13 The Economics of Dehydration The food manufacturing industry, in general, has always been a highly competitive business but no branch of it is more so than dehydration. Profitability hinges on so many factors, some of which are outside the manufacturer’s control. One of the main hazards in this context is that of climate. Total solids in raw materials are the key to a viable operation, and, if these are low, due to wet growing conditions, the plant throughput is going to be seriously reduced, often with disastrous effects on costs. The evaporative capacity of the dryers, in these circumstances, will be strained to the limit, with perhaps a 20 percent reduction in weight of end-product, after additional labour, fuel and overhead costs have been thrown in to what is inevitably a losing battle. Studies have been made of weather statistics in the UK, over the period from planting to early maturity of potatoes and root vegetables, and total solids appear to be affected by the amount of rainfall and hours of sunshine in this period, ie, from early May to late September. Given low rainfall, and a good record of hours of sunshine in these months, the total solids in these vegetables are usually high and subsequent deterioration of weather conditions in the later part of the year, whilst the crop is still in the ground, does not appear to materially affect the balance of moisture content and solids characteristics. 252 Where a wide variety of vegetables is being handled, great care has to be exercised in dovetailing the cropping programme, so that there is no hiatus at any time of the year, which would create costly 'downtime' for the plant. The calling off of tonnage against contract purchases must also be done at a rate of intake which will give the factory a safe margin of stock level if bad weather interferes with harvesting or lifting of crops. With potatoes and root vegetables in silos, a yard stock to keep the plant running for up to four days is a workable and wise precaution, provided that the silos are equipped to give adequate protection against the weather. Where controlled temperature and humidity storage is available, a much larger buffer stock is possible but the cost of operating this, including weight loss and rot wastage, must be taken into account. Onions for example can lose 15-20 percent in weight, even in ideal conditions. From the factors outside the control of the processor, we can now turn to the absolute essentials, which are controllable, for conducting a viable dehydration business. HOURS OF OPERATION It is essential that the plant be operational 24hr per day, six days per week. Eight, or sometimes twelve, hours of the seventh day are required for plant cleaning and maintenance, and four hours are needed to heat up the plant for the ensuing week. In effect, therefore, dehydration becomes a seven day operation. The mechanical and electrical maintenance at the weekend is vital to the profitability, because downtime, arising from any breakdown, is extremely costly. This could amount, with a medium size plant, to perhaps US$700-1000 per hour, according the level of production at the time. LENGTH OF SEASON Any length of shutdown in the year is a cost factor, which must be carefully considered and budgeted for during the months of actual production. This, again, is an insupportable burden if the period of shutdown is long. Normally, it should be possible to process vegetables for about 10-11 months in the year, limiting the shutdown period to 5-8 weeks. Basic wages and salaries, and all standing charges, will have to be covered, in this period, by a weekly contribution in the costing system whilst the factory is in operation, just as, in the same way, annual and statutory holidays are provided for. A major plant overhaul is always undertaken annually and it is essential to have an ample number of fitters and electricians available for a concerted and sustained effort over this period. 253 RANGE OF PRODUCTS This should always be as wide as the limitations of the plant and premises will allow. Without a broad-based programme, the dehydrator can never hope to produce economically. It is almost impossible to specialise, as it is in some other parts of the food industry. For example, it is not a viable proposition to specialise only in potato dehydration, although the raw material may be available nearly all the year round unless there is diversification into a large volume of potato-based value- added products, snack and impulse foods. In the context of our industry, potato is a low priced product, and equally there is a low profit margin on whatever form the dehydrated potato takes. The large potato processors in America solve this problem by diversification in the format of processing. Usually, they buy the potato crop ‘as lifted’ and grade it in their plants. The largest tubers are sometimes foil wrapped and sold as ’bakers’ through the retail chain stores. These are bought by the American housewife for baking in their jackets. They next grade out a top premium grade potato of medium size for prepacking - again selling to the chain stores. The third grade, perhaps not quite bright enough in external appearance to fetch the prepack premium, is diverted to the frozen French Fries line, or to potato crisp production. Eventually, the culls from the foregoing grades go to the dehydration plant for the manufacture of flakes and granules. The exterior imperfections in the raw material, at this stage, are of little consequence in this process, which has built-in facilities for removing them. By intensive diversification of processes and outlets, therefore, it is possible to specialise with potatoes but, where only dehydration is concerned, such specialisation is impossible for purely economic reasons. A rotation of vegetables is required, therefore, to keep the plant operational for 10-11 months of the year, and it is possible that, in some locations, this range may extend to ten different varieties. It is important, however, in the interests of costs, that the production run on any one variety should be unbroken for at least 3-4 weeks. Broken runs, or production runs terminating midweek, are expensive in the context of lost time in cleaning down and running off dryers before another product can be processed. It is impossible to clean down a complete production line properly in less than eight hours, and if this has to be done midweek, the loss of profitability will be obvious. STAFF DEPLOYMENT Economy in manual operations is essential and, wherever the capital cost of a machine, which displaces hand labour, can be seen to be recoverable within a reasonable time - say one to two seasons - then that machine should be 254 installed, provided the staff have the requisite skills to operate and maintain such machines. Areas in which automation is becoming more and more essential are those of raw vegetable preparation, and dry material sorting and selection. Electronic equipment is rapidly providing the answer to many of these problems, and a realistic capital plant investment policy must be adopted by the dehydrator to ensure he keeps abreast of all this development. BY-PRODUCTS AND THEIR OUTLETS It is inevitable that there will be some quantity of downgraded product and by-products arising from the plant in the course of a season, and it is important to find satisfactory outlets for these at an economic price. Some dried vegetables, which are downgraded for reasons of colour, texture or general substandard appearance, usually find ready acceptance in powder form, as this tends to present a more homogeneous product. A Turbo mill is, therefore, a necessary adjunct to the drying plant, for the purpose of dealing with such material. Reject materials from sorting machines and selection belts usually finds outlets in compounding mills for animal foods. Wet vegetable waste should also be disposed of to the best advantage, and this can be converted to animal food if it can be dried cheaply by any waste heat from the plant. A resourceful plant engineer should be able to solve this problem without any great expense on plant or operating cost. By-products and substandard material must at all times be taken into the initial stock at low cost - any writing down of the value being done immediately quality control has designated the product as ’under- specification’. The carrying forward of such stocks at full standard cost until the end of an accounting period, perhaps arising months later, can create severe financial embarrassment when the ultimate stock evaluation comes to be made. Salvage operations are always expensive, therefore it is important to have ready outlets at hand and to dispose of substandard material as it is discovered. COSTING A comprehensive weekly costing system should be established to arrive at a basic factory cost for each product. The standard cost system is undoubtedly best for the dehydrator, and, on the evaluated factory cost, the selling cost can be calculated, and the ability to maintain the factory standard cost will be a measure of the plant’s efficiency. Any profit or loss against standard is brought forward into a reconciliation account and balances set against the company’s annual financial accounts. 255 The weekly cost analysis usually takes the following form: Raw Materials Weekly usage is calculated by evaluating opening and closing stocks, and cost is calculated by establishing a ’cost average’ each week. That is, each week’s intake at a particular price level, is integrated with the carry-forward stock from the preceding week, costed at that week’s price level. Price fluctuations are, therefore, taken into account immediately, and a true cost is established for each week‘s production. The ’cost average‘ system should be applied to all materials used in production. Additives and Process Chemicals These comprise chemicals which remain in the end-product as a constituent, or chemicals used merely in the treatment of vegetables. Sugar, milk powder and glycerol monostearate would come into the former category, and caustic soda, sulphite and sodium carbonate would be designated as process chemicals in the latter category. Hourly usage is invariably logged in the Process Supervisor’s records, therefore this is a simple costing calculation, which is also checked with opening and closing stocks. Fuel Weekly records should be kept for metered fuels, such as gas, and weights of solid fuels and oil, and usage measured from these. A weekly cost average should be calculated, if there are any price fluctuations on fuel purchases. Wages The total factory wages and salaries are computed from the payroll, and their apportionment to the various products made is either the function of the Cost Accountant or the Works Manager. Overheads An estimated weekly sum should be charged to cover rents, rates, depreciation, office administration and expenses, insurance, quality control and general factory expenses. As the actual accounts for these items are received, any excess or deficiency in the estimated weekly provision is corrected through a reconciliation account. Maintenance An arbitrary estimated charge per kilo weight of finished product is brought into the weekly costing and, again, correction is applied as maintenance accounts are received. It is good policy to charge maintenance at a rate which 256 will accrue an increasing credit balance in the reconciliation account, as the season proceeds, so that at the end of the processing season, an adequate balance has been built up to finance the annual plant overhaul during the shutdown period. Conversely, maintenance may be costed as a fixed percentage of the capital cost of the plant (See Table 13.2) Consumable Stores These items comprise all purchases of materials ancillary to production, such as lubricants, adhesives, paint, cleaning materials, industrial clothing, etc. Again, an allowance related to weight of throughput is made, with reconciliation being made as factual expenditure is known. Water The actual metered quantity is charged to the weekly production. Electricity The cost of power and light is calculated from meter readings, and the apportionment to the various products, or departments, is made as for overheads. Unpacked Cost With the above information, and costs apportioned to the relative products made in the week, an 'unpacked cost' is computed. The main costs are factual, based on known usage and value, and the arbitrary charges per pound of end- product, such as maintenance, overhead, consumables, etc, are corrected continuously in the reconciliation account, as the true costs become known. Packaging The specific packaging materials are charged to each product in its particular cost column, and after this addition has been made, a 'packed' cost, or 'ex factory' cost is calculated. This can now be evaluated against the previously fixed 'standard' cost, to measure the efficiency of the factory's operation. Selling Cost and Transportation Having established the true factory cost and its relation to the standard cost, the operations of selling, promotion and shipping have to be considered. The dehydrator will have to decide whether, in the main, he is going to sell his production in bulk packs to wholesale, catering and manufacturing buyers, or specifically to retail outlets. Sales budgets will vary widely in accordance with this decision, as will promotion budgets and transport costs, and it is, therefore, not possible to elaborate in this chapter on this area of economic practice. 257 Financial Assumptions for Feasibility Studies for New Projects To illustrate these assumptions for an overseas Study, the following data will have to be collated by a team consisting of a food technology consultant, a consultant horticulturalist, a plant and machinery design engineer, an architect with intimate knowledge of building design in the region of operation, and a corporate finance consultant To arrive at a format for the financial projections a hypothetical project is taken as an example, located in, say, Southern Europe. In this case the farming would be on the 'estate' pattern on irrigated land, mainly controlled by the investors in the project. Fig. 13.1 shows the best cropping time for a range of 6 different types of vegetables, and Fig. 13.2 the possible processing times. Realistically the processing period would be limited to about ten months when the factory is on full stream, to take account of annual shutdown, holidays, etc, but this shut-down period would be integrated with the cropping programme at such times when harvested crops (onions and carrots) could be stored over the period of plant overhaul, in controlled temperature conditions. Also the programme would need to be flexible to meet the market conditions at the time of operation. Onions, for example, could be increased in tonnage, and other vegetables decreased. Fig. 13.1, in fact, indicates what vegetables have already been grown in trials and for commercial fresh markets in the region, and is only a pointer to the range available for processing. The Pre-Production period is assumed to be 9-12 months, during which time construction work could be carried out, indents for machinery and other equipment would be progressed, horticultural programmes would be finalised with the growers, and towards the end of the period supervisory staff would be selected and engaged. The plant would be operated at 60 percent capacity for Year 1,80 percent in Year 2 and 100 percent in the third, fourth and fifth years. In the Financial Assumptions, the farm equipment would be financed by the growers, and these costs are quite separate from the factory capital expenditure. All farm costs, however, must be calculated in the Study to arrive at a factory-gate price for the raw material. Fig. 13.2 also indicates that two multi-stage band dryers are envisaged in order that two vegetables may be processed simultaneously at periods where harvesting times overlap. This level of drying capacity would be needed for an annual putative throughput of 30,000 tonnes of raw vegetables in any case. In the Study all financial calculations would be in local currency but, for the purpose of this example, all calculations have been converted to �Sterling. 258 259 E 0 DRYER 1 I DRYER 2 260 (1) Financial Assumptions and Estimates (a) Cost of Raw Materials per tonne (b) Volume of Raw Materials per season (c) Cost of production - raw materials per annum (d) Wages and Salaries - job description, numbers and remuneration. (e) Factory Overheads - Distribution costs, Fuel, Power, Water, administration, insurance, shut-down provision, consumable stores (f) Repairs and Maintenance: based on 5 percent of cost of plant (g) Depreciation: Buildings 5 percent: Machinery 10 percent: Transport 25 (h) Other Related Costs and Contingencies (i) Total cost of Production: Raw Material, Labour, Overheads, Maintenance, Depreciation, Other Costs (j) Sales Pricing Structure, based on current market values. (k) Loan Schedules: Export Credits, Foreign Currency Loans, Local Loans, percent Bank Overdraft, Repayment Schedules. (2) Projected Cash-Flow Table 13.1 shows this with figures in Esterling, based on the assumption that the project is financed with equity at �3m., an Export Credit Loan* of E3m. and bank overdraft of �789,000. These figures are arbitrary and are purely for a hypothetical project which purports to process 30,000 tomes of raw vegetables per annum at full capacity. ‘ECGD Loan against purchase of plant from UK. (3) Projected Profit and Loss Projections Table 13.2 shows the profit and loss balances for the production years one to five. The pre-production expenses are amortised over the five productive years, as is interest. 26 I The table shows a manufacturing loss in years 1 and 2 but indicates a profit in years 3,4 and 5. (4) Projected Balance Sheets Table 13.3 shows that in the 5th Year the Term Loans are paid off and a small overdraft remains. Accumulated profits stand at E944,325. Table 13.1 Projected Cash Flow �000~ Year Pre- Production 1 2 3 4 5 EOOOs 60% 80% 100% 100% 100% Cash Flow Equity 3000 Foreign Loan 3800 Local Loan 789 Net Profit + (441) (164) 367 494 689 Depn + Amortisation 739 738 739 738 683 7589 243 574 1106 1232 1372 Cash Outflow Capital cost of Equipment & Buildings 6194 Vehicles 220 Pre-Op Expenses 300 Working Capital (Stock of Raw Materials & Debtors) 450 Loan Interest during Construction 425 Repayment of Loan 918 918 918 918 917 7589 918 918 918 918 917 Cash Surplus (deficit) (620) (344) 188 314 455 Accumulated Cash (620) (964) (775) (462) (7) 262 m u c 3 s ? 3 Lb .-1 e x .% n E 2 u u & u kp h vo iooowo m io0 0 $2 g 3 8 U% N 3 g m w N 2L Q: g m' N 3 ija Y h g-2 iooowom ggg 8 g 8 t& 8 =v] d. 5% xo ; @. N,*.~O.'O,d. '9 2u% %%ES%ZG sa0 2 g d. m 3 p'= >i $?a. 2 2 .g iooowom moo woo 0 o N g 3 8 m5 uo Nooomoh c-3 q .o h $8 &!kg 3 0 a \D 2 2 Y .y ?I> 3 $8 bE Y .e 355. 5 q 3 3 % EE 2u% QQrn0rn-h 1 mNO 32s % $1 % r;! 2 e,g I "-90. % $1 c'. $. C9.d.iNmc.r I m, Nhl m Li 2.". :.:.g.g.:.-&. I Oh0 '90.9 % 21 z 2 Li w?. h0.99v?Om 658 5 q 2 z p m000m0m 1 \D*o m mo Nooomoh Li 2"- y!pssz $. - \9 d. 3 2% 2- Y g >I +m W.d.iNLnN d.. =E .3 Nooomo h w.d. ri N m N m. N d. ek -E Om N U h u .e ux m mo am. N',d.\O.O.'9d. '9 2 am amoomwi aJug \Dv)momim m %?d 0 N d. N rum hOO0\13Od. 388 8 % k g z $uG mamwmQd. mwo 2 ;Itl + od. h. N m %e. hOOOWO m mi5 .i vo \D N-d. H ri m ri w. mhl i 0 co h Y .3 vo mOOOwO 0 moo 0 R^^ %A sm ri *- moooao m. +ad. %.222%23 wmo d. N 2 Z 8 3 ". sg h Organisation of Project Control Figure 13.3 indicates the chain of command for the complete project incorporating the horticultural management. The latter element is included in this example in view of the involvement of the local directors and shareholders in the estate farming side of the project. Such collaboration is not always feasible with some overseas projects and here the raw material is contracted for with a multiplicity of smaller growers, whose farms are visited throughout the growing and harvesting period by fieldsmen employed by the factory - these fieldsmen being under the supervision of the senior horticulturist of the factory. Estate farming and the participation of the growers with the financing of the processing plant sometimes works very satisfactorily but not always. The intending processor must be the final arbiter of the system of raw material procurement which suits the local situation most effectively. Figure 13.4 shows the Management Organisation Chart where the processing factory is independent of the farming operation and management, and where the vegetables are purchased from several sources on contracts which are entered into seasonally. In this instance the contract conditions and supervision of the crops are supervised by the agronomist, assisted by his fieldsmen - all under the overall control of the factory general manager. Several photographs appear in this chapter illustrating the many functions undertaken by the technical consultant and horticulturalist in evaluating the infra-structure, the cropping potential of new regions, availability of labour and services, before Feasibility Studies can be prepared. These Studies have ranged over four Continents - South America, Western and Eastern Europe, India, The Middle East and Africa - but the illustrations indicate only the very early steps in a vastly complicated exercise - that of collaborating with seed breeders, seed merchants, organising field trials, logging fertiliser, herbicide and pesticide treatment, irrigation trials and harvesting yields. In the course of these exercises, the services of the local Horticultural Institutes and their staff are essential, and usually invaluable - otherwise the project leaders would have to become permanent expatriates for two or three years, as horticultural problems are not solved in one growing cycle. It is only then that attention has to be focused on the viability, or lack of same, which has to be assessed by an equally convoluted process. Some of the illustrations in this chapter would appear to show less than encouraging horticultural prospects, and whether one is looking at State farming, estate farming, or husbandry more closely related to oxen-power, or irrigation methods centuries old by application of an ancient Archimedes screw made by a village blacksmith from oil cans with hand-fashioned blades 264 turned by a small boy who lifts water to the land by dipping the end of the tube into the waters of the Nile or the Ganges, the task of converting all this into a thriving agro-industrial enterprise is not a job for the faint-hearted. It has a success rate about on a par with panning for gold in the out-back but, when it does come off, as it has been known to do, the satisfaction of beating the odds, not only physical but also bureaucratic, is tremendous. It is perhaps one of the few occupations one rarely retires from. After all, where food is concerned, there is never enough time to look after the World’s needs. There will always be millions who never have sufficient, and the task of turning the desert into a granary will always be a challenge. However perhaps we should learn a lesson from the past. It is not always massive machinery which will achieve this, nor the bull-dozing of forests. A politician once had the idea that this was the only way to produce much wanted groundnuts in East Africa. The buI1-dozers and tractors reversed the agricultural ’miracle’ and turned fruitful green land into a desert dust-bowl. A journey across the African continent would have demonstrated to the ’experts’ that in the tropical rain forests of West Africa, from Gambia down to the Cameroons, the peasant farmer in every village in an area covering a million square miles, produced the greater part of the world’s supply of groundnuts by hand cultivation in small clearings out into the tropical rain forest with a machete. The micro-climate and infra-structure needed for the crop was sacrosanct and nurtured by these small farmers, and the joke was on the bureaucracy who was quite sure it could be ’estate farmed’. Today, one has to keep a sense of balance and approach any new horticultural or agricultural project with a knowledge of history and tradition and not be blinded by today’s availability of high technology, and in the developing countries one has to get the blend of old and new just right to achieve success. 265 v, *d v, u -u 2 - - 2 G SN 3 E -+.4 u "3 .- c, 2 "r, ze E2 0 m mco 0 r4 Lor. cnm 0 coo oocoo coo N Na ooom r.0 L" ri acn Nri mieN r.r.rit- om ~.lI m 8 OTt ~'~~1 0' ... E. -.a. 0.ON.cn. 2.8 *. i s. r4 r4 z. 2. :. v %- % E Ez' a +- ... 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Zk gk /;I e- 3.9 5L ~~ g2 L .5! :+ 2 u- Eg 85 3u "2 w 2 f" k ~ gc 2 2 Ur: yo "1 m s .bo '\ 'k h mz 8 gz -6Z:g Q'-c a [!. *a !- Y Y 2" QJczg- m .- a+ & .2 5 fz 42 $5 VI 85 = w - Y m 8 0 z c:- .3 268 Conclusion The author has endeavoured to describe the various processes used in the manufacture of a modest range of dehydrated foods, and to bring the operation through to the factory warehouse. At this point, it is hoped that some enthusiasm has been inculcated to promote and further the spread of convenience foods in world markets, which many, who have pioneered in the industry, firmly believe are there for the seeking. 269