The Economic Potential for Small-Scale Shiitake Mushroom Enterprises for Non-Industrial Private Landowners in Kentucky By Marcella Szymanski 1

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1 The Economic Potential for Small-Scale Shiitake Mushroom Enterprises for Non-Industrial Private Landowners in Kentucky By Marcella Szymanski 1 Abstract. Forest resources cover approximately 50% of the land area of Kentucky. Many of these are rich hardwood forests offering an excellent resource for growing shiitake mushrooms (shee-tah-kay), Letinula edodes, a gourmet mushroom native to Japan. Shiitake mushrooms may prove to be a new commodity that will provide some economic return on small diameter woodlots that otherwise would have little use other than firewood. Using a price range of $4.00-$9 per pound to represent three different market opportunities (wholesale, grocery/restaurant, and direct market to individuals), net revenues were compared for profit potential for a small scale (500 log) operation. Net present value and benefit-cost ratios for the range of markets were -$660 to $3,120 and 0.83 to 1.70, respectively. Since shiitake mushrooms have a short time until full production begins, NPV was not as sensitive to changes in interest rates as it was to price indicating a better price or lowering start-up costs will have the most impact on profitability. Profits will not begin until a price above $4.80 per pound. Larger production in lower priced markets would allow smaller scale production to be profitable. In our scenario markets in the lower price range ($4.50 per pound) would not be profitable unless each log produced more than 2.97lbs. This would be possible with lower priced markets if each log were to go through more than production cycles per year. An additional fall fruiting would increase profitability of wholesale markets by 14%, allowing you to break-even. Other markets would still be profitable with lower volumes of mushroom produced per log. INTRODUCTION Kentucky s forest covers 45% to 48% of the land base of Kentucky and contribute to the state s biological and economic base for raw materials, recreational activities, wildlife habitat, environmental quality, and heritage (Environmental Quality Commission, 1997). The most recent survey of Kentucky s forested lands showed more than 90% of these forested land are owned by non-industrial forest land-owners (Alerich, 1990). Many of these rich hardwood forests offer an excellent resource for growing shiitake mushrooms. Shiitake (shee-tah-kay), Letinula edodes, a gourmet mushroom native to Japan, may prove to be a new commodity that will provide some economic return on small diameter woodlots that otherwise would have little use other than firewood. It has commercial interest to small landowners as a cost-effective way to add value to smaller diameter logs removed from woodlots for timber improvement. Shiitake have a meaty flesh, a distinctive, somewhat nutty or garlicky flavor and are high in B vitamins and essential amino acids. They have been grown and used in Japan for centuries, but have developed a steadily growing market in the United States (Leatham, 1982). Although past analyses have been done on shiitake mushroom enterprises, usually these have concentrated on larger mushroom enterprises (Baughman and Rathke, 1993 and Kimmons, 1992). Smaller enterprises examined in a northern United States context (Gormanson and Baugham, 1987) were found to not be profitable under a 200 log basis. The objective of this paper is to examine a 500 log operation that would introduce 100 logs over a five year period until a final production of 500-logs is maintained. Benefit/cost analysis, NPV, and a sensitivity analysis are used to examine the profitability of the operation. Three different mushroom markets, wholesale, market retail (grocery/ restaurant), and direct consumer market are presented. METHODS For the operation the physical activities and inputs required to produce and market mushrooms and the timing of the operation are determined. Assumptions for the analysis are as follows. One hundred logs are inoculated each year. Logs are carried over a five-year rotation with a maximum of 480 logs in year five continuing for the life of the operation. (Table 1). Over a five-year period, a 2% loss in logs is assumed annually due contaminating fungi, weather, and handling. (Table 2). 1 Assistant Extension Professor, Department of Forestry, Robinson Substation, University of Kentucky, Jackson, KY 41339

2 Table 1. Log fruiting and mushrooms produced from 500 log outdoor operation Year Logs at Start Of Year Logs Fruiting Pounds of Mushrooms There is a trade-off between the life of a log and forced fruitings. Logs forced to produce mushrooms will last about four years while logs not forced to fruit last about eight years, depending on the initial diameter of the log (Personnel communication with mushroom growers, Stickney, J. and Madison, M. 1999). Each log is expected to produce 10% of the living log weight over the life of the log (Przybylowicz and Donoghue, 1988). An average initial, fresh log weight of 30 lbs. is assumed, with each log producing a total of 0.3 lbs. per forced fruiting for a total of 2.6 lbs. of mushroom per log over the 5-year period. Logs are expected to produce more during the early part of the production cycle and decrease after the 3 rd year. Logs are assumed to fruit three times a year with fruiting starting a year after inoculation and logs allowed to rest eight weeks between forced productions. Table 2. Log losses and mushroom yields for each 100 logs on a five-year cycle Year Logs at Start Of Year Percent Loss lbs. per Log Mushrooms (lbs. per Year) Total -- 10% The following is a detailed description of the costs of and revenue assumptions used in the study. Variable costs: Tools and supplies -Logs: Hardwood (oak preferred) each, 3-8 diameter by 40 length. -Spawn*: Sawdust spawn logs $22/bag. Varies from /log -Cheese wax: or -Aluminum tags-$6/100 or $0.16/log -Drill bit- 12 mm soft steel with stop 2/ 50 logs $12each Utilities -Water & on site/yr. Advertising -$0.30/lb of mushrooms Shipping -Packaging and labels*-$0.25/lb of mushroom *(depends on market choice) Bulk mushroom boxes- one 50 lb. each Mushroom brown bags- 1 bag holds 1lb; $15/100 bags -Transportation-$0.50/lb* Short-term fixed costs -Inoculation tool- 1 at $26/each -Wax melting pot- 1 at $40 -Glass baster-$30 for apply the wax. -Log drilling stands- 1 at $17 -Drill bit- 12 mm soft steel with stop 2/ 50 logs $12each -Extension cord- $18 -Picking and storage baskets- $2 -Bucket for weighing- plastic bucket $5 each x 2, good for 7 years -Waterhose and sprinkler- $35 -Small spring scale, digital scale (to weight mushrooms): $80 -Drill-1 at $210 -Moisture Meter (High Humidity Hygrometer)- (Optional)- $37 each -Spring scale to weigh logs- $100 -Log cover (Optional): $0.018/sqft., will last for 3yrs. (Recommended to protect mushrooms from rain: mushrooms will absorb water and can get water logged/ soggy. Log covers + 2 cedar posts/ or treated pine + wire + screws to make cover. -Fabric cover: Fruiting blankets are used to maintain a cool, humid environment conducive to mushroom production by moderating the effects of weather outdoors. 1 $45 (12.5 X 25 ) Long-term fixed costs Soak tank-cattle trough: 2.5x2x8-250 gal tank- $125 each. -Refrigerator-.41cu.ft./lb of mushrooms, holds all mushrooms fruited in one week: $650 for 17 cuft.

3 Other Assumptions Using a price range of $4.50-$9 per pound to represent three different market opportunities (wholesale, grocery/restaurant, and direct market to individuals), net revenues are calculated. To simplify calculations all expenses and revenues were assumed to occur at the beginning of the year. A 4% general rate of inflation are assumed in the analysis. Labor is not included in this analysis with the assumption being shiitake producers would perform all labor requirements. RESULTS AND DISCUSSION A cash flow analysis shows negative net revenues during the first two year with positive net revenues in the third years of the operation (Table 3). A larger percentage of costs occur in the first few years of the operation and revenues do not begin until the second year. Examining various interest rates for each market shows NPV is not as sensitive to an interest rates increase as it is to price (Figure 2). This is not surprising given the relatively short production cycle. For the shiitake mushroom enterprise outlined in this NPV ($) of 2.4lb/log. example, profits do not begin until a price above $4.80 $4.50 $6.50 $9.00 Mushroom price ($/lb) 4% 6% 8% 10% 12% per pound. Obtaining a better price for mushrooms, finding ways to increase the pounds of mushroom produced, and finding ways to lower start-up costs have the most impact on the profitability of the shiitake enterprise. Figure 2. NPV and the fresh mushroom price at varying discount rates assuming a total yield Table 3. Cash over a six year cycle of the enterprise assuming 100 new logs placed into production every year with peak production at 480 logs 1. Item Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Tools & supplies $533 $181 $181 $192 $182 $182 Laying yard Logs Utilities Advertising Packaging/labels Transportation Soak tank Refrigerator Scale Total Cost ($) Revenue $4.50 lb $6.00 lb $9.00 lb Net Revenue $4.50 lb $6.00 lb $9.00 lb ,363 1,580 1,580 1 All cost and revenues are presented on a before tax basis. Net revenue assumes a discount rate of 4% 2 Packaging and labels were not included for the wholesale market ($4.50/lb). One strategy for the small-scale production enterprise is finding ways to lower initial costs and thus decrease

4 the amount of time to have a positive net return. A list of the effects of eliminating various start-up costs on the break-even price can be seen in Table 4. Table 4. The effect of eliminating a particular cost on the break-even mushroom price. Break-even Item removed mushroom price as a cost per lb. 1 Logs $4.15 Soak tank $4.22 Refrigerator $4.05 Scale $ Break-even price is $4.80/lb with all the above fixed and variable costs included. The break-even price is the lowest amount you can sell your mushrooms for and cover costs. Having access to a refrigerator or being able to obtain logs free through timber improvement activities will have the largest effect on the break-even mushroom price, with break-even prices being $4.05 and $4.15, respectively. Another strategy to increase the profitability of a smallscale shiitake enterprise is to increase the number of mushrooms produced. Larger production in lower priced markets allows smaller scale production to be profitable. In the scenario outlined, markets in the lower price range ($4.50 per pound) would not be profitable unless each log produced more than 2.97lbs. This would be possible with lower priced markets if each log were to go through more than three forced fruitings per year. An additional fall fruiting would increase profitability by 14%, allowing a break-even price to be obtained in the wholesale market. Other markets would still be profitable with a lower volume of mushroom produced per log. (Table 5) Table 5. For each market, the net present value of a 500-log shiitake enterprise, the cost-benefit ratio or returns on each dollar invested, and the yield/ life of each log you would need to have to break-even. Dollars/Lbs. Break-even Market of mushroom (NPV) 1 Benefit/Cost Ratio 1 mushroom Lbs./log Wholesale $4.50 -$ lbs. Restaurant/Grocery/Mark-up Retail User end or direct market to individual Based on a 4% discount rate and production rate of 2.6 lbs. mushroom/ life of the log. CONCLUSIONS In summary, small-scale shiitake production would be profitable under certain conditions. Starting with 100 logs and adding 100 logs each year would make the production manageable and minimize risk in the first five years of production. Larger production in lower priced markets would allow a smaller scale production to be profitable. This can be obtained through increasing the number of fruitings per year. Small cooperatives are another possibility for increasing the number of pounds of mushroom produced while keeping an individual producer operation small. However, risk due to management and coordination concerns would increase with the number of partners in the operation. Although larger scale operations will have advantages in volume, wholesale markets and higher direct market prices can be obtained with a caveat of greater marketing efforts and expertise. The best recommendation for small-scale shiitake producers would be one that minimizes risk; a combination of markets that would give varied opportunities for smallscale production schemes. Literature Cited Alerich, Carol L Forest Statistics for Kentucky and USDA Forest Service Bulletin NE Baughman M. and D. Rathke Profit Potential from Growing Shiitake. National Shiitake Mushroom Symposium, Nov. Huntsville, Al. Environmental Quality Commission State of Kentucky s Environment (June, 1997).

5 Gormanson, D. and M. Baughman Commercial Analysis of Three Hypothetical, Small-Scale Shiitake Mushroom Production Enterprises, In Shiitake Mushroom Marketing Guide for Growers: Developed for The Southeastern Minnesota Forest Resource Center, Lanesboro, Minnesota. Pg Kimmons, T Shiitake Mushrooms Volume II: Market Overview of an Emerging Agricultural Industry. Report from the Shirley Community Services & Development Corporation. Leatham. G Cultivation of Shiitake, the Japanese Forest Mushrooms on Logs: A Potential Industry for the United States. Forest Products Journal. 32(8): Madison, Matthew Personal communication. Madison's Ridgeview Farm Inc., 2760 Poplar Ridge Rd, West Union, OH. Stickney, Jack Personal communication. Shiitake Mushrooms, 2225 Lilly Ferry Road, Irvine, KY Przybylowicz, P., and J. Donoghue Shiitake Growers Handbook, the Art and Science of Mushroom Cultivation. Kendall/Hunt Publishing Company, Dubuque, IA.