The University of Georgia

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1 The University of Georgia Center for Agribusiness and Economic Development College of Agricultural and Environmental Sciences The Feasibility of a Grower-Owned Peanut Shelling Plant in the Tift Area of Georgia Nathan Smith, Christopher Ferland, Kent Wolfe, Brigid Tuck, and John McKissick FR July 2002

2 THE FEASIBILITY OF A GROWER-OWNED PEANUT SHELLING PLANT IN THE TIFT AREA OF GEORGIA Table of Contents I. Introduction...1 Premise of the Study...1 Objectives and Procedures...1 Georgia Peanut Production and Processing Tift Area Peanut Production...2 Table 1. Tift Area Counties Peanut Acreage, Table 2. Tift Area Counties Peanut Production, Figure 1. Irrigated Peanut Acreage and Shelling Plant Locations II. Estimated Costs and Returns From Alternative Shelling Facilities Retro-fitting an Existing Shelling Facility New Shelling Facility and Farmer Stock Warehouse New Shelling Facility Utilizing Existing Commercial Warehouses New Shelling Facility, Half New Warehouses and Half Commercial Warehouses Existing Shelling Facility Purchase...7 Cost Comparison Summary...8 Table 3. Capital Cost Comparison for New and Existing Facilities Table 4. Cost Comparison for New and Existing Facilities Table 5. Cost Per Ton Comparison for New and Existing Facilities Returns to Shelling...9 Table 6. Historical Georgia and Shelled Runner Peanut Prices by Type Table 7. Three-Year Average Shelled Price Adjusted to Reflect $355 Farmer Stock Price...11 Table 8. Shelling Outturn Rates, Five-Year Average Table 9. Estimated Shelling Returns Per Ton Sensitivity of Peanut Shelling Plant Profitability to Changes in Cost, Price, and Gross Margins...12 Figure 3. Profit vs. % Change in Budgeted Cost, New Facility Figure 4. Profit vs. % Change in Budgeted Cost, New Facility, with Storage Figure 5. Profit vs. % Change in Budgeted Cost, Existing Facility ($8 Mil.) Figure 6. Profit vs. % Change in Budgeted Cost, Existing Facility ($6 Mil.) Figure 7. Profit vs. % Change in Budgeted Cost, Existing Facility ($4 Mil.) Figure 8. Profit vs. % Change in Shelled Price, New Facility Half Storage Figure 9. Profit vs. % Change in Shelled Price, New Facility Figure 10. Profit vs. % Change in Shelled Price, New Facility with Storage Figure 11. Profit vs. % Change in Shelled Price, Existing Facility ($8 Mil.) Figure 12. Profit vs. % Change in Shelled Price, Existing Facility ($6 Mil.) Figure 13. Profit vs. % Change in Shelled Price, Existing Facility ($4 Mil.) Figure 14. Profit vs. % Change in Direct Cost, New Facility, Half Storage

3 Figure 15. Profit vs. % Change in Direct Cost, New Facility Figure 16. Profit vs. % Change in Direct Cost, New Facility, with Storage Figure 17. Profit vs. % Change in Direct Cost, Existing Facility ($8 Mil.) Figure 18. Profit vs. % Change in Direct Cost, Existing Facility ($6 Mil.) Figure 19. Profit vs. % Change in Direct Cost, Existing Facility ($4 Mil.) Figure 20. Profit vs. % Change in Direct Cost, New Facility Half Storage Figure 21. Profit vs. Gross Margin % New Facility Figure 22. Profit vs. Gross Margin % New Facility with Storage Figure 23. Profit vs. Gross Margin % ($8 Mil.) Figure 24. Profit vs. Gross Margin % ($6 Mil.) Figure 25. Profit vs. Gross Margin % ($4 Mil.) Figure 26. Profit vs. Gross Margin % New Facility Half Storage III. Organizational Structure and Alternative Financing Arrangements New Generation Cooperatives...20 Table 10. Share Prices at Various Financing Levels IV. Peanut Buyers Survey...22 Table 11. Location of Companies Interviewed Figure 27. Size of Peanuts Generally Purchased Table 12. Reported Annual Peanut Purchases and Peanut Prices Paid Figure 28. Type of Peanuts Purchased...24 Figure 29. Supplier Line Type...25 Figure 30. Willingness to Pay for Irrigated Peanuts Figure 31. Percent of Companies and Amounts Paid for Irrigated Peanuts Figure 32. Willingness to Pay More For Bar Ready Peanuts Figure 33. Additional Amount Willing to Pay for Bar Ready Peanuts Figure 34. Number of Current Suppliers...27 Figure 35. Peanut Delivery Frequency...28 Figure 36. How Peanuts are Delivered...28 Figure 37. Peanut Packaging...29 Figure 38. Oil Content Requirements...29 Figure 39. Satisfaction with Current Suppliers Figure 40. Consider New Runner Peanut Supplier V. Economic Impact Analysis of Peanut Shelling Facility Table 13. Impacts of Peanut Production for a New Shelling Facility Table 14. Total Impact of Peanut Processing and Associated Production Summary and Conclusions...32 VI. Appendix Appendix

4 THE FEASIBILITY OF A GROWER-OWNED PEANUT SHELLING PLANT IN THE TIFT AREA OF GEORGIA Nathan B. Smith, Chris Ferland, Kent Wolfe, Brigid Doherty, and John C. McKissick I. INTRODUCTION Premise of the Study Changes in the peanut industry including elimination of the Federal Peanut Quota Program and industry consolidation have sparked interest in the feasibility of a grower-owned peanut shelling and marketing operation through a new generation cooperative (NGC). As a result, a group of Tift Area farmers requested an in-depth study of a grower-owned facility to shell peanuts. The Center for Agribusiness and Economic Development was charged with the task of conducting the study. The general idea is to secure market access and improve farm income and profitability through cooperatively shelling peanuts and marketing shelled peanuts to manufacturers. Marketing a high quality peanut on a consistent basis is believed achievable by targeting irrigated production. This project seeks to determine the economic feasibility of such an endeavor. Objectives and Procedures The specific objectives proposed for the feasibility study were to evaluate four different alternatives for a Tift Area new generation peanut cooperative. The four alternatives identified are: 1. Renovating an existing seed shelling facility; 2. Constructing a new shelling facility including new storage; 3. Constructing a new facility and utilizing existing commercial storage; 4. Purchasing an existing shelling facility. The Center for Agribusiness and Economic Development undertook several steps to collect information and evaluate the four alternatives. One of the first steps was to contact the investigators of a recent study by the National Center for Peanut Competitiveness (Hancock et.al.) to obtain the data from their study. Lewis M. Carter (LMC) Manufacturing Co. Inc., the major manufacturing firm for peanut shelling facilities, was contacted for a cost estimate for the construction of a state-of-the-art, efficiently sized shelling plant. An LMC representative toured an existing small tonnage seed shelling facility in the Tift Area. An existing shelling facility was visited to assess the viability of purchasing the facility for the cooperative to shell peanuts. Data was also found to determine cost of construction a new shelling plant and warehouses. In addition to examining the economic feasibility of the four alternatives presented above, a marketing survey was conducted to assess the interest among potential buyers to purchase peanuts from a farmer-owned cooperative. This report presents the findings of the economic

5 2 feasibility study, the marketing survey, and examines the potential economic impact of the proposed venture on the local community. Georgia Peanut Production and Processing Peanut production in the United States is largely limited to nine states (Alabama, Florida, Georgia, New Mexico, North Carolina, Oklahoma, South Carolina, Texas, and Virginia). Georgia tops the list in peanuts produced in the US with roughly a third of the acreage and 40% of the production and quota (NASS). In 2001, Georgia planted 515,000 acres of peanuts and has averaged 520,000 planted acres over the last five years. Georgia s five-year average yield is 2,815 pounds per acre, for an average production of billion pounds or 733,300 tons. Peanuts are grown in at least seventy counties in South Georgia (FSA). The value of peanut production in Georgia has ranged from $380 to $428 million from 1999 to 2001 (CAED). The infrastructure related to peanut production in Georgia includes buying points, warehouses, shelling plants, cold storage, and manufacturers. A new shelling facility would utilize some of the existing infrastructure, particularly buying points. Georgia has 170 buying points in operation in 2002 according to the Federal State Inspection Service. Tonnage handled each season by a buying point ranges between 1,500 and 10,000 tons. In 2000 and 2001, most buying points operated at 65% to 75% capacity (Webb). Several buying points have warehouses to store peanuts, ranging from 2,000 tons to a 20,000 tons capacity. A typical warehouse will store between 3,000 to 5,000 tons. Ten shelling plants are located in Georgia (American Peanut Council). Two major shellers, Golden Peanut Company and Birdsong Peanuts, control about 73% of the shelling market in Alabama, Florida, and Georgia (Godwin). Shelling plants are located in Arlington, Ashburn, Bainbridge, Blakely, Colquitt, Dawson, Columbus, Rochelle, Smithville, and Sylvester. Three shelling plants are located in Alabama in the towns of Eufaula, Headland, and Opp. No data was available on the shelling capacity of these plants. Tift Area Peanut Production One of the objectives for this study is to determine if a shelling plant located in the Tift Area of Georgia is feasible. The Tift Area is defined for this study to include the counties of Tift, Berrien, Colquitt, Cook, Irwin, Turner, and Worth. Total peanut acreage for these seven counties averaged 137,000 acres over the last ten years. Total production averaged 311 million pounds or 155,600 tons. The five-year average is 133,300 acres and 150,600 tons. Table 1 indicates acreage by county and Table 2 indicates production by county. These figures suggest that the supply is available to support an efficiently sized shelling plant that mills roughly 70,000 tons annually. There are three existing shelling plants within a 50 mile radius that would compete for these tons. Depending on interest in stockholders from the Tift Area new generation cooperative, supply may have to be brought in from a larger area than the seven counties. One issue not specifically addressed in the feasibility study is competition from other shellers and the

6 risk of a production shortfall in any given year. A contingency plan would be needed in the case of a disaster in the Tift Area. One contingency plan is to grow and shell irrigated peanuts. The potential supply of irrigated peanuts is estimated using data from the 1997 Ag Census. Figure 1 shows the counties with irrigated acres and a range of irrigated acres in the peanut producing counties. The circle represents a fifty mile radius from the center of Tift County. According to the 1997 Census data, there were nearly 74,000 acres of peanuts in the counties within or touched by the radius line. Census data indicates irrigated peanut yield of 3,163 pounds per acre and estimates the total irrigated peanut production at 116,810 tons. Some of this tonnage may actually fall outside of the fifty mile radius since the entire county s acreage is counted. Figure 1 also indicates a 25 mile radius which is estimated to include 26,000 irrigated acres which would translate into 41,000 tons of irrigated peanuts. The twenty five mile radius includes mainly the counties consisting of the Tift Area region. Based on an average production in 1997 of 125,000 tons, an estimated 33% of the peanuts were irrigated in This figure can fluctuate from year to year but the only data source available on irrigated acreage is the Census of Agriculture data that is collected every five years. A list of twenty-eight buying points were identified as being located in the Tift Area region. The number in each county is given in parentheses: Berrien (3), Colquitt (4), Cook (2), Irwin (3), Tift (7), Turner (3), Worth (6). Calls were made to the twenty-eight buying points to determine their average volume and storage capacity. Eighteen responses were recorded. Three of the eighteen did not comment. From the fifteen responses, average volume reported was 5,200 tons and the average storage capacity was just under 7,000 tons. Volume from 1,500 to 9,000 tons and storage ranged from 100 to 21,000 tons. 3

7 4 Table 1. Tift Area Counties Peanut Acreage, COUNTY Yr Avg 5 Yr Avg Acres BERRIEN 21,061 26,146 14,110 14,670 11,955 8,862 7,128 7,438 9,612 10,441 9,228 12,786 8,769 COLQUITT 19,541 25,764 16,580 16,810 16,302 14,983 12,846 13,386 13,726 13,385 12,470 15,981 13,163 COOK 12,297 13,194 9,050 10,048 7,728 6,692 5,887 6,493 7,153 7,374 6,442 8,396 6,670 IRWIN 30,155 32,635 24,497 24,513 22,623 20,461 18,863 17,888 18,878 19,143 18,021 22,516 18,559 TIFT 25,170 27,671 22,214 23,254 20,509 18,665 17,305 16,834 17,420 16,851 14,974 20,079 16,677 TURNER 25,594 27,285 24,939 24,594 23,017 21,951 19,365 16,885 14,502 15,804 13,291 20,657 15,969 WORTH 42,591 46,779 40,309 40,600 37,684 35,873 32,614 30,894 31,802 32,527 30,165 36,531 31,600 TOTAL 176, , , , , , , , , , , ,359 Source: Farm Service Agency Table 2. Tift Area Counties Peanut Production, COUNTY Yr Avg 5 Yr Avg 1000 Pounds BERRIEN COLQUITT COOK IRWIN TIFT TURNER WORTH TOTAL (lbs) TOTAL (tons) Source: Farm Service Agency

8 5 Figure 1. Irrigated Peanut Acreage and Shelling Plant Locations. Source: USDA Census of Agriculture and Industry Sources

9 6 II. ESTIMATED COSTS AND RETURNS FROM ALTERNATIVE SHELLING FACILITIES Sufficient data was found to adequately assess the likely cost and returns of each alternative identified for examination by the interested Tift area peanut producers. Lewis M. Carter Manufacturing Company, Inc. (LMC), provided a quote for the cost of construction. Secondary data from the National Center for Peanut Competitiveness study was used as a source for operating costs and secondary data provided warehouse construction cost. The shelling turnout rate for irrigated peanuts was provided by Marshall Lamb with the National Peanut Research Laboratory, ARS, USDA, in Dawson, Georgia. Market prices for shelled peanuts were a three-year average price as reported in the Peanut Report by the USDA Agricultural Marketing Service. Georgia wage and tax rates were used to estimate appropriate labor and benefit cost. The annual ownership cost was determined by applying standard interest and depreciation rates to the capital cost of the plant. The objective was to determine the yearly cost and returns for a new shelling facility once it is in full operation, for an average year. Retro-fitting an Existing Shelling Facility The idea of retro-fitting an existing sheller was proposed as an alternative to constructing a new plant for the new generation peanut cooperative. An older shelling facility built in the 1960's and used primarily for seed shelling is located in Tifton. The sheller has a shelling capacity of 6 tons per hour. Estimates for upgrading to make it viable for shelling edible peanuts were sought from LMC. Upon inspection, LMC declined to give a figure for upgrading and suggested that the highest and best use for the sheller was for its current utilization as a seed sheller. Concerns over the age of the equipment and availability of parts were the primary reasons for discouraging retro-fitting to handle more tonnage. Thus, this alternative was not pursued further. New Shelling Facility and Farmer Stock Warehouses The examination of constructing a new peanut shelling facility begins with what is the most efficient size of shelling plant to construct. LMC, Inc. proposed a facility that can mill 18 tons per hour as the most efficient plant size. A smaller capacity shelling plant would involve downsizing the equipment and transfer system, which would result in an estimated savings of $500,000 to $800,000. Increasing capacity at a later date would involve having to replace existing equipment and/or adding equipment and upgrading the transfer system. The building that would house the shelling plant would have to be planned to handle future expansion in anticipation of remaining competitive. Therefore, savings would not be realized in reducing size of the building. A list of equipment is included in Appendix 1 with the estimated prices. The description is broken down into six sections; Farmer s Stock Receiving Section, Cleaner Section, Sheller Section, Finishing Section, Hull Section, and Air Section.

10 Operating and ownership cost of operating a new peanut shelling facility with a capacity of 18 tons per hour is provided in Table 4. The plant is assumed to run two eight hour shifts for 48 weeks. The remaining four weeks would be for retooling and maintenance. The assumption of running at 90% capacity is made for unanticipated down time. This would give a total of 62,208 tons of farmer stock peanuts processed. The farmer stock peanuts would be stored in new warehouses constructed by the cooperative for the facility. Four 11,500 ton warehouses were assumed to be constructed at a cost of $1,458,000 each for this study. A 5,000 ton feedstock warehouse is included with the new shelling plant that feeds directly into the facility. It is assumed for this study that existing buying points in the Tift Area would be used to handle peanuts at harvest for a commission of $40 per ton. The capital cost is summarized in Table 3 and compared with the other alternatives. Total operating costs are summarized in Table 4. New Shelling Facility Utilizing Existing Commercial Warehouses As an alternative to all new facilities (plant and warehouses), the possibility of building a new shelling facility and utilizing existing commercial warehouses in the Tift Area was examined. A 5,000 ton feed warehouse is included with the plant but no other warehouses are built. The same assumptions for the all new facilities example were used for operating cost with the exception of paying for commercial storage at a rate of $3 per month. The storage fee was assumed to be charged for the average amount of peanuts stored over the 48 week period which was 4.85 months. Capital cost is summarized in Table 3 and operating costs are summarized in Table 4, respectively. New Shelling Facility, Half New Warehouses and Half Commercial Warehouses Another alternative examined was a new facility and half commercial warehousing with a reduced operating schedule. Half of the storage capacity would be new construction and the other half would be from existing commercial storage. Thus, two 11,500 ton warehouses were included in the capital costs. The Tift Area producers requested the CAED analyze the facility using double shifts on a 39 week schedule (48 week for other alternatives). This results in 50,000 tons processed. It was believed 50,000 tons may be a more realistic goal for the cooperative in the initial years of operation. Capital costs and operating costs of this alternative are summarized in Tables 3 and 4. Existing Shelling Facility Purchase The possibility of purchasing an existing shelling facility was examined. To model an existing sheller, assumptions were made using the operating cost data for a new facility. Shelling technology has not changed tremendously over the decade, so it is appropriate to assume the cost of operating an existing sheller would be similar to operating a new facility with some adjustments. The existing shelling facility is assumed to have a capacity of 15 tons per hour and run at 80% capacity allowing for more down time for repairs and maintenance. Total throughput was assumed at 46,080 tons. 7

11 Three different purchase prices for an existing facility were used to estimate capital costs, $8 million, $6 million, and $4 million. The purchase price was broken down into the same proportion of capital costs between buildings, equipment, and working capital, as determined in the new facility. Operating costs were adjusted to reflect the loss in efficiency due to older facilities, equipment, and additional labor. Also, it was assumed that the existing shelling facility has 20,000 tons or half the farmer stock storage needed on site. The remaining storage is obtained through existing commercial storage at a rate of $3 per month for an average of 4.85 months. Cost Comparison Summary The capital costs required for start-up were estimated for each alternative. The capital costs are summarized in Table 3. Capital was broken down into building/land, plant equipment, working capital and peanut inventory working capital. The working capital was determined as two months worth of the total annual working capital required during an average year. The peanut inventory working capital is included at two months worth of the value of peanuts in storage during an average year. Table 3. Capital Cost Comparison for New and Existing Facilities, 18ton/Hr Capacity 8 Cost Category New Facility New Facility & Comm. Storage New Facility with Half Storage Existing Facility & Comm. Storage $8 Million $6 Million $4 Million Building & Land $6,542,300 $3,706,229 $5,124,299 $3,272,000 $2,454,000 $1,636,000 Plant Equipment $8,918,924 $5,922,924 $7,420,924 $4,728,000 $3,546,000 $2,364,000 Working Capital $1,100,839 $855,134 $807,239 $834,926 $799,313 $763,700 Peanut Inventory Working Capital $3,680,640 $3,680,640 $3,680,640 $2,726,400 $2,726,400 $2,726,400 Total $20,242,703 $14,164,997 $17,033,102 $11,561,326 $9,525,713 $7,490,100 Total capital required ranged from $20.24 million for a new facility to $7.49 million for an existing facility ($4 million purchase price). The capital cost is the total estimated capital to be raised by the cooperative through equity and/or debt financing. Average yearly cost of operation are summarized across alternatives in Tables 4 and 5. The largest expenditure is the purchase of peanuts for shelling. The purchase price was assumed at a loan rate of $355 per ton. Included in the direct cost of peanuts is a handling fee, storage fee, grading fee, and transportation to the warehouse. Shrink is also included to account for the physical loss of peanuts during the process whether through handling or shelling. A five percent shrink was assumed for this study. Shrink from storage is also included at 2%, reflecting an average rate of shrink (Butts). The 2% storage shrink is reflected in the total tons shelled.

12 9 Table 4. Cost Comparison for New and Existing Facilities, 18Tons/Hr Capacity. Cost Category New Facility New Facility & Comm. Storage New Facility with Half Storage Existing Facility & Comm. Storage $8 Million $6 Million $4 Million Direct Cost of Peanuts $28,990,833 $28,933,003 $23,658,516 $21,790,801 $21,672,901 $21,555,001 Direct Labor Cost $1,188,100 $1,188,100 $1,015,300 $1,648,900 $1,648,900 $1,648,900 Other Direct Costs $434,476 $434,476 $434,476 $414,655 $381,375 $348,095 Fixed Costs $1,530,100 $1,232,255 $1,422,351 $617,622 $466,421 $315,220 Total $32,143,509 $31,787,834 $26,530,644 $24,471,978 $24,169,597 $23,867,216 Table 5. Cost Per Ton Comparison for New and Existing Facilities, 18Tons/Hr Capacity. Cost Category New Facility New Facility & Comm. Storage New Facility with Half Storage Existing Facility & Comm. Storage $8 Million $6 Million $4 Million Direct Cost of Peanuts $466 $465 $468 $473 $470 $468 Direct Labor Cost $19 $19 $20 $36 $36 $36 Other Direct Costs $7 $7 $9 $9 $8 $8 Fixed Costs $25 $20 $28 $13 $10 $7 Total $517 $511 $525 $595 $525 $518 Returns to Shelling Potential returns must be balanced against the cost of peanut shelling and processing. To estimate yearly returns for a ton of shelled peanuts, the three-year average season price was used. Table 6 indicates the average F.O.B. domestic price for shelled peanuts in the Southeast. The three-year average was chosen to reflect most recent price fundamentals as well as to be a conservative projection since it is lower than the ten and five year average prices. The Georgia average season price paid to farmers is a blended price of quota, additionals, and buybacks. The quota price is the price paid farmers for domestic edible peanuts, Table 6.

13 10 Table 6. Historical Georgia and Shelled Runner Peanut Prices by Type. Year GA Season Avg. Price (Cents/Lb.) 1 Quota Price Jumbos (Cents/Lb.) 2 Mediums (Cents/Lb.) 2 No. 1s (Cents/Lb.) 2 Splits (Cents/Lb.) Yr Avg Yr. Avg Yr. Avg Source: Georgia Agricultural Statistics Service & Federal-State Market News Service, USDA, AMS 1 August - July marketing year 2 Southeast (Alabama, Georgia, Florida) F.O.B domestic price, 19 month (Feb - Aug) marketing season The change in the 2002 Peanut Program from a quota system to a marketing loan system will result in lower shelled peanut prices as well as a lower farmer stock price. To project returns under the new program, the three-year average price (based on $610 quota price) in Table 5 was adjusted to reflect a $355 marketing loan price established under the 2002 farm bill. The shelled price for each type was converted to a farmer stock price per ton adjusting for 25% hulls, 12% culls, and a ten cent per pound shelling cost. The ratio or margin between the shelled price by type and a $610 quota price was used to adjust the shelled price to reflect a $355 farmer price, Table 7. The oil stock price

14 11 was assumed at 12 cents as a conservative estimate (adjusted down from the NCPC study) and hulls were assumed to be at 5 cents based on data collected from a recent bio-mass fuels study (Ferland). Table 7. Three-Year Average Shelled Price Adjusted to Reflect $355 Farmer Stock Price Type 3 Yr. Avg Adjusted Price Jumbo Medium Number US Splits Oil Stock Hulls 5 5 Source: Federal-State Market News Service, USDA, AMS Income from shelling was calculated using adjusted prices by type and multiplying them by corresponding shelling outturn rate. Table 8 gives the five-year shelling outturn rates for irrigated and non-irrigated peanuts (Lamb). The irrigated outturn rate was used since this was the targeted production to be processed by the shelling facility. The weighted average price was approximately $.28 per pound. Table 8. Shelling Outturn Rates, Five-Year Average Type Irrigated (%) Non-Irrigated (%) Jumbo Medium Number US Splits Oil Stock Hulls Source: National Peanut Research Laboratory, USDA, ARS Estimated returns for each alternative are given in Table 9. Detailed cost and return budgets for each alternative can be found in Appendix 2. The new facility is estimated to return $40 per ton based on projected average costs and returns of the shelling operation. A new facility and commercial storage in the Tift Area would net an estimated return of $45 per ton. Net returns at three different purchase prices for an existing facility are also positive, ranging from $34 per ton at an $8 million purchase price to $47 per ton at a $4 million purchase price. The shelled value per ton is higher for the existing facility due to the assumption of a 2% premium for

15 12 shelled peanuts. The existing facility is assumed to receive a premium for having established market relationships over time. Table 9. Estimated Shelling Returns Per Ton Cost Category New Facility New Facility & Comm. Storage New Facility with Half Storage Purchasing Existing Facility & Comm. Storage $8 Million $6 Million $4 Million Shelled Value $556 $556 $556 $565 $565 $565 Total Cost $518 $512 $526 $533 $526 $519 Net Return $39 $44 $30 $32 $39 $46 Sensitivity of Peanut Shelling Plant Profitability to Changes in Cost, Price, and Gross Margins If cost and return estimates are indicative of actual cost and returns encountered from a shelling plant in the Tift Area, the potential for total plant profitability is encouraging. Some gains in efficiency would hopefully be realized in a new plant from lower costs of operation. However, the capital required is substantially more than when purchasing an existing facility. Purchase of an existing facility may also include an entry into the market not accounted for in this study. It appears from the feasibility study that acquiring shelling capacity is not necessarily the greatest barrier to a grower-owned cooperative marketing its own peanuts. Figures 3 to 8 indicate how a reduction or increase in the expected cost would affect profitability. In the case of the first alternative, an increase in budgeted cost of 7.5% would lead to zero profits for the new facility. The other alternatives, new facility, commercial storage, and existing facilities ($8, $6, $4 million), would reach zero profit with an 8% increase in budgeted cost. Thus, all alternatives could absorb between 7 to10% more cost than anticipated and remain profitability. Such a margin is especially desirable given that costs are often difficult to quantify in start-up operations.

16 13 Figure 3. Profit vs. % Change in Budgeted Costs, New Facility. Figure 4. Profit vs. % Change in Budgeted Costs, New Facility, with Storage. Figure 5. Profit vs. % Change in Budgeted Costs, Existing Facility ($8 Mil.) Facility ($6 Mil.) Figure 6. Profit vs. % Change in Budgeted Costs, Existing

17 14 Figure 7. Profit vs. % Change in Budgeted Costs, Existing Facility Figure 8. Profit vs. % Change in Budgeted Costs, New Facility Half ($4 Mil.) Storage Figures 9 to 14 illustrate how a change in sales price of the shelled peanuts affect the profitability of the facility. The yearly weighted average price of about $.28 cents per pound was used as a base for this study. Thus, the weighted sales price of peanuts could drop by about 4% and still result in a profitable operation. Again, given the risk associated with a new entrant into an uncertain peanut market, margins of the magnitude are desirable. The new facility reaches a zero profit at approximately $.27 per pound, while the other scenarios reach a zero profit around $.26. Figure 9. Profit vs. Change in Shelled Price, New Facility. Figure 10. Profit vs. Change in Shelled Price, New Facility with Storage.

18 15 Figure 11. Profit vs. Change in Shelled Price, Existing Facility. Figure 12. Profit vs. Change in Shelled Price, Existing Facility. ($8. Mil.) ($6 Mil.) Figure 13. Profit vs. Change in Shelled Price, Existing Facility. Figure 14. Profit vs. Change in Shelled Price, New Facility, ($4 Mil.) Half. Storage Figures 15 to 20 demonstrate how initial price paid cooperative s producers affect the shelling plants profitability holding cost and finished selling price constant. As the purchase price of peanuts approaches $.20 all scenarios appear to become unprofitable. An initial price of $.1775 was assumed in this study for all alternatives.

19 16 Figure 15. Profit vs. Change in Direct Cost, New Facility Figure 16. Profit vs. Change in Direct Cost, New Facility with Storage Figure 17. Profit vs. Change in Direct Cost, Existing Facility Figure 18. Profit vs. Change in Direct Cost, Existing Facility ($8 Mil.) ($6 Mil.)

20 17 Figure 19. Profit vs. Change in Direct Cost, Existing Facility Figure 20. Profit vs. Change in Direct Cost, New Facility Half ($4 Mil.) Storage Figures 21 to 26 indicate the gross margin percentage required in each scenario to produce profits. Gross margin is the difference between purchase price of raw peanuts and the final selling price expressed as a percentage of the raw peanut price. The historical margin was found to be 16.25%. The new facility and new facility with storage approach profitability at a 9% gross margin. Existing facilities approaches profitability at a 10% gross margin. Figure 21. Profit vs. Change Gross Margin % New Facility. Figure 22. Profit vs. Change Gross Margin % New Facility with Storage

21 18 Figure 23. Profit vs. Change Gross Margin % ($8 Mil.) Figure 24. Profit vs. Change Gross Margin % ($6 Mil.) Figure 25. Profit vs. Change Gross Margin % ($4 Mil.) Figure 26. Profit vs. Change Gross Margin % New Facility Half Storage. This study was conducted using conservative cost and return estimates. One advantage of a new peanut program is the provision for a new venture to utilize the governments non-recourse marketing loan. As a grower owned cooperative, it should be eligible to operate as a loan servicing agent. Working capital required to purchase peanuts can potentially be significantly reduced by paying members the loan rate at delivery and enrolling the peanuts in the loan program, which is proposed to cover the cost of storage and handling. These could be great savings in operation cost by not having to raise and borrow the working capital needed to purchase peanuts for shelling.

22 19 III. Organizational Structure and Alternative Financing Arrangements New Generation Cooperatives A marketing cooperative is one of the financing and ownership methods being considered for the processing facility in Tift County, Georgia. The main purpose of this facility is to further process peanuts and return the added value to producers in the community. The recommended organizational structure would be to form a value-added peanut shelling cooperative of defined or selected membership whereby members invest through the purchase of stock shares. The basic concept of this new type of cooperative is that producers capture profits that occur beyond the farm gate by owning and controlling the local businesses that are positioned to earn those profits. The motivation of new generation cooperatives is more offensive than defensive, by taking control of its own destiny and being proactive rather than reactive. The main emphasis in cooperatives of this type has been on value-added processing, niche marketing, and producer/members viewing themselves as producing a finished product rather than supplying a raw product. These new types of producer processing cooperatives are called New Generation Cooperatives (NGC), closed cooperatives, or stock cooperatives. NGCs combine solutions to financing and operating questions posed by new producer/owned, processing operations. First, producers raise an initial portion of the investment and working capital cost through stock sales. The remaining capital could be raised through debt financing. Second, the shares serve as a dual contract. Each shared owned provides the producer with both the obligation and the right to deliver to the cooperative. Likewise, the cooperative is obligated to accept delivery given quality standards are met. These delivery rights and obligations are transferable. Each member is still granted only one vote, regardless of the number of shares owned. Thus, a NGC stock sale, properly structured, assures that the processing venture will be financed AND have adequate supply to operate efficiently. Producers tend to take greater interest in operations developed as a producer cooperative since they are also investors. The typical amount of member equity required is 40-60% of the initial capital needed for the project. This gives potential lenders the security of sufficient producer commitment. Commercial banks have been the primary source of financing for the remaining 40-60% needed by new cooperatives. The USDA also has numerous financial programs that can assist cooperatives that meet certain criteria. Credit unions and the Farm Credit System have also actively lent funds to farmers for investment in new cooperatives. Other helpful support systems in the development of these new cooperatives include communities, regional economic development commissions, individual rural electric cooperatives, and university extension services. The initial stock share price of an NGC is calculated by taking the total capital cost needed to start the plant divided by the total number of tons of unshelled peanuts needed for a standard operating year. This will yield a share price for 100% financing by the producers. If the producers

23 20 wish to the lower their amount of equity, the share prices will drop accordingly to the amount financed outside the operation. Table 10 displays the different initial share prices per ton based on various levels of producer financing. Each share represents one ton of unshelled peanuts to be supplied to the facility. Each share purchased requires a commitment to deliver one ton of raw product for the duration of the cooperative. However, the stock purchase price is paid once with the opportunity to receive returns annually. NGCs retain many principles of traditional cooperatives: democratic control through a one member, one vote policy; distribution of excess earnings among members as patronage refunds or dividends; and member-elected board of directors. The financing of NGCs allows the return of virtually all net earnings to members at year-end since members invest capital up-front. Future expansion is financed in the same way as original equity; members invest through the purchase of shares. In some instances, preferred shares may be offered to the community or general public. Issuing this non-voting stock is allowed under Georgia Cooperative law. This allows communities to support the project while keeping control in the hands of the members. Some of the advantages of the NGCs include the ability of producers to react quickly to opportunities or problems, the creation of wealth within a community, stability for producers, efficiency for the processing through restricted membership, consideration of the interests of the community through a diverse set of stakeholders, and commitment to the quality of the product by both the producers and processor. One of the keys to success of a NGC is producer commitment. The group of producers must be motivated, determined, and committed. Other keys to success include public policy that supports cooperative formation, financial institutions willing to finance the cooperative, and consultants or facilitators to help producer groups through the process. These keys to success seem to be available in Georgia. Georgia peanut producers have an opportunity to take ownership of the shelling facility and increase producer returns. Table 10. Share Prices at Various Produce Equity Levels. Percent Producer Equity New Facility New Facility with Storage New Facility with Half Storage Existing Facility & Comm. Storage $8 Million $6 Million $4 Million 100% $325 $228 $335 $251 $207 $163 75% $244 $171 $253 $188 $155 $122 60% $195 $137 $202 $151 $124 $98 50% $163 $114 $169 $125 $103 $81 40% $130 $91 $135 $100 $83 $65

24 21 IV. Peanut Buyers Survey In order to assess the market potential of a new entrant into the shelled peanut market, a personal interview was conducted during March, 2002, of 44 national shelled peanut buyers. The survey contains results from different peanut users and represents a number of states. One-quarter of the companies interviewed were located in Georgia. Table 11 provides a breakdown of where the interviewed companies were located. Table 11. Location of Companies Interviewed (n=44) Location Frequency Percentage Multiple Locations 5 11% Alabama 3 7% Florida 2 5% Georgia 11 25% Mississippi 1 2% Tennessee 1 2% Illinois 1 2% Indiana 2 5% Louisiana 1 2% Michigan 1 2% North Carolina 2 5% New Jersey 1 2% New York 2 5% Ohio 4 9% Oklahoma 1 2% Texas 5 11% Wisconsin 1 2% Total %

25 22 Respondents were asked whether they purchase the different sizes of peanuts presented in Figure 27. Nearly two-thirds of the companies indicated they generally purchase jumbo peanuts. Medium peanuts are the second most frequently purchased, followed closely by US#1s and splits. There appears to be a market for each of the four peanut sizes and the information in Figure 27 provides limited insight into the market share for each peanut size. Figure 27. Size of Peanuts Generally Purchased (n=44) In addition to the size of peanuts, it is important to determine if companies are purchasing shelled, blanched, roasted, or a combination of the three types. It appears that companies are more likely to purchase either shelled or blanched than roasted peanuts. A quarter of the companies indicated they buy blanched and roasted peanuts. Given the information in Figure 28, it is important to create a facility that can shell and blanch peanuts or have an available blancher. Roasting capabilities would increase the operations market potential but is less critical than shelling and blanching. Table 12 provides information into the companies annual peanut usage by size as well as what the companies are paying for peanuts. As reported earlier, jumbos account for the largest number of peanuts being used followed by US #1s. On average, the various companies are using 151,048 tons of jumbo peanuts, and 129,098 tons of US #1 peanuts. However, given the large range of annual peanut usage by each size group (i.e., usage of jumbos ranged from 1 ton to 950,000 tons annually), the mean figure may overstate the market s peanut usage.

26 23 Table 12. Reported Annual Peanut Purchases and Peanut Prices Paid Reported Annual Purchases (Tons) Peanut Mean Median Jumbos 151,048 14,000 Mediums 76,250 1,500 Splits 30,950 5,250 US #1s 129,098 14,000 Total 387,346 34,750 Reported Peanut Prices (Lbs) Peanut Mean Median Jumbos $0.72 $0.69 Mediums $0.69 $0.62 Splits $0.61 $0.55 US #1s $0.61 $0.56 The peanut prices indicated in Table 12 do not exhibit the same level of variability as observed in the annual usage figures. Jumbo peanuts were being purchased for an average price of $0.72 per pound while US #1s and splits were being purchased for $0.61 per pound. Again, the reported jumbo prices ranged from a low of $0.45/lb to a high of $1.14/lb. The median price may be more representative of the actual market prices the proposed facility may experience as the extreme high and low stated prices do not influence its calculation like they do in calculating the mean value. It is important to note that the reported purchase prices from this survey are well above the historical average prices reported in Table 6. In addition to collecting information on the types of processing the companies use, it is equally important to determine the level of final processing the companies are demanding. The companies are currently purchasing peanuts from both traditional shelling lines and bar ready peanut shelling lines and from facilities with both types of lines. Based on the information presented in Figure 29, the proposed facility should consider a bar ready shelling line and traditional shelling line to maximize its customer base. The proposed shelling facility has the potential to supply the majority of the companies interviewed if it can offer shelled peanuts from both types of lines. Figure 28. Type of Peanuts Purchased

27 24 Figure 29. Supplier Line Type (n=44) Figure 30 indicates that just under one-fifth (18%) of the companies interviewed indicated they would be willing to pay more for high quality irrigated peanuts. This information can be used to determine whether irrigating peanuts is financially feasible. If the vast majority of customers are not willing to pay more for irrigated peanuts, then it would not benefit financially to irrigate the peanuts. However, if there is a quality issue and non-irrigated peanuts are inferior to the irrigated peanuts, then irrigation is essential to producing a high quality peanut; not irrigating and the lack of associated quality may hurt the proposed facilities market entry. The response is rather surprising and begs the question: do respondents associate irrigated peanuts with higher quality? Figure 30. Willingness to Pay for Irrigated Peanuts

28 25 Figure 31. Percentage of Companies and Amounts Paid for Irrigated Peanuts (n=44) Figure 32 indicates that only 11% of all companies interviewed indicated they would be willing to pay 5%-10% more for high quality irrigated peanuts. Therefore, the cost of processing irrigated peanuts exclusivly needs to be examined in relation to the additional revenue. In addition to willingness to pay for irrigated peanuts, the companies were asked if they would be willing to pay more for bar ready peanuts. One-quarter of the respondents reported they would pay more for bar ready peanuts as indicated in Figure 32. Figure 32. Willingness to Pay More for Bar Ready Peanuts

29 Forty percent of the companies indicated they would not be willing to pay extra for bar ready peanuts. However, among the companies that would pay more, no specific additional dollar amount emerged as what would be acceptable. As shown in Figure 33, there was a lack of consensus on how much more companies would be willing to pay for bar ready peanuts. Figure 33. Additional Amount Willing to Pay for Bar Ready Peanuts (n=44) 26 Most peanut buyers rely on more than one peanut supplier. Spreading purchases among different peanut suppliers helps reduces the risk of an inconsistent peanut supply. If only one source is used and problems develop, the company has an alternative source of inputs and can maintain product production. Figure 34. Number of Current Supplier (n=44)

30 Peanut buyers have peanuts delivered at varying time intervals, Figure 35. Almost one-third of the companies receive peanut deliveries daily while a quarter receive their peanuts monthly. The other response includes on demand and as needed delivery responses. Being able to deliver product on a daily basis should be considered so the proposed facility can be competitive. 27 Figure 35. Peanut Delivery Frequency (n=44) Figure 36 indicates 84% of the respondents have their peanuts delivered by truck while only 5% reported their peanuts are delivered by a train. Therefore, to compete in the marketplace, the proposed shelling facility should have daily truck delivery capabilities. Figure 36. How Peanuts are Delivered (n=44)

31 It is important to understand how companies receive their peanuts. According to survey results, the proposed facility should be equipped to package peanuts in both bags and boxes, Figure 37. The survey results indicate that nearly 90% of the companies receive their peanuts packaged in bags or boxes or both. Again, it is important to provide finished peanuts in packaging consistent with consumer expectations to eliminate possible reasons for not purchasing peanuts from the proposed facility. Figure 37. Peanut Packaging (n=44) 28 The interviewed companies apparently do not have oil content requirements, Figure 38. Only one-inten companies indicated they have oil content requirements. However, the proposed facility should abide by industry standards as companies likely rely on these standards to ensure a consistent and acceptable oil content level. Figure 38. Oil Content Requirements (n=44)

32 Overall, companies that were interviewed are satisfied with their current peanut suppliers. Only about 10% of the companies indicated they were less than satisfied with their current supplier(s), Figure 39. The apparent high level of satisfaction with current suppliers provides a barrier to entry in that the proposed facility may have difficulty convincing targeted companies that they can offer a better product and/or superior service as the companies do not perceive their current suppliers as having problems. Figure 39. Satisfaction with Current Suppliers (n=44) 29 The interviewed companies are satisfied with their current suppliers but appear to be willing to explore business relationships with new suppliers. About two-thirds of the companies interviewed indicated they would consider a new supplier, Figure 40. This is very encouraging and provides an opportunity for new peanut suppliers to discuss potential supplying arrangements with a large segment of buyers. Figure 40. Consider New Runner Peanut Supplier (n=44)