policy 42 6.3 Economic Forecast 42 6.4 Working Capital 42 6.4.1 Account receivable 43 6.4.2 Inventory 43 6.4.3 Account payable 44 6.5 Start-up Costs 44 6.6 Costs of Goods Sold 44 6.7 Taxes 456.7.1 Property taxes 45 6.7.2 Income taxes 45 6.7.3 Capital taxes 46 6.8 Operating expenses 466.9 Accounting Information system 47 6.10 Ratio analysis 47 6.11 Financial analysis 48 6.12 Sensitivity analysis 50 7.0 Future Considerations 52 7.1 Addition of Oils 52 7.2 Pre-milling of Peas 52 8.0 Summary of Proposed Project 53List of Tables and FiguresTable 1: List of equipment for Fractionation plant 18 Table 2: Marketing Budget 23 Table 3: Table of Input and Output Costs (10 yr. Projection) 32 Table 4: Future projection of salaries 39 Table 5: Future projection of wages 40 ______College of Agriculture & College of Commerce, University of Saskatchewan4 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Table 6: Selected Ratios Outlook (10 yr. Projection) 48 Table 7: Variables used in sensitivity analysis 48 Table 8: Sensitivity Analysis summary (18% discount rate) 49 Table 9: Protein selling price Break-Even 49 Table 10: Starch selling price Break-Even 50 Table 11: Pea purchasing price Break-Even 50Figure A: Estimated Sales Revenue (2004) 9 Figure 1: Site plan 16 Figure 2: Breakdown of pea fractionation process 18 Figure 3: Dehuller 19 Figure 4: Cleaner 19 Figure 5: Pin Mill 20 Figure 6: Air Classification 21 Figure 7: Pelleter 22 Figure 8: Size of pea particles 29 Figure 9: Human Resources structure 38 Figure 10: Opening Balance Sheet 41 Figure 11: Cash Flow, Net Income and Dividend Summary 43 Figure 12: Cost of Goods Sold breakdown (10 yr. Average) 45 Figure 13: Operating Expenses (10 yr. Average) 46 Figure 14: Projected IRR under best, base and worst case scenarios 51Appendix A : Financial InformationAcknowledgmentsThe accumulation of this material would not be possible if there wasn’t help from the many sources we interviewed. We greatly appreciate the time, effort and expertise provided by these individuals and companies.Special thanks go out to:  Bill Brown, Professor, College of Agriculture  Marv Painter, Professor, College of Commerce.  Brad Wildeman, General Manager, Pound-Maker Agventures  Sheri Peterson, Keith Reeve, Ken Ewen, Trent Sandercock, Employees, Pound- Maker Agventures Ltd.  Jason Mann, Research & Development, EWOS Canada Ltd.  Gil Assie, Accountant, Meyers Norris Penny ______College of Agriculture & College of Commerce, University of Saskatchewan5 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______ Vern Racz, Senior Consultant, Prairie Feed Resource Centre  Grant Olsen, Engineer, Olsen Engineering Inc.  Dr. Ron McLaren, Nutritionist, Feed-RiteMission Statement:“To be a leader in the profitable value-added processing of agricultural products in an ethical and environmentally sustainable manner for the benefit of stakeholders”______College of Agriculture & College of Commerce, University of Saskatchewan6 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Executive SummaryIntroductionPound-Maker Agventures is a 28,500-head cattle feedlot and a 12,000,000-litre ethanol plant. The ethanol facility currently uses CPS wheat as a source of starch. The entire wheat kernel is used in the distillation process. The starch is used in the ethanol, and the remaining product, the distiller’s grain, is fed to the cattle in the feedlot. The Pound- Maker Pea Fractionation Plant is a proposed addition to the ethanol plant. The addition would use feed peas as a substitute for CPS wheat. This substitution will allow the protein to be sold, the hulls and screenings to be fed and the starch to be processed into ethanol and then fed as wet distiller’s grain. The addition benefits from an existing, trained labour force and management. Grain handling facilities are already in place.OperationsThe peas will first be dehulled and cleaned, producing hulls, screenings, and chaff. This product can be fed directly to the cattle without having to go through the ethanol plant, reducing the volume of product going through the distillery. The cleaned, dehulled peas are then fractionated in 3 pin mills and separated in 1 air classifier. The protein is lifted ______College of Agriculture & College of Commerce, University of Saskatchewan7 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______off, pelleted, and stored ready for shipment. Five to six carloads a week (45-55 tonnes per railcar) will be shipped. The starch is fed directly into the ethanol plant.The pea fractionation plant will run the same number of days as the ethanol plant because there is no storage for starch. Currently the plant is averaging 300 days per year.The main input cost of the plant is the cost of peas, a commodity, and the cost of electricity due to the high horsepower electric motors required to run the pin mills. Revenue from the protein is a new income for Pound-Maker, while the hulls and screenings are a small percentage of the volume and are of little value.Human ResourcesPound-Maker Agventures has an existing staff and management that will operate this addition. The addition of the pea fractionation plant will not see any new positions opening up; rather, it will see a minute increase in responsibilities among employees. The president, operations manager and office staff will have a percentage of their salary and benefits paid by the addition based on how much of their time is allocated to the fractionation plant. For the General Manager this is around 10 % of his time, while the purchasing manager has been allocated 70% of his time with the fractionation plant. Likewise the wage earners, the labourers, process operators, electrician and maintenance staff will have a percentage of their wages and benefits paid for by the addition. MarketingThe pea fractionation plant will sell all of its protein production to EWOS initially. EWOS is a multinational company that specializes in the research, development and production of fish feed. Their headquarters are in Norway, with companies in Chile, ______College of Agriculture & College of Commerce, University of Saskatchewan8 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______United Kingdom and British Columbia, Canada. The protein that they receive goes into any number of the products that they produce. The price of pea protein is set relative to corn gluten and soy meal. All the hulls, screenings and starch are sold to Pound-Maker on site. The majority of the marketing time will be spent buying peas. Commodity prices are controlled by the open market. Field peas are a commodity; therefore we are a price taker.Sales RevenuePound-Maker Pea Fractionation sells three products: pea protein, starch and hulls/screenings. The protein is sold to EWOS. The starch and hulls/screenings are sold on site to Pound-Maker Agventures. The following table shows the breakdown of volumes and values of sales.Figure A: Estimated Sales Revenues (2004)______College of Agriculture & College of Commerce, University of Saskatchewan9 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______9,000,0008,000,0007,000,0006,000,000 s r a l l 5,000,000 o d Protein Sales. 4,000,000 n Starch Sales d c 3,000,000 Hull/Screenings Sales2,000,0001,000,0000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 yearFinanceThe initial capital requirements are around $6.9 million. This will be raised half in equity, and half by debt financing. The $3 million dollars of debt will be financed over 10 years at 6.5%. The equity will be raised through the offering of shares to the existing shareholders first and then to the general public for sale. Pound-Maker Investments will also have the option of buying shares in the new share offering.Pound-Maker Pea Fractionation has a few critical values that can affect income. These include:  Cost of peas  Selling price of starch and protein  Cost of electricity______College of Agriculture & College of Commerce, University of Saskatchewan10 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______SummaryThe projections given indicate that the pea fractionation expansion would be a feasible investment for Pound-Maker Agventures. However, it is fairly risky when the $6.9 million dollar initial investment is considered. Most of this is equipment that is depreciating between 20 and 30% per year and carries little salvage values. Also, the ‘price taker’ nature of buying and selling commodities can bring a great deal of risk. A good marketer can take advantage of the market over the long term to reduce this risk variable. The base case scenario gives an internal rate of return of 37.4%, and a net present value of $2,995,670. The worst case scenario gives a negative NPV value of ( - $9,564,573. ) Using average prices for our products clearly makes this venture feasible. We believe that the expected net profits are significant enough to compensate for the risk and Pound- Maker should proceed with the investment.1.0 IntroductionPound-Maker Agventures Ltd. is an integrated feedlot & ethanol facility located 7 miles east of Lanigan, Saskatchewan. The company has approximately 50 employees working in the office, feedlot, feed mill and ethanol plant. Pea fractionation presents a good fit to current ethanol production due to the relative ease of installation and implementation to the current system. The pea fractionation plant established at Pound-Maker, would be located along the west side of the ethanol plant building. It would replace the current milling operation for the ethanol plant, which consists of two large hammer mills that supply the necessary wheat for the ethanol process. The three pin mills that would replace the current system would provide the same amount of starch output the ethanol plant has received. Along with the pin mills an air classifier would be placed alongside the building to separate the protein and starches that has been broken down through the milling operation. The extra equipment necessary for the cleaning and processing of peas include a cleaner, dehuller, and pelleter for the finished pea protein before it is transported on rail.______College of Agriculture & College of Commerce, University of Saskatchewan11 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______In regards to the industry where our protein is to be sold, the market we analyzed showed a great demand for an alternative feed supply within the aquaculture industry. This demand is due to the steady decrease in fishmeal that is used as fish feed. It is estimated that by 2009 the supply of fishmeal will be insufficient to satisfy the demand in the aquaculture industry( Hemre, 2001), which will cause an increase in the price for fishmeal. The main reason for the infeasibility is that feed production costs are the largest variable in profitability when producing fish feed. Therefore, there will be an increasing demand for pea protein and similar feed supplements in the near future. 2.0 Industry overview2.1 Pea Production in SaskatchewanPeas are an integral part of the food supply for people around the world. Peas are one of the world’s oldest crops grown, dating back almost 9000 years( www.saskpulse.com). Within North America, particularly in Wisconsin and area, peas have been grown for nearly 100 years. Here in Saskatchewan though, they have only been grown as a major crop for the last 15 years. Peas are still classified as a specialty crop.Pea production is growing rapidly within Canada. It is estimated in 2005 that pea production will go from 2.8 million to 3.5 million acres(www.agrivision.sk.ca). Saskatchewan is a major contributor to that pea production, providing over 70% of Canada’s total production. This estimate is close to the amount of canola that is produced ______College of Agriculture & College of Commerce, University of Saskatchewan12 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______yearly within Saskatchewan. By 2015, pea production is projected to surpass the amount of canola produced within Saskatchewan (www.agrivision.sk.ca), making it the fastest growing crop in Saskatchewan today.2.2 Pea PerceptionsPeas are thought to be a valuable crop, although somewhat more risky and harder to grow than other crops such as wheat or canola. Nitrogen fixation capabilities of peas allow the producer to use less chemical fertilizer, making them a more environmentally friendly crop. However, more energy may be spent harvesting the peas if they lodge like they have a tendency to do. 2.3 Pea productionProducing peas requires more than just planting them in the ground and hoping they grow. They can be one of the most energy intensive crops grown on the prairies. They are hard hulled and have a tendency to split when handled. They perform much better when they are inoculated with the proper strain of Rhizobium. These can be in granular, liquid, or peat carriers. Peas are relatively poor competitors in the field therefore they need to be on fields with little weed competition. They require very little fertilizer; in fact nitrogen fertilizer (N) can do more harm than good. If the plant has adequate N, it will not produce N-fixing nodules. This means that the plant will suffer when the N supply runs out. They are sensitive to other forms of fertilizer as well, such as phosphate and potassium. Little amounts of these fertilizers will increase the vigour of the plant. Peas tend to lie over or lodge due to their vine stems. This means that harvest must be done carefully and is slow. ______College of Agriculture & College of Commerce, University of Saskatchewan13 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______2.3.1 Advantages of Pea production within SaskatchewanWithin Saskatchewan, peas have a great environment for growth. Currently, peas are grown in most parts of the province. This is due to field pea’s positive performance on drier soils because of their shallow rooting systems. Peas perform best on well-drained soil that provides adequate moisture throughout the growing season.Along with the lack of moisture requirements compared to other crops, peas do not require an abundance of nitrogen for a high yielding crop due to their nitrogen fixation properties mentioned above. This makes them an invaluable component to cropping rotations in some areas of Saskatchewan, and a welcome addition to any soil that has a depletion of nitrogen, especially on a cereal stubble field. The sustainability of peas in cold temperatures also makes them an attractive cropping option. Peas will germinate between 4 to 24 degrees Celsius, and the seedlings can tolerate temperatures of up to –7 degrees. This makes them a very hardy crop for Saskatchewan’s environment.2.3.2 Disadvantages of Pea production within SaskatchewanSaskatchewan currently exports most of the pea production. The province is not near the exporting ports resulting in an increase in costs. Also, peas are not a major part of the local diet in comparison to world consumption. This variable makes their value in local markets less than what they are in the areas where consumption is greater. 2.4 Dehulling Peas______College of Agriculture & College of Commerce, University of Saskatchewan14 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Dehulling peas removes the low feed value hulls, reducing the volume of product that requires transportation. This process allows Pound-Maker to be able to feed the hulls in with the screenings and not have to process the extra volume. Hulls have low feed value, but are highly palatable to cattle.2.5 Properties of a pea seed (compared to CPS wheat)Peas are a larger seed with a higher percentage of protein than CPS wheat. The starch levels acquired from peas reduce the volume of total product required to fill the ethanol plant. 2.6 Buying PeasPea prices vary greatly between feed peas and food peas. Feed peas are the input that Pound-Maker Pea Fractionation needs to buy. The long term average price of peas in Saskatchewan is $177/t or $4.82/bu for food peas(www.agrivision.sk.ca). To ensure adequate volume of feed peas are available, 79% of the price of food peas will be paid. Contracting feed peas is not a feasible practice. When looking at historical trends the average buying price of feed peas was estimated at $140/t or $3.80/bu (Canadian). This price can vary greatly, and therefore requires most of the marketing time to decrease the chance of having to pay a great deal more for them. Buying feed peas directly from farmers as well as screenings from pea processors will be the main sources of the peas because the price for a food grade pea would be much too expensive to run through the plant. If enough peas cannot be found this way, a broker may be used or food pea prices may have to be paid.______College of Agriculture & College of Commerce, University of Saskatchewan15 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______2.7 Estimated Sales Volumes and RevenuesSales volumes from Pound-Maker Pea Fractionation are constant due to the limited production of the ethanol plant that the starch component of the pea is used for. The first year’s projections are down only to allow for start up complications to be corrected, otherwise every year has the same output with no growth. All the starch is used in the ethanol distiller, the hulls/screenings are used entirely by the feedlot, and the pea protein is all sold to EWOS. There are 35,990 tonnes of starch produced yearly, 6,100 tonnes of hulls/screenings, and 18,910 tonnes of protein pellets. The price of the starch is calculated from Pound-Maker Agventure’s existing cost of starch and set at $200/t. The hulls/screenings are given a small feed value of $25/t calculated from Pound-Maker Agventure’s costs of feed. The pea protein price is taken from the world market. It is derived from the feed value relative to corn gluten and soy meal as well as herring meal. For the base case we set the selling price of protein at $400/t. These selling prices are inflated at 2.0% per year to account for growth in the market and inflation. 3.0 Operations Plan3.1 Existing FacilitiesPound-Maker is currently operating a feedlot with an attached 12 million-litre ethanol plant where all the by-products are feed to the cattle. Currently wheat is run through the facility with starch used in the ethanol plant and the protein passed through to the cattle. The plant will be converted to use pea starch as an ethanol source with the pea protein being extracted as a main product. Existing facilities for loading / unloading of trucks as well as for bulk storage of raw and finished products will be cash rented from Pound- Maker. The existing site is already setup with electricity, natural gas, and water. Electricity will be a major expense to the operation as all of the equipment is electrical. Figure 1 illustrates the site plan, where the only addition to the existing Pound-Maker site ______College of Agriculture & College of Commerce, University of Saskatchewan16 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______is the new building, which will house the Dehuller, Pelleter, Milling and Classification system. Figure 1: Site Plan3.2 Incorporation of Pea Fractionation The company will be incorporated as a private company. The company will benefit from limited liability, capital gains exemptions, continuous lifespan, and flexibility for distribution of income. Half of the capital will be generated from the issuance of shares and the other half will be a bank loan guaranteed by Pound-Maker. By creating a separate company it allows share capital to be raised independently from Pound-Maker. 3.3 Fractionation ProcessA using a single stage air-fractionation process will be used to separate the protein from the starch. This will yield 22 % protein by mass with a concentration of 60 % protein. One additional building will need to be built, one dehuller, one cleaner, 3 pin mills, one ______College of Agriculture & College of Commerce, University of Saskatchewan17 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______air-fractionation system, and one pelleter will need to be installed. The peas will first be de-hulled, the hulls consumed by the cattle as they are produced. The peas will then be cleaned to remove any by-products. The peas will then be fed into one of three pin mills that are run side by side to increase capacity. The pin mills grind the peas into fine flour. The flour from all three mills is then continually fed into the air-refractor. Protein is lighter than starch and can be separated by a centrifugal air blast. The ethanol plant uses the starch as it is produced. The protein is pelleted to make it more compact so it is easier to handle as well as more concentrated to reduce shipping costs. The protein can be sold at a premium into specialty markets and all by-products can be fed directly to the cattle, on site. By building next to the existing facility it creates an onsite market for by- products giving Pound-Maker a distinct advantage over the competition.3.4 Equipment for OperationsTable 1: List of Equipment for Fractionation plant Description Qty. Cost per unit Total cost SourceBuilding 1 $ 500,000 $ 500,000 Grant Olsen Milling & Classification Equipment Hosokawa Micron - Model 750 ZPS Mill w/ 150 HP m otor 3 $ 450,000 $ 1,350,000 - Model 500/4 ATP classifier 1 $ 480,000 $ 480,000 - Pea Dehuller 1 $ 100,000 $ 100,000 Pelleting Equipment (CPM 3000 Package) UAS Canada - Overhead Bin 1 $ 5,000 $ 5,000 - Feeder 1 $ 10,000 $ 10,000 - Conditioner 1 $ 60,000 $ 60,000 - Pelleting Mill 1 $ 100,000 $ 100,000 - Cooler 1 $ 10,000 $ 10,000 Cleaner & Gravity Table 1 $ 100,000 $ 100,000 Installation Grant Olsen - Milling & Classification 1 $ 1,737,000 $ 1,737,000 - Pelleting & Cleaning 1 $ 256,500 $ 256,500 - Building Set-up 1 $ 450,000 $ 450,000 Instrumentation & Controls 1 $ 996,750 $ 996,750 Electrical Equipment 1 $ 675,500 $ 675,500Total Equipment & Cost 6,830,750Figure 2: Breakdown of Pea Fractionation process ______College of Agriculture & College of Commerce, University of Saskatchewan18 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______A – 100 lbs whole peas, 21 % protein B – 68 lbs Starch, 8 % protein C – 22 lbs Protein, 60 % protein D – 10 lbs Hulls / Cleanings, 23 % protein3.5 DehullerFigure 3: DehullerSource: www.savageequipment.com/ pecanproducts.htmlAll of the peas processed will be dehulled. This process is not entirely necessary but it will make it easier for the feedlot to handle the by-product, by having the hulls and the ______College of Agriculture & College of Commerce, University of Saskatchewan19 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______starch separated. This will also reduce the volume of the product put into the pin mills and air-classifier increasing efficiencies.3.6 Cleaner Figure 4: CleanerSource: www.northlandsuperior.com/The peas are going to be received directly from the farmer, so they will have to clean them before they are run through the system. If a rock was to get into the pin mills it could potential cause a lot of damage resulting in costly down time. 3.7 Pin millsFigure 5: Pin mill______College of Agriculture & College of Commerce, University of Saskatchewan20 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Source: www.munsonmachinery.com/ cmi.htmlPea flour is obtained by finely grinding peas. The flour has a light cream color with a protein content of 21 %. The fineness varies depending on the type of mill used. The mill that has been chosen will produce flour with 90 % of the particles under 325 mesh, this number relates to the number of openings in the screen per inch, but the actual opening size is hard to estimate since the thickness of the wire varies. 3.8 Air ClassificationFigure 6: Air Classification______College of Agriculture & College of Commerce, University of Saskatchewan21 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Source: www.praterindustries.com/products/ classifiers_separators.phIn pea flour the starch particles are considerably larger than the protein particles. The finely ground flour is continuously fed into a spiral air stream with a cut point of 800 mesh or 15 microns between the fine and course particles. The pea protein concentrate produced will contain about 60 % protein. 3.9 PelleterFigure 7: Pelleter______College of Agriculture & College of Commerce, University of Saskatchewan22 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Source: www.jrdare.co.uk/images/pelleter1.jpgThe pea protein concentrate is a very bulky commodity. The plant will be putting it through a pelleter that will convert it from a fluffy powder into a solid pellet. This will allow for cheaper transport due to a more concentrate product that can be handled in a fashion similar to grain. 3.10 Timeliness for OperationsThe plant will operate twenty-four hours a day, seven days a week. The only scheduled down time will be for regular maintenance. The equipment for operations was selected to match the capacity of the existing ethanol facility. The farmer will deliver peas directly to the facility. A 14-day supply of raw, unprocessed peas will be kept on hand to account for periodic deliveries, bad weather and any unforeseen difficulties. The protein pellets will be stored on site and shipped out once a week. It will be moved to Lanigan by truck where it is transferred onto a train. A three-car train will be sent to EWOS every week which will see approximately 160-170 tonnes of product carried within the rail car. ______College of Agriculture & College of Commerce, University of Saskatchewan23 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______4.0 Marketing Plan4.1 Marketing ObjectivesTo best fulfill our mission statement attention must be focused on these goals:A. Establish loyal relationships with the buyer(s) of Pound-Maker product. B. Provide alternative markets for Pound-Maker shareholders products. C. Explore alternative markets for Pound-Maker pea protein.4.2 Marketing Budget Table 2: Marketing CostsCost per Tonne Protein Total Cost (CDN $) (CDN $) Freight 40.00 756,400 Phone 0.05 1,000 Office Supplies 0.05 1,000 Travel 0.51 10,000 Quality Control 0.51 10,000Total 41.13 778,400Total (less freight) 1.13 22,000______College of Agriculture & College of Commerce, University of Saskatchewan24 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______4.3 Situation Analysis4.3.1 SWOT Analysis4.3.1.1 Strengths  Tied to an existing, profitable company with a good name  Existing, trained labourers and office staff/management  Easy to attract quality workers  New equipment for processing (newest technology available)  Internal Financing from Pound-Maker Agventures4.3.1.2 Weaknesses  Limited growth due to maximum production level of ethanol distillery  High level of investment capital  Price takers4.3.1.3 Opportunities  New market to service in the fish food industry  Possible new markets in Asia and the health food industry  Open market buying of main input to buy at lowest possible price  Growing aquaculture industry in Saskatchewan4.3.1.4 Threats  Pea price and availability dependent on weather and open market  Competitors closer to coast undercutting price to EWOS & losing market4.3.2 Market FundamentalsThe current aquaculture market (growing of fish for restocking or human consumption) is showing rapid growth and continuous change as the current supply of fish diets (especially salmon) is rapidly vanishing. It is estimated that the current supply of fish oil and fish meal, which are major components of aquaculture diets, will be equal to the demand for these products by 2009 within aquaculture (Hemre,2001). This means that the ______College of Agriculture & College of Commerce, University of Saskatchewan25 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______search for alternative fish feed is a major priority for the aquaculture industry today. When looking at the current size of the fish market, one billion people around the world depend on fish for their diets. The aquaculture industry itself provides over ¼ of all the fish for human consumption around the world. This means that the continual depletion of our worldwide stocks of wild fish, the degradation of our waters with environmental pollution, the over fishing of 70% of our fish species, and the lack of fish stock for use as feed in the aquaculture industry results in very tight supply of fish for consumption and fish feed. This demonstrates the opportunity for pea protein to realize considerable growth in the near future.The pea protein market for use as a fish protein supplement is relatively new. The major limitation to using pea protein as a supplement for fish is the lack of research in that particular area (Hemre, 2001). Introductory data has shown that fish perform well with the protein and it seems very likely that it will be used as a major source of protein in future diets. The market for pea protein as fish supplement has the potential to be the fastest growing industry in agriculture today. The potential requirements for pea protein could be substantial because as mentioned earlier, the current supply of fish meal and fish oil that is used in the diets within aquaculture is going to be less than the demand for these products by 2009. This demonstrates that the opportunity for an alternative protein supplement is necessary to keep the aquaculture industry running at the same pace it is now. This also shows that a market for pea protein concentrate is now being seriously considered as a main source of protein for this industry.4.3.3 Opportunity for PeasAs mentioned above, the use of peas as a source of protein for fish diets has now reached the point where it could see overwhelming growth in the next few years. Peas have a ______College of Agriculture & College of Commerce, University of Saskatchewan26 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______distinct advantage within fish diets as it is one of the cheapest forms of processing the protein in comparison to similar oilseeds and pulses that could be utilized (Racz,1998). The largest factor in the cost efficiency of the production of fish supplements is feed costs. This factor alone accounts for 50% of the total costs of the feed source (Hemre,2001). This gives peas a major advantage over other comparable crops such as canola.Another advantage is the current status of some oilseeds causing major morphological defects within the fish (Hemre,2001), along with other serious side effects as well. This has not been the case with peas, making them an excellent alternative for fish protein supplement. Another factor that provides an opportunity for pea protein is the continual price increases for fish meal and fish oil over the last number of years. This is due mainly to the lack of fish meal and oil supply in the world. The prices of fish meal and fish oil alone could single handily eliminate the opportunity for profitability within aquaculture(Naylor et al., 2000). This pushes the search for alternative markets for fish feed even higher.Although the opportunity for peas is great in this particular industry, the manufacturing and selling of pea protein concentrate has considerable risk when looking at the break even analysis later on throughout the report. It will show you that it doesn’t take much variation within pea buying price to make this venture a higher risk investment. Therefore, the acquisition of peas at Pound-Maker is crucial to the success of this particular project. 4.3.4 Industry Growth There are only a couple of companies in the pea protein fractionation industry in Saskatchewan. Further analysis of these companies show that all of the peas they process ______College of Agriculture & College of Commerce, University of Saskatchewan27 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______are produced for human consumption. A portion of the peas that are fractionated for human consumption within Saskatchewan are sold to the feed market when the situation is right. This means that within Saskatchewan, there are no companies that fractionate peas solely for feed. This opportunity for entry into the market would see no barriers to entry and require little additional work to establish this plant within Saskatchewan. For the purchase of pea protein from Pound-Maker there would be a number of companies that would be interested. The main buyer being EWOS Canada Inc. a fish food production company that specializes in the research and development of new feed stocks for the aquaculture industry. Other potential industries that can utilize pea protein are the poultry and swine industries. Poultry and swine also have shown favourable growth when using pea protein in their diets. With over 1,000,000& 3,000,000 (www.statscan.ca) swine and poultry, respectively, within Saskatchewan, this could be another avenue of distribution for pea protein concentrate.4.4 CompetitionAs mentioned above, there are very few companies that are producing pea protein within Saskatchewan, and the concept of producing pea protein for fish consumption is relatively new. The competition that is faced when producing this product for sale into the fish market is basically non-existent. Right now there are no crops such as peas that are made into protein supplements solely as a main staple for fish feed. One crop that could provide competition for pea protein concentrate is soybeans which has a higher nutritional value than peas, yet this alternative much like wheat, canola and some distiller’s products don’t seem to be the answer to the market as they do not contain the proper levels of protein and essential nutrients that fish require, or no not react positively with the fishes growth cycle to make it viable in the long term. This is where peas seem to have the advantage right now, because the use of pea protein concentrate has not yet been found to effect the fishes morphology or anything to do with the fishes growth cycle.______College of Agriculture & College of Commerce, University of Saskatchewan28 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______4.5 CustomersThe customer base currently interested is EWOS Canada Inc. who established a Canadian division in 1986, is located in two locations in British Columbia, the first at Campbell River and the second at Surrey. Since 1991, EWOS has been dedicated to the fish feed industry and remains the leader in fish feed production around the world. The two locations in Canada alone have over 65 employees that are dedicated to the production of feed for the aquaculture industry and producing alternative fish food in the future. The majority of their extensive research is done at their main base in Dirdal, just outside Stavenger, Norway. Along with their Canadian division, they are located in three other countries around the world including Britain, Chile, and Norway with main headquarters located in Bergen, Norway. Spread out amongst these countries is over 800 workers (www.ewos.ca). 4.6 Product4.6.1 ColorWhen the manufacturing of pea protein is complete, the protein concentrate comes out of the fractionation plant a pale yellow color, which is very similar to what the soybean protein concentrate looks like when manufactured(PFC Bulletin, 1974).4.6.2 SizeThe fractionation plant produces 2 products, starch and protein. The hulls and screenings are taken off before the product reaches the fractionation process. The starch size is approximately 50 microns, while the protein sizes up around 2-5 microns (PFC Bulletin, ______College of Agriculture & College of Commerce, University of Saskatchewan29 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______1974). The separation of starch and protein is possible because of the size, shape and density differences between the particles.Figure 8: Size of Pea particles Source: PFC Bulletin, 19744.7 Sales and Profit Objectives______College of Agriculture & College of Commerce, University of Saskatchewan30 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______4.7.1 Sales ObjectivesThe objective is to initially sell the entire production of pea protein to EWOS Canada Inc. initially to the Surrey, B.C location, and then later to their Campbell River, B.C location if necessary. Currently, there will be no excess product being produced, nor will any of our product not be sold to EWOS in the very beginning. This make is easier to market to just one buyer than what would be required if there were many buyers, but can be a risk when placing the success of this operation in the hands of a company that does not have any risk in this operation or Pound-Maker’s operation. The opportunity to sell to this industry right now is wide open and have relatively no competition. In the future though, if pea protein becomes a main ingredient in fish feed, their will be increased competition to sell this particular product and could lose competitive advantage to those companies that are established closer to British Columbia. This is why it is crucial to analyze further, the opportunity to sell this product to alternative markets in the chance that it is not profitable to sell this product at a particular competitive price in the future. The Pound-Maker fractionation plant production numbers will be steady at 11,997 tonnes per year as the plants production is tied to the production of starch (35,990 tonnes) that is produced for the ethanol plant. The only change in production numbers would be if Pound-Maker took the milling of peas into a second class of fractionation that would see an extra 10 kilograms of protein produced for every 100 kilograms that is manufactured. This would considerably increase the amount of protein that would be sold.4.7.2 Profit ObjectivesAlthough generating a profit is the nature of any business, when looking at this particular project, the clear objective is for the integration into the existing facility to therefore see some of the costs of production are absorbed by the economies of scale that is situated at ______College of Agriculture & College of Commerce, University of Saskatchewan31 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Pound-Maker Agventures Ltd. This particular project has an expected internal rate of return (IRR) of over 37% in the base case scenario. There will be a profit generated by the addition of this project into the feeding/ethanol plant at Pound-Maker. 4.8 Channels of DistributionThe inputs of the fractionation plant will come directly from the producers of peas. This will be done mainly on a ‘as-needed’ basis allowing Pound-Maker to have 2 weeks of inventory to run the plant continuously. With this type of inventory needed to be held by Pound-Maker there may be the need also to construct new bins to hold the raw product before use in the pea fractionation plant. In regard to the end product, the hulls and screenings will be placed back into the facility directly from the fractionation plant to the feed mill where they can be mixed into the current feed rations for the feedlot side of Pound-Maker’s operations. The starch is used continuously at the ethanol plant that is tied into the fractionation plant. The production of starch is necessary for the continued operations of the ethanol plant as it requires a steady stream of this product to produce fuel-grade ethanol. The actual new product being manufactured, pea protein concentrate, will be pelleted for ease of handling and transportation to the buyer and then held at Pound-Maker Agventures until it is shipped by rail to EWOS in Surrey, B.C. The end product will see it delivered to the rail cars near Lanigan by semi and trailer and shipped bulk to its destination.4.9 Pricing PolicyAlthough there are over 120 aquaculture companies within British Columbia alone, there are only a handful of companies that supply the fish feed and supplements. One of these ______College of Agriculture & College of Commerce, University of Saskatchewan32 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______companies in particular is EWOS Canada Inc. EWOS is a major player in the fish supplement and feed supply industry recording over 5 billion dollars in sales alone within the industry. EWOS has shown considerable interest in purchasing pea protein from Pound-Maker indicating that they would be interested in buying all of the pea protein that was produced. If the need to expand the search for the marketing of pea protein was necessary, the sale to international buyers would be considered. With Asia producing over 55% of all aquaculture products for human consumption, China contributing 2/3 of that total number for Asia, the need for an alternative market is the same there as it is anywhere else in the world. Table 5 below illustrates the expected prices for outputs and the main input for the fractionation plant, raw peas.Table 3: Table of Input and Output costs (10 yr. Projection)Product Price per tonne 2003 2008 2012 Protein (60%pure) $400 $442 $478 Starch (8% protein) $200 $221 $239 Hulls/Screenings $25 $28 $30Inputs Peas $140 $155 $1674.10 Selected Markets and Product/Service mixAs mentioned earlier, the preferred market for pea protein is in the fish feed production market. This is due to the steadily increasing need for an alternative feed supply for the aquaculture industry. The opportunity for this product to become a major player in the near future is very legitimate. The alternative markets that are a consideration is in ______College of Agriculture & College of Commerce, University of Saskatchewan33 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______poultry and swine feed production. Both animals show positive results to our pea protein concentrate as protein supplement in their diets.The starch and hulls/screenings market is very small, and it is only through the integration of this facility to Pound-Maker, where transportation of these products is zero, can it be profitable. The alternative markets for starch are out there but when assessing the value of transportation of the starch slurry, or the cost of drying the product, the profitability of this venture is extremely small. Alternative markets for hulls and screenings would be to livestock producers or other ruminant animal producers where the nutritional value of the hulls and screenings can be consumed and the product itself can be digested properly.. 4.11 Selling & AdvertisingThe use of advertising of this product in the local media does very little to the increase in sales for this particular product. The real media that will stimulate interest in our target markets is both word of mouth and promotion by people in the agriculture industry. The need to establish contracts for this particular product is necessary to maintain the limited storage space of pea protein on site at Pound-Maker, managing the logistics of delivering the product to the rail yard, along with reducing the risk of holding onto this product for an undetermined time period.5.0 Human Resources5.1 Job Descriptions______College of Agriculture & College of Commerce, University of Saskatchewan34 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______The concept of pea fractionation is relatively simple but requires some sophisticated equipment to produce on a large scale. The use of air refractors for separation of particles, along with the milling equipment used for breaking the pea from a whole seed to small particles (5-50 microns) (PFC Bulletin, 1974) requires precise equipment and a knowledgeable staff. Because of the integration of the starch into the existing ethanol plant at Pound-Maker Agventures, the staff that is currently running both the plant and the company itself will be contracted out to run the pea fractionation plant. Their time running this plant will differ with each job description below.5.1.1 General ManagerThe general manager of Pound-Maker will assume the responsibility of the overall management and operations of the plant. This individual’s main duty will be the marketing and selling of the pea protein to potential buyer(s), along with overseeing the plant and continually checking to make sure the plant is reaching its objectives and running at the proper speed. This individual’s responsibilities will also include maintaining proper human resources at the plant and reporting to the board of directors the current status of the operation. This position will see 10% of their time allocated to the future facility.5.1.2 Operations ManagerThis individual is responsible for dealing with the day to day operations of the plant. This includes maintaining employee motivation, building worker timetable schedules, daily evaluation of product quality, upkeep of equipment, upkeep of proper inventory within the plant, continuous contact with the purchasing and general manager to evaluate the ______College of Agriculture & College of Commerce, University of Saskatchewan35 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______fractionation plant requirements, generating weekly reports for management’s evaluation and researching and reviewing any and all new innovations that could have a possible impact on the pea fractionation plant. The operations manager may also be in contact with the buyers of the pea protein to make sure that they are clear on each other’s needs in regards to quality. This particular position will have the manager spend 20% of their time with the fractionation plant.5.1.3 Purchasing ManagerThe purchasing of the raw product for the pea fractionation plant will be done through one buyer. This buyer will be responsible for purchasing the appropriate amount of inventory needed to keep the system running. The individual’s duties will include creating relationships with pea suppliers, meeting with the operations and general managers to stay informed about any changes to the plant or its operations, and setting the price of peas on a daily basis. This individual will be responsible for staying up to date with the grain markets and current economic situations that would affect the price of peas. The purchasing manager will also be responsible for assessing the value of the peas that are being delivered to Pound-Maker. This duty includes both grading and weighing of peas at the time of delivery. With the amount of work done by the purchasing manager with the plant it is estimated that they will spend 70% of their time with the new plant.5.1.4 Process OperatorsThe operator’s main duty will be to continuously monitor the milling equipment to make sure the proper amount of material is being processed and the equipment is running at the proper specifications. An operator must be present at all times when the plant is running. Therefore, at least one operator will be present in the facility 24 hours a day during ______College of Agriculture & College of Commerce, University of Saskatchewan36 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______normal operations. This job will see the process operator spend 2 hours a day with the fractionation plant.5.1.5 MaintenanceThe maintenance employees will be journeyman millwrights. There duties are to proactively maintain the equipment within the pea fractionation plant. This means making sure to fix or change any equipment that would stop the milling process. The employees will be notified of the maintenance needed to be done by the operations manager. These individuals will need to report back to the operations manager and file written reports to the operations manager for future use. The estimates for the maintenance in the pea fractionation plant is ½ hour per day.5.1.6 ElectricianThis individual will be a part time employee with the plant and the position will be contracted out to a local electrical company. This individual will need to be a journeyman electrician with extensive knowledge in electrical motors and three phase power. This position will require the individual to maintain all electrical equipment so that they stay running continuously. This is very important to the operations of the ethanol plant because the pea fractionation plant is supplying all the required starch for ethanol production. This position will require the contractor to be on call at all times in case of an emergency within the plant. The estimates for the electrician in the new plant is ½ hour per day.5.1.7 Accounts Manager______College of Agriculture & College of Commerce, University of Saskatchewan37 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______This individual is a full time employee with Pound-Maker Agventures and is responsible for the entering of all relevant data into the company’s computer database. This job will require being involved in all of the accounting entries, preparation of cheques throughout the year, along with preparation of year-end statements and interim reports. The individual will have a recognized accounting designation as well as formal education at a business college or university. This individual must possess strong accounting and computer skills. The Accounts Manager will spend approximately 30% of their time with the pea fractionation plant.5.1.8 AdministrationThe administration staff must possess a friendly personality and be very knowledgeable with the company’s computer programs. The duties will include receiving all mail, phone calls and requests from outside sources. They must also be able to redirect any calls to staff, print any reports management requires, set up meetings for customers, and have a general understanding of the complete operations within Pound-Maker Agventures. These individuals will be full time employees and can be either wage or salary positions. The Administration will spend 20% of their time with the future facility.5.2 Training ProgramsThe current employees at Pound-Maker Agventures have already taken numerous training for the operation of the ethanol plant. Some of the training includes 3rd or 4th class steam tickets, operation of the plants computer system and journeyman millwright. This training will be equivalent to the training needed to run the pea fractionation plant. Although not all of the employees at the ethanol plant or office will be working within ______College of Agriculture & College of Commerce, University of Saskatchewan38 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______the facility it is important that all employees are given basic training to ensure that they are on the same playing field when discussing any issues in regard to pea fractionation. Giving a tour of this facility will ensure all employees have a good feel for the plant and its basic operations. For the employees that work within the facility, the addition of pin mills, along with the new equipment used for the processing of the pea seed, will require the operators and the operations manager to undergo training in the differences between the different mills and the orientation with any new equipment that is installed. This can either be done on-site at Pound-maker Agventures or off-site at a location that works best for the employees and trainer.Once the pea fractionation plant is up and running, the need for continual evaluation and training is necessary to assure the quality of the product does not change. This will also allow for Pound-Maker to keep up with the ever-changing industry and adapt to the requirements of its buyers. 5.3 Lines of AuthorityFigure 9: Human Resources StructureBoard of Directors 6 Directors (Internal)PresidentOperations Manager Accounts ManagerPurchasing Manager Administration______College of Agriculture & College of Commerce, University of Saskatchewan39 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Operators Maintenance Electrician5.4 Present and Future Costs of EmployeesTable 4: Future projection of salariesPresident / General Operations Purchasing Accounts 2003 Manager Manager Manager Manager Annual Wage $10,000 $10,000 $28,000 $8,000 EI (3.08%) $308 $308 $862 $246 CPP (4.70%) $470 $470 $1,316 $376 Workers Comp.(1.0%) $100 $100 $280 $80 Benefits Package $40 $80 $280 $120 TOTAL $10,918 $10,958 $30,738 $8,822President / General Operations Purchasing Accounts 2008 Manager Manager Manager Manager Annual Wage $11,041 $11,041 $30,914 $8,833 EI (3.08%) $340 $340 $952 $272 CPP (4.70%) $519 $519 $1,453 $415 Workers Comp.(1.0%) $110 $110 $309 $88 Benefits Package $40 $80 $280 $120 TOTAL $12,050 $12,090 $33,909 $9,728President / General Operations Purchasing Accounts 2012 Manager Manager Manager Manager Annual Wage $11,951 $11,951 $33,463 $9,561 EI (3.08%) $368 $368 $1,031 $294 CPP (4.70%) $562 $562 $1,573 $449 Workers Comp.(1.0%) $120 $120 $335 $96 Benefits Package $40 $80 $280 $120 TOTAL $13,040 $13,080 $36,681 $10,520______College of Agriculture & College of Commerce, University of Saskatchewan40 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Table 5: Future projection of wages2003 Operators Swing Maintenance Annual Wage $68,000 $32,000 $25,000 EI (3.08%) $2,094 $986 $770 CPP (4.70%) $3,196 $1,504 $1,175 Workers Comp.(4.0%) $2,720 $1,280 $1,000 Holiday Pay (5.77%) $3,924 $1,846 $1,443 Benefits Package $600 $300 $150 TOTAL $80,534 $37,916 $29,5382008 Operators Swing Maintenance Annual Wage $76,579 $36,037 $28,154 EI (3.08%) $2,359 $1,110 $867 CPP (4.70%) $3,599 $1,694 $1,323 Workers Comp.(4.0%) $3,063 $1,441 $1,126 Holiday Pay (5.77%) $4,419 $2,079 $1,624 Benefits Package $662 $331 $166 TOTAL $90,681 $42,693 $33,2612012 Operators Swing Maintenance Annual Wage $81,266 $38,243 $29,877 EI (3.08%) $2,503 $1,178 $920 CPP (4.70%) $3,820 $1,797 $1,404 Workers Comp.(4.0%) $3,251 $1,530 $1,195 Holiday Pay (5.77%) $4,689 $2,207 $1,724 Benefits Package $731 $366 $183 TOTAL $96,260 $45,320 $35,303 ______College of Agriculture & College of Commerce, University of Saskatchewan41 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______6.0 Financial Plan6.1 Financial BudgetFigure 10: Opening Balance Sheet______College of Agriculture & College of Commerce, University of Saskatchewan42 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Pea Fractionation Opening Balance Sheet 1-Jan-03Assets Liabilities Current Assets: Current Liabilities: Cash $69,250 Long Term Debt $3,450,000 Total Current Assets $69,250 Total Liabilities $3,450,000Fixed Assets: Land $0 Shareholders' Equity Buildings $950,000 Share Capital $3,450,000 Equipment $5,880,750 Total Shareholders' Equity $3,450,000 Total Fixed Assets $6,830,750 Total Liabilities and Total Assets $6,900,000 Shareholders' Equity $6,900,0006.1.1 Debt FinancingOne half of the initial capital investment will be in the form of debt financing. Bank loans totalling $3,450,000 will be obtained. The bank loans will be amortized over a 15 year period. The annual debt payments are estimated to be $366,917. The estimated bank loan interest is estimated at 6.5%. A favourable interest rate will be obtainable based on the past performance of the parent company, Pound-Maker Agventures.6.1.2 Equity InvestmentThe other half of the required initial investment into this venture will be in the form of common stock. The parent company, Pound-Maker Agventures, and its current shareholders will purchase the majority of the common shares that will be issued. The ______College of Agriculture & College of Commerce, University of Saskatchewan43 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______total equity investment that is required is estimated at $3,450,000. Pound-Maker Investments would be the company that would be buying any of the shares on behalf of Pound-Maker Agventures. Pending on the financial situation and many other variables, the amount to which Pound-Maker would be in the purchasing of shares is unknown.6.2 Dividend Policy Equity investors into the pea fractionation plant can expect an external rate of return on equity investment of approximately 7.2% under the base case scenario. The dividend policy of the new company will be to pay dividends equal to 60% of the previous year’s net income in excess of $100,000 to equity shareholders. Dividends payments will begin in 2005. A summary of cash flow, net income, and dividends are summarized in Figure 11 below.6.3 Economic ForecastAll expenses and revenues have been inflated at an estimated annualized rate of 2.0%. 6.4 Working Capital When operating at the targeted capacity of 53,000 tonnes per year the required working capital will be approximately $500,000. The projected cash conversion cycle is equal to 37 days of protein production. Figure 11: Cash Flow, Net Income & Dividend Summary______College of Agriculture & College of Commerce, University of Saskatchewan44 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______$1,800,000 $1,600,000 $1,400,000 s r $1,200,000 a l l $1,000,000 o d Change in Cas h. $800,000 n Net Incom e d c $600,000 Dividends $400,000 $200,000 $- 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 year6.4.1 Accounts Receivable Protein sales to EWOS will be based on a credit policy of net 30 days. The sale of the starch and hulls/screenings are internal transfers therefore will not have any credit terms attached. The average credit sales are expected to be approximately $400,000. 6.4.2 InventoryInventory will consist of unprocessed pea and protein product. Approximately two weeks of unprocessed peas will be held in inventory in order to minimize the risk of inconsistent producer delivers. Protein inventory will be held for one week based on the assumption that it will be shipped weekly. The plant capacity will be matched to ensure that the output of starch is equal to the input rate of the adjacent ethanol plant. All ______College of Agriculture & College of Commerce, University of Saskatchewan45 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______hull/screenings produced by the pea fractionation plant will be immediately transferred to the Pound-Maker feedlot.6.4.2 Accounts PayableAccounts payable consist primarily of peas purchased on credit terms of net 14 days. As a result the pea inventory, of 14 days, is financed by the payment terms on pea delivery. This policy of 14 days is consistent with the payment policy of the parent company.6.5 Start-Up CostsIn order to bring the plant up to full operation initial start-up costs will be incurred. The total start-up cost has been estimated at $100,000. These costs include employee training, machinery testing, and estimated costs of off-specification start-up production.6.6 Cost of Goods SoldThe majority of cost of goods sold (COGS) consists of the purchase of peas for processing. As is shown in Figure 12 below direct material purchase (peas) accounts for approximately three-quarters of the COGS. As a result of this large operating cost the price peas are purchased at will be a very important variable for this operation. The processing of peas into protein and starch is a machinery intensive operation that requires only minimal labour inputs. As is shown below, direct labour only accounts for 3% of the COGS based on the ten year financial projection. ______College of Agriculture & College of Commerce, University of Saskatchewan46 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Figure 12: Cost of Goods Sold Breakdown (10 yr. Average)Manufacturing Overhead 21% D irec t Labour Us ed 3%Direct Materials U s ed 76%6.7 Taxes6.7.1 Property TaxesProperty taxes have been estimated at $40,000 per year and are expected to grow at the rate of inflation. Property tax estimates are based on Pound-Maker current property tax levels.6.7.2 Income TaxesIncome taxes are estimated based on Canadian and Saskatchewan current tax rates. Federal taxes are calculated at 28% on the first $200,000 of income and at 21% on the balance of income. A small business tax credit of 16% is also applied to a maximum of $32,000 on the first $200,000 of taxable income. As well a federal surtax is calculated as 4% of the total federal tax owing.______College of Agriculture & College of Commerce, University of Saskatchewan47 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Provincial taxes are estimated based on a 6% tax rate on the first $300,000 of income and 10% on the balance.6.7.3 Capital TaxesCapital Taxes are estimated based on a federal rate of 0.225% and a provincial rate of 0.6%. Capital taxes are calculated based on the value of the shareholder’s equity plus the long term debt. Capital taxes are charged on capital over $10,000,000 for federal tax, and over $15,000,000 for provincial tax. The financial projections shows the company paying zero provincial capital tax over the ten year time period and starting to pay federal capital tax in year 9.6.8 Operating ExpensesThe largest operating expense will be the cost of transporting the protein product to the west coast of Canada. The cost is estimated at $40/tonne and will increase at the rate of inflation. Approximately 12,000 tonnes of protein will be shipped per year at a total average cost of approximately $480,000 per year. The other most significant expense will be the interest paid on the $3.45 million dollar long term debt.Figure 13: Operating Expenses (10 yr. Average)Ins urance Benefits Telephone 10% Salaries 1% Interes t LT Debt 1% 7% 20% Marketing 3%______Adm inis tration 2%College ofTransportation Agriculture & College of Commerce, University of Saskatchewan 56% 48 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______6.9 Accounting Information SystemThe operations and marketing managers will track a number of key variables. Production volumes will have to be closely monitored to ensure that the output of starch meets the requirements of Pound-Maker’s ethanol plant. The extraction rate of protein from the raw peas will also be closely monitored by the operation manger to ensure that the target of 22.5% is being met. Regular monitoring will be conducted to ensure that the protein product being shipped to EWOS meets specifications. The Marketing Manager will be informed monthly, at minimum, of pea purchase prices and protein, starch, and hulls/screenings selling prices. 6.10 Ratio Analysis Important ratios are summarized in Table 8. The profit margins are relatively small for this operation, as such, it is very important that management carefully monitors the actual profit margins earned. The annualized average return on equity and total assets are projected to be relatively strong at 17% and 12%, respectively.Table 6: Selected Ratios Outlook (10 yr. Projection)2003 2005 2007 2009 2011 10 yr avg. Gross Profit M argin 18% 17% 20% 22% 23% 20% Net Profit Margin 6% 7% 9% 10% 11% 9% Return on Equity 13% 17% 18% 18% 17% 17% Return on Total As sets 7% 10% 13% 14% 14% 12% Debt Ratio 47% 39% 31% 25% 19% 30%______College of Agriculture & College of Commerce, University of Saskatchewan49 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______6.11 Financial AnalysisA number of key variables have been identified that are important to the financial strength of the operation. The selling prices of all three products, along with the purchasing price for peas and electricity are the significant risk factors. The estimated variances in these variables are shown in Table 9.Table 7: Variables used in sensitivity analysis Base Case Worst Case Best Case Output Prices Protein $ 400.00 $ 350.00 $ 450.00 Starch $ 200.00 $ 170.00 $ 300.00 Hulls $ 25.00 $ - $ 50.00Input Prices Peas $ 140.00 $ 165.00 $ 110.00 Electricity $ 9.25 $ 13.88 $ 6.94The Internal Rate of Return and External Rate of Return for base, best and worse case scenarios are shown in Table 10. Due to the significant variance of the risk factors identified there is a large difference in the rates of return under the three estimated scenarios. The probability of either the best or worse case scenario is likely low. It is realistic to assume that the price of pea protein and starch is related to the price of peas. If this is the case then the likelihood of input costs being at the maximum estimated when output prices are at the lower level is low. Table 8: Scenario Analysis summary (18% discount rate)______Scenario NPV IRR ERR College of Agriculture & College of Commerce, University of Saskatchewan Base Case $ 2,995,344 37.4% 7.2% Worst Case $ (9,565,053) 50 N/A N/A Best Case $ 21,831,420 135.0% 44.8% Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Break-even analysis was completed using purchase price of peas and the selling prices of protein and starch. The financial projections show a significant gap exists between the projected protein selling price and all break-even price levels. If all other variables remain constant the price of protein can be reduced by over 20% and the required rate of return of 18% will still be met.Table 9: Protein Selling Price Break-Even Levels2004 2006 2008 2010 2012 Projected 408 424 442 459 478 Net Income 318 300 287 281 280 Cash Flow 244 255 265 274 284 Economic 325 339 352 366 381The break-even analysis for the selling price of starch is tighter than protein break-even. The price of starch does not have to decrease as significantly as the protein price to be at break-even levels.Table 10: Starch Selling Price Break-Even2004 2006 2008 2010 2012 Projected 204 212 221 230 239 Net Income 173 170 169 170 172 Cash Flow 151 156 162 168 175 Economic 177 185 192 200 208______College of Agriculture & College of Commerce, University of Saskatchewan51 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______The break-even prices that can be paid for peas is approximately $20/tonne above the projected pea price. Table 11: Pea Purchasing Price Break-Even2004 2006 2008 2010 2012 Projected 143 149 155 161 167 Net Income 164 179 192 205 216 Cash Flow 180 188 196 205 213 Economic 161 168 174 181 1896.12 Sensitivity AnalysisBased on the risk analysis of key variables shown in Figure 14. The variables that are of the greatest concern are pea purchasing price, protein selling price and starch selling prices. Starch accounts for 57.5% by weight of the product sold, so a relatively small change in selling price will significantly affect revenues. Pea purchase account for 76% of the Cost of Goods Sold, so any change from the projected long run average purchasing price will significantly affect the return on investment.Figure 14: Projected IRR under Best, Base, and Worst Case Scenarios______College of Agriculture & College of Commerce, University of Saskatchewan52 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______100.0%80.0%60.0%R best R I 40.0% base worst 20.0%0.0% p r o t e i n p r i c e s t a r c h p r i c e h u l l s / s c r e e n in g s p e a p r i c e e l e c t r i c i t y p r i c e s e l l in g p r i c e year6.13 SummaryBased on the analysis of all of the factors mentioned throughout this study, it is proposed that Pound-Maker Agventures takes a serious look and considers the addition of this pea fractionation plant in the near future. Given the situation that they are currently in, with all of the operations set up around them, this addition would not require extensive work to install and begin manufacturing pea protein concentrate.7.0 Future ConsiderationsThe proposed pea fractionation plant would see a new value-added industry to the existing operation that Pound-Maker Agventures Ltd. When considering the proposal, there are a couple of additions to the pea fractionation plant that could see it become more streamlined and profitable in the future.7.1 Product Addition______College of Agriculture & College of Commerce, University of Saskatchewan53 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______Through the investigation of pea protein concentrate, there was the possibility to add particular products to the pea protein concentrate before it was shipped to the end buyer. The example of possibly adding a canola oil to the protein would increase the nutritional value of the product and resulting in a increase in selling price of the product and possible ease of transporting the product, being that the protein concentrate is like a flour when manufactured and can cause some headaches when trying to transport it.7.2 Pre-milling of PeasThe use of some other form of mills before the fractionation of the peas could see a considerable savings of electricity consumption due to the fact that the pin mills are very powerful machines and require such a large source of power to generate this product. The use of the existing hammer mills or roll mills that are at Pound-Maker could see the reduction in time it takes to break the pea down into its final form. Further analysis would have to be done to see if this would in fact be beneficial in the long run.8.0 Summary of Proposed projectThroughout the examination of pea protein fractionation the financial estimates are consistent with the trends of each variable to ensure that they would not be skewed because of a short term difference in the variable. Such an example is the drought conditions Saskatchewan has faced in both 2001 and 2002. This drought has led to a short term artificial price of peas that will ultimately be levelled out in the future once supply returns to normal levels.Our assessment of this project sees this as a profitable venture for Pound-Maker Agventures and a welcomed addition to their existing facilities. The need for investment from shareholders new or old, is necessary to finance the capital investments in the ______College of Agriculture & College of Commerce, University of Saskatchewan54 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______fractionation plant. This plant does present risk to Pound-Maker but also promises a healthy return on investment. The establishment of this facility suits Pound-Maker well due to its integration of both the ethanol plant and the large feedlot that is already in place. WORKS CITED:Hemre, Gro-Ingunn Institute of Nutrition “Effect of replacing fish oil and meal in aquaculture diets on growth, feed utilisation and product quality” : http:// www.aquachallenge.org/workshop_materials/Hemre.pdf.Hp. 2001Racz, Vern “ Feed Peas may offer solutions to aquaculture’s challenges” Feed News, Feed Resource Centre. Volume 3, Issue 2 Spring 1998 : 3 pagesNaylor, Rosamond L. “Effect of aquaculture on world fish supplies” nature June 2000 : 12 pages ______College of Agriculture & College of Commerce, University of Saskatchewan55 Pound-Maker Agventures Ltd. Pea Fractionation Feasibility Study ______PFC Bulletin “Pea Flour & pea protein Concentrate” Prairie Regional Library, National Research Council & College of Home Economics, University of Saskatchewan : June 1974APPENDIX A:Pound-Maker Pea Fractionation Financial Projections______College of Agriculture & College of Commerce, University of Saskatchewan56

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