A method and apparatus is provided for the two stage grinding of paper material with the controlled addition of dry and wet fire retardant chemicals to produce a desirable cellulose insulation material. The paper is first ground into coarse granules which are placed in a storage hopper and systematically fed by an auger into a fine grinder. At the same time that the cellulose material is introduced into the fine grinder, a controlled flow of dry fire retardant chemicals is continuously added and ground with the material. The resultant granular material is then transported by air in an upward direction where a solution of liquid fire retardant chemicals is sprayed in a concurrent direction with the flow so as to wet and saturate the cellulose material producing a fire retardant product. The wetted material, because of its adhering qualities, is directed through a corrugated flexible pipe section to storage. An arrangement is provided for extending and contracting portions of the flexible pipe to prevent the material from collecting and blocking the flow of material. A novel bagging apparatus is provided which allows the insulation material to be fed directly into a horizontal bag and automatically shutting off the flow when the bag is filled. The bag is then automatically lowered into a vertical position for removal. An electrical alarm system is provided in conjunction with a rotary "water wheel" type dry chemical flow meter and optical liquid flow meter, for controlling the operation to maintain the proper ratio of fire retardant chemicals to cellulose material to produce a quality insulation product.