Feasibility Study for a Slaughter Facility in the North Isles of Shetland

A Report for Shetland Enterprise

December 2006

Prepared by;

Peter Cook

P & L Cook and Partners

Tel; 01467 642802

(M) 07774 160246

1. INTRODUCTION

This report presents the results of a short study into the likely viability of an abattoir facility for the North Isles of Shetland – Yell, Unst and Fetlar. Four broad objectives have been set by Shetland Enterprise for the study;

  • Identify the demand for a slaughter facility in the North Isles
  • Provide an estimate as to the size and scale of the facility
  • Estimate the capital costs involved with establishing the facility
  • Provide financial projections and forecasts in order to assess the financial viability of the project.

The key objective is to establish the scale and nature of demand for the facility, both in terms of markets for meat and the likely level of support from local producers.

As set out in the proposal, the research has taken the form of;

  • a desk review of livestock and producer trends over the last 10 years in the North Isles
  • interviews with a sample of crofters covering their business trends, views on current and future livestock trends in the region, stock finishing, home-kill, slaughter and processing needs and mechanisms for operation of a facility
  • interviews with potential wholesale, processing, food service and retailing customers
  • interviews with stakeholders who could be investors/ supporters, including other primary food producers
  • a brief review of competitors
  • an outline costing of a suitable size of facility by an abattoir expert
  • a quick review of alternatives such as mobile abattoirs
  • preparation of a simple financial viability projection with sensitivity analyses

Before starting the study all parties realised the difficulty of making a small abattoir pay. A recent study (March 2006) for Shetland Enterprise on the options for North Isles Pork identified the sheer capital cost of a new facility and the ongoing challenge of meeting current food safety and environmental legislation. A July 2005 SIC study on the options for Shetland as a whole also identified the problems for a new facility even when drawing stock from a much larger catchment. A major aim must be to find an operating formula which can help a facility to be viable in the face of very major capital and operating cost disadvantages.

2. SUMMARY AND CONCLUSIONS

2.1 Supply of stock to a North Isles abattoir

  • Store systems may not maximise value added, but they have developed for a reason; they fit very well with the limited resources and time of the majority of crofters.
  • The steady concentration of stock onto fewer units may be “professionalising” the industry. The bigger, full time units may be able to justify investment in finishing.
  • Where there is some interest in finishing it is concentrated on adding value to the pure Shetland wether “by-product”, either by concentrate feeding over winter or carrying through to a second summer. There is a high perceived risk in winter finishing and it is highly price sensitive, even when subsidised by SIC. An increase in cattle finishing perhaps has fewer problems, but is highly sensitive to store prices and would only ever be in small numbers due to the limited cattle population.
  • There is already a small potential supply base for a local abattoir - a proportion of the lambs sold store are actually fat, there are some mainly Shetlands being finished in sheds and there is a home-kill market. To secure this potential throughput means paying a better net price than competitors and offering a low cost, quality slaughter service.
  • Land quality and crofting constraints mean that any facility will always be highly seasonal, even if more producers can be attracted to winter finishing, etc.
  • If a facility existed, many say they would try a few fat lamb sales. Those who are already selling a few finished lambs find existing Shetland outlets are constrained by their small size, especially in the autumn.

2.2 Demand for the output and services of a North Isles abattoir

Total Local Meat Demand

  • Calculating local meat consumption tells us nothing concrete about the market for a local abattoir. For example, it ignores what could be achieved by a business exporting meat products outside the North Isles, it assumes consumers buy 100% local and it also assumes that the diverse meat processing needs can be provided locally.
  • However, it does give us at least some indication of scale. Even if the business or businesses operating/ using the facility captured all of the domestic red meat demand, it would only need 110 cattle and just over 1,600 sheep. Even before looking at capital and operating costs, these would seem to be very small throughputs with which to make a facility viable.
  • Even if local sheep meat consumption is 3 times national levels this only equates to 2,420 lambs (of 35kg liveweight).

Local Retail and Food Service Demand

  • Retailers and foodservice businesses want highly prepared products. This means that any new business which wants to capture a significant proportion of this market must have butchery and processing facilities plus the related skills. To a great extent the availability of a North Isles abattoir is secondary.
  • These markets want year round supply of a consistent product. Given the seasonality of sheep supply especially, this is a major challenge for a meat supplier based on a local abattoir.
  • Local product is attractive to local people, but there is price sensitivity. Local retailers are aware their prices are relatively high in comparison to Lerwick competition and foodservice outlets want a good margin given their relatively low throughputs. A local abattoir business might struggle to recover its higher costs through premium pricing to local outlets.
  • Tourists do want local meat products and this segment could grow if Saxa Vord is successful. However, the demand will be for well processed, packaged and presented products.

Export Demand

  • To export high priced niche products will require excellent processing, marketing and distribution facilities and skills. An abattoir is secondary.
  • To export into volume markets from an abattoir with minimal butchery facilities means competing on price with much bigger businesses.

Homekill Demand

  • Numbers are very difficult to estimate, but could be over 2,000 lambs per annum in the North Isles. This is a static or declining practice with numbers sensitive to the store price.
  • Highly seasonal, mainly Shetland ram lambs.
  • Low value animals so only a low slaughter charge could be justified.
  • Even if legislation was tightened and an abattoir offered a low slaughter charge, some producers would never use an abattoir service.

2.3 Abattoir Competition

  • There are a couple of fairly competent competitors for stock in Shetland. Despite their attempts to expand, they only kill a total of around 5,000 lambs and 300 cattle. A North Isles abattoir must compete with these outlets and the question needs to be asked why so few stock are going through these facilities and how a North Isles business can be more successful.
  • Orkney and mainland Scotland abattoirs will also be formidable competitors. They could also cash in on the success of any Shetland brand.
  • Mainland abattoirs can draw on a large pool of finished stock from dedicated finishers. A North Isles abattoir does not have this pool. If crofters decide to sell store, they do not sell to finishers within easy transport distance, but their stock disappear South beyond the economic reach of the North Isles.

2.4 SWOT conclusions for a North Isles abattoir

  • A lot of weaknesses and not many strengths
  • The formula would seem to be to have a facility which allows a significant level of meat processing, operated by a business/ individual who wants to build a specialised meat business selling premium regional products in Shetland and beyond, with close contacts in the crofting community to ensure continuity and quality of supply (perhaps backed up by a demonstration programme to show crofters how to profitably winter finish), also carrying out some contract slaughtering of home-kill to supplement the meat business and perhaps sub-contracting facilities to other food processing businesses. The facility would likely operate on a part-time basis except perhaps when doing contract home-kill in the autumn (it would be designed to cope with the autumn peak which means that during the rest of the year it has a lot of excess capacity). Given the likely level of throughput the capital cost may need to be largely written off (i.e. subsidised).
  • This is also likely to be the strategy of the new facility near Lerwick, so the hope for a North Isles business must be that this does not go ahead or fails.
  • The judgement on need for an abattoir depends a lot on how each strength, weakness, opportunity and threat is weighted. For example if the threat to home-kill from increased enforcement is strong and this is a very important activity for the community which people will want to continue, then the case for a facility is stronger.

2.5 North Isles Abattoir; Scale/capacity required.

The scale of any abattoir really depends on what a well run meat business can achieve and should really be defined by a well worked business plan prepared by that business. However, the following table is one way of defining a sensible maximum capacity for a North Isles abattoir.

Local Consumption Estimate (converted into numbers of animals) / Local Production for Sale (number per annum) / Home-kill Estimate (number per annum) / Abattoir Capacity (number slaughtered per annum)
Lambs / 1,600 – 2,400 / 25,000 / 2,000? / 4,000
Cattle / 110 / 180 / ? / 60
Pigs / 770 / 30? / ? / 100

2.6 Abattoir Capital Cost Estimate

  • The size and basic cost of the building is largely set by the number and type of slaughter lines needed. The length and strength of the building is to a great extent defined by the cattle line and the need for a pig line and a sheep line defines the minimum width.
  • Covered lairage for 250 lambs and chill space for 200 – 250 lamb carcasses is included. Only a very small cutting room is assumed.
  • The estimated capital cost for this facility is £1,192,523. The building cost is estimated at approximately £644,000 and the internals and equipment at £549,000. This seems like a very high cost for what on the outside looks like a 35m x 15m shed. However, EU standards to a certain extent define the costs and many of the systems required are expensive. For example the refrigeration system could cost up to £300,000 and the effluent system over £60,000.

2.7 Viability Assessment

  • Operating a small abattoir in the North Isles results in a loss of almost £88,000 per annum, even if we charge relatively high slaughter rates and make assumptions about part-time labour which keep operating costs low. If the capital cost of the facility is covered by the tax payer and no rent is charged, then it achieves break-even, so long as 4,000 lambs, 60 cattle and 100 pigs are processed annually.
  • Margin is highly sensitive to throughput. If less than target is achieved the losses mount rapidly. Conversely, higher throughputs would help the facility get closer to break-even.
  • The capital cost of the facility is a major issue. With no capital commitments the facility just breaks-even, so any level of repayment destroys the viability of the enterprise. Raising finance from the crofting community would be difficult as interest is low, so it is likely that public funds would have to cover the entire cost if the operator was to have any chance of survival.
  • Central to this viability assessment are two assumptions. First is the decision by crofters to finish a significant number of lambs and cattle and to send them to a North Isles abattoir rather than to sell store or to sell finished to another abattoir. Second is the assumption that a meat business in the North Isles can buy the stock and cover the loss on slaughtering from the profit made on further processing and marketing.

2.8 Alternatives and Comparisons

A number of other abattoir developments have been assessed in recent years throughout the Highlands. These tend to show the same pattern as outlined above; surprisingly high capital costs in relation to the size of proposed facilities and operating losses from the abattoir operation, but margins in the meat processing/ adding value end.

Alternatives such as mobile or modular abattoirs have been assessed in detail over the years. These options tend to have an even higher capital cost in relation to throughput. Mobiles need the capital cost of several docking stations and are severely restricted in the Highlands by the massive peak in demand for slaughtering services in the autumn and a complete lack of demand at some other times of year.

3. IS THERE A SUPPLY BASE FOR A NEW ABATTOIR?

3.1 Livestock Trends

The 10 year trends (1996 to 2005) in livestock numbers, employment in agriculture and the numbers of holdings in the North Isles are tabulated at Appendices 1 and 2.

June census sheep numbers peaked in 1997 at 85,100 head (including 39,937 ewes). They have declined every year since, to a total of 64,494 in 2005 (including 30,245 ewes). Basically breeding ewe numbers have dropped by a quarter in 10 years. Despite the fall in ewe numbers, lambing percentages (based on June ewe and lamb numbers) have not increased. Total recorded lamb numbers have fallen from 34,876 in 1997 to 26,478 in 2005.

The statistics do not suggest any increase in the number of wethers being carried through to a second year for finishing. “Other non-breeding sheep 1 year and over” totalled 1,463 in 1997, but had dropped to 885 by 2005.

In contrast cattle numbers were static over the 1996 to 2000 period, but have since increased. However the total is only 712 head on the three islands in 2005. This includes 255 beef cows. Breeding cow numbers were at their lowest in 1997 (218 head) when sheep were at their peak. Spring calving dominates with the bulk of the cows in milk and, in 2005, 190 calves under 6 months old at the June census date. The statistics do not give any indication of an increase in cattle finishing – numbers of non breeding cattle over 2 years of age are too small to disclose in the statistics in case they allow identification of individual holdings.

These trends are backed up by the crofter interviews. They all described a sharp reduction in sheep numbers, aided by the environmental destocking schemes and more recently the Scrapie scheme. However the expectation for the future, despite the decoupling of the Sheep Annual Premium, is for numbers to stabilise. Some even described the possibility of increasing ewe numbers on some grazings if the ESA payments ended in a few years time, though the tax system acts as a disincentive to restocking in the medium term.

Interviewees described how the enhanced LFASS payment for higher cattle stocking rates, extensification premia, the RSS native cattle payment and the decline in sheep numbers aided the growth of cattle numbers. Most expected this trend to now cease following decoupling. Uncertainty over the future of the LFASS was seen as a threat to future cattle numbers.

The number of holdings in the North Isles carrying cattle is very small – 38 in 2005. However this is 5 up on 2001. The number of units carrying sheep has fallen steadily (352 units in 2001, 275 in 2005 = a fall of 22%).

Likewise the number of crofters has fallen steadily from 336 in 1996 to 289 in 2005. When spouses involved in the business are included, the total in 2005 is 431 occupiers and their spouses involved in agriculture. Of these, 52 record themselves as full time. The vast majority list themselves as being less than half time on the croft.

3.2 Finishing Trends

The vast majority of lambs and cattle are of course sold store off the islands in the autumn. As one producer described it, this is a function of “no feed, no facilities, no time”. As the weather changes in the autumn there is an urgent need to get lambs away to ensure adequate winter grass supplies are left for the ewes and ewe lambs. Finishing lambs through the winter really means having buildings for intensive concentrate feeding. Only very limited areas could grow forage crops (rape, etc) and there is a lack of appropriate equipment and skills. For the majority of crofters who work elsewhere full time, producing store lambs fits best with their available time. Feeding stock daily over the winter is not easy alongside a job.

Store systems fit well with the resources available;

  • a peak of summer grass, but little winter growth
  • few buildings
  • very little machinery
  • little free time and much better income earning opportunities off the croft
  • little knowledge of finishing systems, lamb selection, etc.
  • high transport costs per head if not shipped in large batches i.e. lorry loads.

To finish more stock means working against the structural constraints listed above while also incurring higher input costs, mainly in the form of imported concentrate feed at say £10 per head for long keep lambs.