Disposal of spent hens: options evaluation

Abattoir Facility & Added Value Options Review

Options and Scenarios

80. Four options and five scenarios for a new abattoir and/or processing facility have been considered with capital costs estimated as follows (Detailed breakdown in Appendix 2):

Options and Capital Costs

Option 1

Abattoir and processing with carcasses sent for petfood

£7.13m

Option 2

Abattoir with protein and oil extraction capacity targeting the petfood and aviation fuel markets

£12.56m

Option 3

Abattoir with carcasses sent for incineration

£7.5m

Option 4

Abattoir with butchery and further processing targeting processing and ethnic markets and exports

£9.23m

81. An economic evaluation for each option was undertaken using these key assumptions:

• Number of birds processed from Scotland per annum is 4.8m
• Potentially collecting birds from Northern Ireland adds up to a further 6.3m
• Cost of birds – range from 15p to 30p delivered/bird (this includes the cost of purchase, catching, transport and a small residual fee for egg producers)
• Average bird liveweight – 2.25 kgs
• Depreciation of plant & equipment over 7 years
• Depreciation of buildings over 25 years

82. The table below highlights the key elements of profit and loss for each option using different scenarios and the assumptions in the paragraph above. For the 4.8m Scottish volume of spent hens, In every case, the options were loss making (See Scenario 1 below).

83. Increasing the throughput to 8.5m birds per annum enables Option 2 to breakeven, but would require birds from Northern Ireland or elsewhere (see Scenario 2 below):

84. Increasing the throughput to 8.5m birds per annum and reducing the input cost of the livestock hens to 15p/bird enables Options 2 and 4 to become viable, which likely means no payment to producers for the birds (See Scenario 3 below):

85. Increasing the throughput to 11.1m birds per annum (4.8m Scottish birds cost at 25p and 6.3m Northern Irish birds cost at 30p) enables Options 2 and 4 to become more profitable (See Scenario 4 below):

86. Assuming an input of 20% of Northern Ireland’s spent hen slaughter volume (1.26m birds) which may realistically be the maximum available, in addition to the full Scottish volume of spent hens provides no profit in any of the Options. (See Scenario 6 below):

Analysis of options and risk

87. The feasibility evaluations were based on costs and rates gathered during this study. The analysis identifies that achieving a viable spent hen processing plant in Scotland using birds from Scottish flocks alone is not possible for all the options examined. Like many businesses in the food processing sector, scale is frequently a key factor towards achieving profit, particularly in commoditised markets. Scenario 1 demonstrates that none of the processing options are profitable with the assumed Scottish volume of 4.8m birds per annum. Hence, the number of birds required to ensure a financially viable business is critical. Realising a value-add proposition for spent hens, which might enable a smaller scale approach, would be highly challenging.

88. In Scenario 2, testing the impact of scale, the throughput was raised to 8.5 million birds per annum which achieved a breakeven outcome for Option 2 (see Scenario 2). This option focuses on the supply of protein for pet food and oil to the Lighthouse Green Fuels project (Lighthouse Green Fuels Project). In addition to sourcing from Scotland, this option would require spent hens to be obtained from Northern Ireland and/or Northern England. Northern Ireland producers have access to an approved RSPCA spent hen slaughtering facility located at Castleblaney in Ireland, just south of the border. The research identified that 80% of Northern Ireland’s spent hens are dispatched to Castleblaney and it is only the remaining, mostly non-RSPCA approved birds, that are sent to English abattoirs for slaughter. A key risk associated with this scenario is the unknown impact on the purchase cost of hens which sourcing from a wider area may have. Adding a new buyer into the market (at least in the short term) is likely to increase purchase prices and cost, which will have an effect on the overall profitably of the Option 2 in this scenario.

89. Scenario 3 considered that throughput was maintained at 8.5m birds but the purchase price was reduced to 15p/bird (see Table 3). This was considered as one method to fund some of the working capital by egg producers where they supplied the birds at no cost. The 15p/bird charge reflects the costs of catching and transport. This scenario achieved positive returns for Options 2 and 4. A key risk with this scenario is the extent to which egg producers would support the new venture by accepting no returns for spent hens, at least until the business was suitably established.

90. Assuming that attracting birds from the North of England may be challenging given the high levels of competition, Scenarios 4 and 5 were developed where the throughput of hens from both Scotland and Northern Ireland were included to deliver options of 11m and 6m birds for slaughter. Using the considerations, 11m birds would deliver an attractive 23% return on the capital investment required to construct the plant for Option 2 (See Scenario 4). Like the other profitable scenarios for Option 2 this relies on additional throughput but at an even larger scale. It assumes that all the spent hens from Scotland and Northern Ireland would be secured by the plant. Scenario 5, processing 6m birds, produces a loss across all of the production options.

Conclusions

91. The overriding finding from the financial feasibility evaluation is the highly marginal nature of spent hen processing. To make it successful, scale is required and that points towards an approach which procures hens from Scotland, Northern Ireland and the North of England. There are existing businesses in this sector already operating at this scale. It is a highly competitive, significantly invested and marginal sector, and competition for volume is strong. As such, they will be incentivised to disrupt a new player entering the market adding to the risk of establishing a successful operation.

92. An alternative option could be to seek a partner based in Scotland with the capacity and desire to undertake this type of project alongside existing broiler operations. This would likely be a broiler abattoir/processor either as an existing business or potentially, as a new investor. It is likely only feasible as a broiler and spent hen combined processing plant given the volumes required. Currently, no UK service-based abattoirs appear to mix broiler and spent hen processing, but it was a practice which took place in the past, including in Scotland. Dialogue with existing and potential investors could establish if they have interest in this type of processing opportunity.