Silage Production in Silo-Pit In

Pre-Feasibility Study

SILAGE PRODUCTION IN SILO-PIT IN

PERI-URBAN AREAS

PAKISTAN AGRICULTURE RESEARCH COUNCIL ISLAMABAD

MINISTRY OF NATIONAL FOOD SECURITY AND RESEARCH

Government of Pakistan

January 2014

Contents

1. DISCLAIMER...... 4

2. PURPOSE OF THE DOCUMENT...... 5

3. INTRODUCTION TO SCHEME...... 5

4. EXECUTIVE SUMMARY...... 5

5. BRIEF DESCRIPTION OF PROJECT...... 6

6. CRITICAL FACTORS...... 6

7. INSTALLED AND OPERATIONAL CAPACITIES...... 7

8. GEOGHRAPHICAL POTENTIAL FOR INVESTMENT...... 7

9. POTENTIAL TARGET MARKET...... 7

10. PRODUCTION PROCESS FLOW...... 8

11. PROJECT COST SUMMARY...... 8

11.1 Project Economics……………………………………………………………………...... 8

11.2: Project Financing...... 8

11.3: Project Cost...... 9

11.4: Space Requirement...... 9

11.5: Machinery and Equipment9

11.6: Human Resource Requirement...... 10

11.7: Revenue Generation ...... 10

13. KEY ASSUMPTIONS1

12. CONTACTS – SUPPLIERS, EXPERTS / CONSULTANTS...... 11

14: ANNEXURES2

List of Table of Contents

Table 1 – Project Economics ...... 8
Table 2 – Project Financing ...... 8
Table 3 – Capital investment for the Project ...... 9
Table 4. - Space Requirement ...... 9
Table 5 - List of Machinery & equipments ...... 9
Table 6 - Human Resource Requirement ...... 10
Table 7. Revenue Generation ...... 10

DISCLAIMER

This information memorandum is to introduce the subject matter and provide a generalidea and information on the subject. Although, the material included in this document is based on data/information generated from experiments and field testing by a team of relevant scientists; however, it is basedupon certain assumptions which may differ from case to case. The contained information may vary due to any change in any ofthe concerned factors, and the actual results may differ accordingly from the presentedinformation. The PARC and its employees do not assume any liability for anyfinancial or other loss resulting from this memorandum in consequence of undertakingthis activity. The prospective user of this memorandum is encouraged to contact qualified consultant/technical expert, especially designated focal person(s) of this enterprise for reaching to an informed decision.

PURPOSE OF DOCUMENT

The purpose of this document is to facilitate potential investors in Silage production on commercial scaleby providing them with a general understanding of the business, with theintention of supporting potential investors in crucial investment decisions. The project pre-feasibility may form the basis ofan important investment decision and in order to serve this objective, thedocument/study covers various aspects of project concept development, start-up,production, finance, and business management. The need to come up with pre-feasibility reports for undocumented or minimallydocumented sectors attains greater imminence as the research that precedes such reports reveal certain thumb rules; best practices developed by existing enterprises by trial and error, certain industrial norms and well established research findings that become a guiding source regarding variousaspects of business set-up and it’s successful management. Apart from carefully studying the whole document, one must consider critical aspects provided later on, which form the basis of investment decisions.

INTRODUCTION TO SCHEME

Prime Minister’s Youth Business Loan Program, for young entrepreneurs, with anallocated budget of Rs. 5.0 Billion for the year 2013-14, is designed to providesubsidized financing at 8% mark-up per annum for one hundred thousand (100,000)beneficiaries, through designated financial institutions, initially through National Bank ofPakistan (NBP) and First Women Bank Ltd. (FWBL). Loans from Rs. 0.1 million to Rs. 2.0 million with tenure up to 8 years inclusive of 1 yeargrace period, and a debt: equity of 90: 10 will be disbursed to SME beneficiaries across Pakistan, covering; Punjab, Sindh, Khyber Pakhtunkhwa, Balochistan, Gilgit-Baltistan, Azad Jammu & Kashmir and Federally Administered Tribal Areas (FATA).

EXECUTIVE SUMMARY

Silage production in silo-pit is considered for peri-urban business in this project pre-feasibility. This business is proposed to be located primarily near peri-urban areas of big cities where dairy farming entrepreneur is already in practice.All the technical prospects of silage production in silo-pit have been studied and practiced at Livestock Research Station (LRS), Animal Sciences Institute (ASI),National Agricultural Research Centre (NARC), Islamabad. After successful experimentation and on-farm testing, the silage preparation is declared technically feasible for commercial production. Some large dairy farmers having more than 500 heads of animalsare already successfully practicingsilage production in pits to feed their own animals. Likewise, this technique is equally feasible for silage production on commercial scale in peri-urban areas. Silage production can be successfully carried in Sindh, Punjab and some parts of Balochistanand Khyber Pakhtunkhwa. The project can be startedat an area of kanal having two silo-pits measuring 50 ft long, 10 ft wide and 7 ft high constructed in it with the capacity of 105 tons. Total cost estimate is Rs.1.680 million, with fixed investment of Rs.0.780 million andworking capital amounting to Rs.9 million. Given the cost assumptions, Net Present Value (NPV), Internal Rate of Return (IRR), Benefit Cost Ratio (BCR) and payback period are Rs. 16367107.74, 60%, 1.20 and1.58 years respectively.

BRIEF DESCRIPTION OF PROJECT AND PRODUCT

Following key parameters must be addressed as per pre-feasibility study:

• Techniques: Two different techniques are used for commercial silage production (i) Silage production in silo-pit, (ii) Silage production in bales. However, keeping in view the economical, technical and managerial factors, and availability of silage baling and rapping machines, this pre-feasibility is suggested to make silage in silo-pit for the proposed project.

• Location: The business can be initiated infodder growing areas of Sindh, Punjab and some parts of Balochistan and Khyber Pakhtunkhwa.More specifically, the areas near peri-urban dairy farming and green fodder market are most suitable for this entrepreneur.

• Product: This project aims to produce silage to replace daily cut and carry fodder feeding system for dairy animals in Pakistan. The dairy farmers have been feeding fresh fodder to their animals for centuries. However during the last decade the fresh fodder supply is significantly hampered because of ever increasing demand of food which consequently has decreased the land under fodder cultivation. Introducing the silage technology to farmers will not only ensure the abundant and consistent supply of quality fodder but will also help improve the land utilization efficiency.

• Target Market: In addition to peri-urban dairy farmers in all major cities, such as Quetta, Karachi, Lahore, Islamabad, Rawalpindi, Peshawar,Sialkot, Gujranwala, Faisalabad and Hyderabad etc., there is an enormous export potential for Middle Eastern countries.

• Employment Generation: The proposed project will provide full time employment to two individuals and part time employment to five individuals. Financial analysis shows the profitability of proposed business within first year of its operation.

CRITICAL FACTORS

The commercial viability of the proposed project depends on the following factors:

•Selection of proper location where green fodder of oats crop is abundantly available during peak production period i.e. 15th February to 15th of March. Likewise, the maize fodder availability is ensured during summer season up to the end of October.

The most critical factor for quality silage production is the proper stage of green fodder, when grains are in milky condition. Do not remove the corn cobs from green fodder because it will reduce the quality.

The silage preparation process must be completed within shortest possible time period (5 – 7) days.

•Proper compaction of chopped green fodder in the silo-pit is very important to avoid any spoilage.

•Once the silo-pit is full of chopped green fodder and compacted, it must be properly covered with plastic sheet to stop any air circulation and create anaerobic conditions. Make sure that central line of the preserved fodder is high enough that rain water may not enter into it after properly covering.

Silage will be ready for sale after 6-8 weeks. Open the pit from one end and dig out the quantity one has to sell same day. Cover the open end with plastic every day.

•Farmer/produceris required to maintain the record of production and management practices for successful marketing and traceability.

•Farmer/producer should have strong market linkages for effective disposal of produce.

INSTALLED AND OPERATIONAL CAPACITY FOR SILAGE PRODUCTION IN SILO-PIT

Thispre-feasibility suggests a silage production operation in two silo-pits measuring 50 ft long 10 ft wide and 7 ft high. The total capacity of these pits will be 105 tons of green fodder. Ideally there will be no loss during preservation process. Hence, the recovery rate of silage will be 100%.

GEOGRAPHICAL POTENTIAL FOR INVESTMENT

The proposed location for establishment of the silo-pits will primarily be near the peri-urban dairy farming areas. Availability of green fodder as raw material for silage preparation be assured from the nearby market.

POTENTIAL TARGET MARKETS

The marketing of silage follows the traditional distribution channel, through middlemen or wholesalers at the silage production site who identifies potential dairy farmers in the peri-urban areas. Some dairy farmers in the nearby areas will be direct buyers of silage from the silo-pit on day to day basis. The key factors in marketing are availability of green fodder, quality of silage and supply demand which will determine the selling price.

PRODUCTION PROCESS FLOW

The overall production cycle for silage in silo-pit comprises of 2-3 months, subject to the environmental temperature. Silage storage capacity of 2 pits will be 105 tons (2625 mounds). Silage will be ready within 6-8 weeks after preservation. Silage from oats fodder may be prepared during 15th February to 10th March, when fodder is in milky seed stage, abundant and cheap. The silage will be ready for sale by 1st of May. The third batch of silage in the same pits from the maize fodder can be prepared from the maize fodder during 15th September to 15th October. The best stage of maize fodder for silage is when grains are milky. Be sure that silage from maize fodder be prepared along with grains.

PROJECT COST AND BENEFIT SUMMARY

A detailed financial model has been developed to analyze the commercial viability of silage production under the Prime Minister’s Small Business Loan Scheme. Various cost and revenue related assumptions, along with results of the analysis, are outlined in this section.

1 1.1 Project Economics

All figures in the financial model have been calculated for silage production in two silo-pits measuring 50 ft length, 10 ft width and 7 ft height. Three different batches of silage will be prepared at different time intervals around the year. The following table shows internal rates of return and payback period.

Table 1 – Project Economics

Description / Details
Internal Rate of Return (IRR) / 60%
Payback Period (Years) / 1.58
Net Present Value (NPV) / 16367107.74
Benefit Cost Ratio (BCR) / 1.20

11.2 Project Financing

Following table provides details of the equity required and variables related to bank loan;

Table 2 – Project Financing

Description / Details
Total Equity (10%) / Rs. 1680000
Bank Loan (90%) / Rs. 1512000
Markup to the Borrower (%age/annum) / 8%
Tenure of the Loan (Years) / 08
Grace Period (Year) / 01

11.3Project Cost

Following requirements have been identified for operations of the the proposed business.

Table 3 – Capital investment for the Project

Capital Investment / Amount (Rs.)
Land (Leased/Rental basis) / 120,000
HumanResourceRequirement / 575,000
Machinery & equipments / 65000
Total Capital Cost / 775000
Initial Working Capital / 900,000
Total Project Cost / 1680000

11.4Space Requirement

Table 4. - Space Requirement

Area Required / Monthly Rent Charges (Rs.) / Yearly Rent (Rs.)
1 Kanal / 10,000 / 120,000

11.5Machinery & equipments

Table 5- List of Machinery & equipments

Description / No / Cost/unit (Rs) / Total price (Rs)
Tractor (on rent) / 1 / 20000 / 2*20000= 40,000
Plastic sheet / 1 / 5000 / 2*5000= 10,000
Chaff cutter machine with 3hp electric motor / 1 / 35,000
Implements and tools / 10,000
Misc. / 15,000
Total / 65,000

11.6Human Resource Requirement

Table 6 - Human Resource Requirement

Description / No / Salary (Rs) / Salary per year (Rs)
Machine operator/laborers / 4 / 350/day/each for 15 days for each batch= 350*4*15=21000 / 2 batch/year
21000*2
42,000
Helper/sale man / 1 / 12000 / 144,000
Security guard / 1 / 10000 / 120,000
Electricity Charges / 120,000
Telephone / 24,000
Rent / 10,000/MONTH / 120,000
Total / 570,000

The table above provides details of human resources required to run a silage production in silo-pit in peri-urban areas. Salaries of all employees are estimated to increase at 10% annually.

11.7Revenue Generation

Product / Unit/mound / Purchase price / Market Sale price
Green fodder / 2500 mounds / 180/mound
2500 x 180
450,000 x 2
900,000 / 360/mand
2500 x 400
1,000,000 x 2
2,000,000

Table 7. Revenue Generation

KEY ASSUMPTIONS

Description
Interest Rate / 8%
Loan Tenure / 8 Years
Grace Period / 1 Years
Debt Equity Ratio / 90:10
Sale Price Growth Rate / 5%
Repair and Maintenance Rate / 5%
Prepaid Rent Period / 1 Year
Increase in Staff Salaries / 5%
Increase in Office Expense / 5%
Increase in Input Price / 5%

13 . CONTACTS – EXPERTS / CONSULTANTS

DR. Aman Ullah Cheema

LRS, NARC, ISLAMABAD

Ph: 051-8443851

Email:

14. ANNEXURE

14.1: Income Statement of the Project

Income Statement
Year / Year / Year / Year / Year / Year / Year / Year / Year / Year
Revenues / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10
2,000,000 / 2,100,000 / 2,205,000 / 2,315,250 / 2,431,013 / 2,552,563 / 2,680,191 / 2,814,201 / 2,954,911 / 3,102,656
Wages (Direct labour) / 42,000 / 44,100 / 46,305 / 48,620 / 51,051 / 53,604 / 56,284 / 59,098 / 62,053 / 65,156
Un choped grass / 900,000 / 945,000 / 992,250 / 1,041,863 / 1,093,956 / 1,148,653 / 1,206,086 / 1,266,390 / 1,329,710 / 1,396,195
Plastic sheet / 10,000 / 10,500 / 11,025 / 11,576 / 12,155 / 12,763 / 13,401 / 14,071 / 14,775 / 15,513
Cost of Goods Sold / 952,000 / 999,600 / 1,049,580 / 1,102,059 / 1,157,162 / 1,215,020 / 1,275,771 / 1,339,560 / 1,406,538 / 1,476,864
Gross Profit / 1,048,000 / 1,100,400 / 1,155,420 / 1,213,191 / 1,273,851 / 1,337,543 / 1,404,420 / 1,474,641 / 1,548,373 / 1,625,792
Salaries / 264,000 / 277,200 / 291,060 / 305,613 / 320,894 / 336,938 / 353,785 / 371,475 / 390,048 / 409,551
Rent / 120,000 / 132,000 / 145,200 / 159,720 / 175,692 / 193,261 / 212,587 / 233,846 / 257,231 / 282,954
Utilities / 144,000 / 158,400 / 174,240 / 191,664 / 210,830 / 231,913 / 255,105 / 280,615 / 308,677 / 339,544
Depreciation / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500
Repair & Maintenance / 5,000 / 5,250 / 5,513 / 5,788 / 6,078 / 6,381 / 6,700 / 7,036 / 7,387 / 7,757
Interest on Loan / 120,960 / 120,960 / 107,404 / 92,763 / 76,951 / 59,874 / 41,431 / 21,512 / - / -
Sub - Total / 713,460 / 753,310 / 782,916 / 815,048 / 849,944 / 887,868 / 929,109 / 973,983 / 1,022,843 / 1,099,305
Operating Income / 334,540 / 347,090 / 372,504 / 398,143 / 423,906 / 449,675 / 475,312 / 500,658 / 525,530 / 526,486
Tax / 22,254 / 25,069 / 29,260 / 33,570 / 39,491 / 46,290 / 53,242 / 60,335 / 67,554 / 71,394
Net Income / 312,286 / 322,021 / 343,243 / 364,573 / 384,416 / 403,385 / 422,070 / 440,323 / 457,977 / 455,092

4.2: Cash Flow Statement of the Project

CASHFLOW STATEMENT
Year / Year / Year / Year / Year / Year / Year / Year / Year the / Year / Year
0 / 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9 / 10
Net Income / 312,286 / 322,021 / 343,243 / 364,573 / 384,416 / 403,385 / 422,070 / 440,323 / 457,977 / 455,092
Depreciation / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500 / 59,500
Net Inventory / (910,000) / (100,100) / (110,110) / (121,121) / (133,233) / (146,556) / (161,212) / (177,333) / (195,067) / (214,573) / 2,360,306
Tax / 22,254 / 25,069 / 29,260 / 33,570 / 39,491 / 46,290 / 53,242 / 60,335 / 67,554 / 71,394
Cash from Operations
Inflow / Outflow (A:G) / (910,000) / 234,440 / 296,480 / 310,883 / 324,410 / 336,850 / 347,963 / 357,478 / 365,091 / 370,457 / 2,946,292
Interest on Loan / 120,960 / 120,960 / 107,404 / 92,763 / 76,951 / 59,874 / 41,431 / 21,512 / - / -
Net Cash from Operations
Inflow / Outflow (I - J) / (910,000) / 113,480 / 175,520 / 203,479 / 231,647 / 259,899 / 288,089 / 316,048 / 343,579 / 370,457 / 2,946,292
Owners Equity / 168,000
Principal Amount / - / 169,453 / 183,010 / 197,651 / 213,463 / 230,540 / 248,983 / 268,901 / - / -
Long Term Loan / 1,512,000
Cash from Financing
Inflow / Outflow (L+M) / 1,680,000 / - / 169,453 / 183,010 / 197,651 / 213,463 / 230,540 / 248,983 / 268,901 / - / -
Cash from Investment
Silo-Pit / (100,000)
Tools and Implements / (10,000)
Land Rent (02 kanal) / (120,000)
Machinery / (35,000)
Net Cash from Investing Activities / (265,000) / - / - / - / - / - / - / - / - / - / -
Net Cash
Inflow / Outflow (K+N+Q) / 505,000 / 113,480 / 344,973 / 386,489 / 429,297 / 473,361 / 518,628 / 565,030 / 612,480 / 370,457 / 2,946,292
Opening Balance / - / 505,000 / 618,480 / 963,453 / 1,349,942 / 1,779,240 / 2,252,601 / 2,771,229 / 3,336,260 / 3,948,740 / 4,319,197
Closing Balance / 505,000 / 618,480 / 963,453 / 1,349,942 / 1,779,240 / 2,252,601 / 2,771,229 / 3,336,260 / 3,948,740 / 4,319,197 / 7,265,490