Will My Feed Processing Plant Be Profitable? – Part III – Raw Material Costs
We’ve already established three key variables which will determine the ultimate profitability of your feed processing plant:
- Feed formulation
- Raw material costs
- Market value of your output(s)
My last blog post focused on feed formulation. You’ve got to have a pretty good idea of your formulation in order to effectively tackle today’s topic: raw material costs.
The raw material cost analysis can be broken down into two steps:
1) Determining the quantity of each ingredient required to make 1 ton of your formulation. Let’s use a very basic example and assume that this is the formulation you’re planning to use:
Ingredient A – 50%
Ingredient B – 40%
Ingredient C – 10%
Your formula will require 1,000 lbs. of Ingredient A, 800 lbs. of Ingredient B, and 200 lbs. of ingredient C per ton of production.
2) Determining the blended cost per ton of raw material formulation. Let’s use the following costs assumptions for our raw ingredients:
Ingredient A – $130/ton
Ingredient B – $100/ton
Ingredient C – $0.75/lb
Your blended cost per ton can be calculated as follows:
Ingredient A – $130/ton x .5 tons = $65
Ingredient B – $100/ton x .4 tons = $40
Ingredient C – $0.45 x 200 lbs = $150
Total Raw Material Cost = $255/ton
Keep in mind that these costs must be landed costs (the cost to get the ingredient to your doorstep); transportation of raw materials to your plant can be a major expense and shouldn’t be overlooked.
Now is a good time to begin some sensitivity analysis to help understand how cost changes will impact your overall raw ingredient cost. We’re all familiar with the wild fluctuations in oil prices, and it’s important to note that the impact that oil prices have on corn and soybean prices (major components of many feeds). From Watt AgNet’s Lower Feed Ingredient Prices Expected in 2012:
“Crop pricing all revolves around energy prices,” Ebert said. “Corn prices are tied to oil prices, and soybeans are tied to corn. As corn has stolen acreage from other crops, energy prices have pulled up the price for all grains.” As prices have risen, price volatility has increased as well. “There is now and will be more market volatility,” he said. “There has been a stunning amount of change in the market in the last five years.”
There will be more to come later on sensitivity analysis, but the point is that even seemingly small cost movements can have substantial impacts on your formulation costs (even more significant impacts on our processing margin!)
