Estimated Returns for Contract Broiler Production in Arkansas, Missouri, and Oklahoma: Historical and Future Perspectives
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1 2005 Poultry Science Association, Inc. Estimated Returns for Contract Broiler Production in Arkansas, Missouri, and Oklahoma: Historical and Future Perspectives H. L. Goodwin, Jr.,*,1,2 B. L. Ahrendsen,*,2 T. L. Barton, and J. H. Denton *Department of Agricultural Economics and Agribusiness, University of Arkansas, 217 Agriculture Building Fayetteville, Arkansas 72701; Department of Poultry Science, and Center of Excellence for Poultry Science, University of Arkansas, POSC O-114 Fayetteville, Arkansas Primary Audience: Contract Poultry Growers, Integrated Broiler Firm Managers and Lending Institutions SUMMARY Nearly all broilers produced in the United States are grown under contract arrangement between independently contracting broiler producers and integrated poultry companies. These contracts may vary in some minor points, but all include general provisions stipulating that the integrators are responsible for chick placement, feed provision, and live hauling of slaughter weight broilers (weights and age to be determined by the integrators) with growers providing the housing and equipment (as specified by the integrators), labor, utilities, and management expertise, with periodic consultation by the integrator service personnel. From time to time, it is desirable to look at this production system and compare current structure, costs, and returns with those from past years. The Poultry Federation (comprised of poultry firms in Arkansas, Missouri, and Oklahoma) Board of Directors commissioned a study in June 1999 to be conducted later that year to quantify changes that occurred in the structure, costs, and returns in the region s broiler industry during the period 1979 to Persons considering either entering the broiler business or seeking to expand existing operations can use these results. Lending institutions can use results in evaluation of loan applications for enterprise establishment or expansion. Broiler producers and integrated poultry companies can also use these results to compare costs and returns with past years and evaluate both the future state of the existing industry and opportunities for expansion. Key words: grower returns, poultry economics, broiler contracts 2005 J. Appl. Poult. Res. 14: DESCRIPTION OF PROBLEM There has been extensive research addressing the pros and cons of the contracting arrangements under which the poultry industry operates. Even though some of the historic research has dealt with grower returns (notably [1]), much of the recent research has focused on specific allocation of input and output price risks and management risk between growers and in- 1 To whom correspondence should be addressed: haroldg@uark.edu. 2 Lead authorship is shared.
2 GOODWIN ET AL.: RETURNS FOR BROILER PRODUCERS 107 tegrators; the treatment has been both theoretical and empirical, albeit with limited actual primary data [2, 3, 4]. The most recent publicly available primary research results are related in the 1999 USDA-Economic Research Service publication entitled Broiler Farms Organization, Management and Performance [5]. This research used data from the 1995 USDA Agricultural Resource Management Survey and compared earnings of broiler operations with other farming enterprises and US households. Nationwide, mean net farm income, an accrual based measure of income, for broiler farms with sales of $50,000 or more for that year were $15,969, down from $25,401 in Broiler farms are defined as commercial production facilities under contract with poultry integrators and sales are defined as payments to growers for total annual live weight production. Growers are paid on a per pound basis, generally at a rate of between $0.035 and 0.045/lb, depending on geographic area, size of bird, and overall grower performance in their production pool. Mean net cash farm income, a cash-based measure of income, for 1995 was estimated to be $32,602. Mean net farm income and mean net cash farm income for the Delta (Arkansas is in this region) for 1995 were $15,265 and $34,716, respectively. The primary differences between net farm income and net cash farm income are that net farm income includes depreciation expense and accrual adjustments in beginning and ending inventories. A paucity of research exists that actually utilizes comprehensive contract grower and integrators complex primary data to assess returns to contract growers in a longitudinal fashion from poultry production operations. An exception to this is the research by Cunningham [6], which used Georgia broiler grower survey data to estimate net returns to land, labor, and management. Thus, a sizable knowledge gap exists in understanding the financial issues confronting contract growers and the resultant integrator responses to these issues over time. MATERIALS AND METHODS This study involved 16 poultry production complexes, comprised of 150 to 200 family farms each, in Arkansas, Missouri, and Oklahoma. Each complex was visited to obtain information on house size, building and equipment cost, house capacity, market weight, livability, flocks per year, contract payment per pound, gross income per house per year, and gross income per square foot per year. This information for 1979, 1989, and 1999 is summarized and presented in Table 1. The 1999 data shown are averages of the 16 complexes surveyed. Information for the 1979 and 1989 data is comprised of 12 and 13 complexes, respectively, as some complexes were yet to be built in 1979 and 1989 and some had changed ownership and were not consistent across all years. A total of 20,090,000 chicks were placed each week in these 16 complexes, an average of 1,255,625 per complex per week. Poultry enterprises have followed the patterns experienced in other sectors of agriculture during the last 20 yr, increasing in both size and capital intensity. For example, a 4-house operation in 1979 was comprised of houses of 15,000-bird capacity; in 1999 the same 4-house operation was comprised of houses of 27,451- bird capacity. Much of this capacity increase is due to the advent of larger tunnel-ventilated houses. This change has enabled growers to continue to expand their operating size with little if any change in labor requirements. Similarly, housing and equipment costs per square foot have increased from $3.40/ft 2 in 1979 to $6.25 in Contract payments to contract growers in the 16 complexes have increased from $0.0320/lb in 1979 to an average of $0.0465/lb in Gross revenue per year, unadjusted for inflation, increased from $10,138 in 1979 to $34,796 in Expressed on the basis of unadjusted gross revenue per square foot, there was an increase from $0.84 in 1979 to $1.62 in Importantly, gross revenue per square foot figures in real terms (adjusted for inflation over the period) and expressed in 1999-dollar equivalents were $1.69 in 1979 and $1.62 in The downturn to $1.48 of adjusted gross revenue per square foot in 1989 is attributable primarily to the inflationary pressures that adversely affected capital-intensive operations, such as broiler production. Although not shown in Table 1, the increased substitution of capital for labor under less inflationary conditions is an important factor in the increased revenue in 1999 compared with The poultry industry has been a leader in in-
3 108 JAPR: Research Report TABLE 1. Average broiler operation characteristics for sample complexes gross revenues House size (linear feet) House size (ft 2 ) 12,000 16,000 21,500 Building and equipment costs ($/ft 2 ) House capacity (n birds) 15,000 20,000 27,451 Live weight (lb/bird) Livability (%) 96.00% 96.00% 96.00% Flocks per year Contract payment ($/lb) Gross revenue ($/house) 10,138 18,780 34,796 Gross revenue per year 1 (real 1999 $/house) 20,320 23,620 34,796 Revenue per year ($/ft 2 ) Revenue per year 1 (real 1999 $/ft 2 ) Gross national product deflator 1979 = 49.89, 1989 = 79.51, 1999 = creased mechanization and labor efficiency. The total labor requirement for a 15,000-bird broiler house in 1979 was 96 h per flock but had been reduced to just 75 h per flock for the 27,451- bird broiler tunnel-ventilated house used in In addition to the efficiency gains derived from technological improvements in housing and ventilation and reduced labor requirements, numerous other changes have either become available or more widely adopted or have more fully reached their potential in increasing efficiency in broiler production. These include continued breed improvement, use of nipple drinkers, improved feed formulation (i.e., pharmaceuticals, vitamins, minerals, and amino acids), and improvements in flock health and lighting programs. A detailed discussion of these improvements and innovations is not possible in the length limitations of this article; sufficient documentation of the results of these changes is available in both industry and academic literature sources. RESULTS AND DISCUSSION Summary information for an average 4- house, tunnel-ventilated broiler unit built in 1999 is shown in Table 2. Four ft broiler houses completely equipped (feeders, waterers, ventilation, lighting, heating, brooders, and so on) costs $525,000 to construct. The houses and equipment are financed at 100% for 15 yr at 9% interest. An unencumbered 75 acres of land (80 acres less 5 acres with family housing) valued at $75,000 is assumed to be offered as collateral in support of the loan. The broiler houses are depreciated over 20 yr, and the original housing equipment is depreciated over 10 yr. Support equipment, which includes a portion of a tractor attributed to the broiler enterprise operation and necessary decaking equipment for between-flock litter removal, is allocated a cost of $35,000. The entire amount for the support equipment is financed for 7 yr at 9% interest and depreciated over 10 yr. Replacement equipment is installed after 10 yr at a cost of $48,000 and is financed for 7 yr at 9% interest and depreciated over 10 yr. The houses and all equipment are assumed to have a 10% salvage value for depreciation purposes. Depreciation is computed using the straight-line method [7]. In this example, 5.03-lb birds are grown with an average density of approximately ft 2 / bird (4 flocks at 0.75 ft 2 /bird and 2 summer flocks at 0.8 ft 2 /bird). On average, 28,105 birds per house per flock are placed with an estimated livability of 96%. In 6 flocks, 814,268 lb of live broilers per house are produced. Future Perspective The Analysis Utilizing the primary data and information of the operation discussed in the foregoing section, projections of economic data for a new broiler operation for a 21-yr period for 2 labor scenarios (hired labor vs. unpaid family labor) are shown in Tables 3 and 4, respectively. Four analyses of the projected economic data are undertaken. One analysis includes estimates of annual gross revenues and expenses so that a grower s annual net farm income may be computed. A second
4 GOODWIN ET AL.: RETURNS FOR BROILER PRODUCERS 109 TABLE 2. Characteristics of a 4-house broiler unit, 1999 Annual Investment/ Depreciation depreciation unit period expense Description Initial investment ($) (yr) ($) Broiler houses ($) 319,200 79, ,364 Equipment ($) 205,800 51, ,522 Support equipment ($) 35,000 35, ,150 Replacement equipment ($) 48,000 12, ,320 Live weight (lb/bird) 5.03 Density (ft 2 /bird) Livability (%) 96 Birds placed/house per flock 28,105 Live pounds/house per year 814,268 Contract payment ($/lb) Labor/house per flock (h) Wage rate ($/h) 7.5 Other cost per house/flock ($) 1,500 Houses (n) 4 1 Four flocks at 0.75 and 2 flocks at 0.8. analysis focuses on estimation of the annual cash flows of the grower. In a third analysis, returns to management and equity capital are estimated to show the economic returns to these specific resources. Finally, the net farm income ratio and term debt coverage ratio are estimated to evaluate the potential efficiency and repayment capacity of the business. Specific formulas for computing these economic measures are contained in footnotes to Tables 3, 4, and 5. The gross revenue figures shown in Tables 3 and 4 were increased by 1.25% each year (as a result of historical increasing per pound contract payments) from the average base payment of $0.0465/lb. This increase of 1.25% per year was slightly under the historical annual average increase for the 16 complexes sampled. Additionally, these revenue figures do not reflect any increase in bird weight or bird density that may stem from improvements in genetics, feeds, pharmaceuticals, or other technology over the ensuing 21 yr. This analysis assumes a constant weight per bird for the 6 flocks per year, and no value is attributed to the litter. Traditionally, about $15 per ton fertilizer value has been attributed to litter. However, recent regulatory and legal developments in the production region for which this analysis was performed have prohibited, in many cases, the land application of litter to pasture and forage acreage, thus, the decision to allow no positive impact on grower revenues attributable to poultry litter. In several watersheds within the area of analysis, litter may still be used in its traditional manner. If the contract poultry producer has a cattle operation, approximately 700 tons of litter (the amount from the 4 poultry houses) with a value of $15.00 per ton spread on pastureland would result in a value of $10,500 per year to be credited to the total farm operation. If the producer does not have cattle, then the litter would be sold and would generate considerably less revenue, in the range of $6 to $8 per ton, for revenues of $4,200 to $5,600 per year. Total expenses include interest, depreciation, labor, property tax, and other production costs. Labor costs increase by an average of 3.9% per year based on the historical increase in labor costs for the period 1990 to 1999 [10, 11]. Property taxes and others costs are not explicitly shown in Tables 3 and 4; however, they are used to estimate total expenses. Property taxes for the broiler houses are computed at rates that are common in the area. Income taxes are omitted from consideration since any assumed rate would be speculative and would depend upon other income that might be generated within the household. Other costs of $1,500 per house per flock include costs for litter, gas, electricity, repairs, and insurance. These costs increase by an average of 2.6% per year based on the historical increase in the cost of farm supplies
5 110 JAPR: Research Report TABLE 3. Returns and cash flows using hired labor Loan Net Opportunity Returns Returns Net Adjusted principal Gross Interest Depreciation Labor Total farm Mgmt. cost of to to cash net cash Year owed revenue 1 expense expense expense 2 expenses 3 income 4 allowance 5 equity 6 mgmt. 7 equity 8 flow 9 flow , ,454 50,400 36,036 13, ,246 10,208 24,000 5,250 4,958 (13,792) 24,559 23, , ,347 48,448 36,036 13, ,485 12,862 24,928 5,618 7,245 (12,065) 25,262 23, , ,264 46,321 36,036 14, ,606 15,658 25,892 6,011 9,647 (10,233) 25,930 23, , ,205 44,002 36,036 15, ,594 18,611 26,892 6,432 12,179 (8,282) 26,564 23, , ,170 41,475 36,036 15, ,433 21,737 27,932 6,882 14,855 (6,195) 27,163 23, , ,159 38,720 36,036 16, ,105 25,054 29,012 7,364 17,690 (3,958) 27,725 23, , ,174 35,717 36,036 16, ,591 28,583 30,134 7,879 20,704 (1,551) 28,251 23, , ,214 32,444 36,036 17, ,869 32,345 31,298 8,431 23,913 1,046 35,694 28, , ,279 29,502 36,036 18, ,542 35,737 32,508 9,021 26,715 3,228 36,144 28, , ,370 26,295 36,036 18, ,015 39,355 33,765 9,653 29,701 5,589 36,555 27, , ,487 27,120 18,684 19, ,769 55,717 35,071 10,329 45,389 20,647 26,854 19, , ,630 22,841 18,684 20, ,277 60,353 36,426 11,052 49,301 23,927 27,210 19, , ,801 18,177 18,684 21, ,470 65,331 37,835 11,826 53,505 27,496 27,523 19, , ,998 13,092 18,684 21, ,315 70,683 39,297 12,654 58,029 31,386 27,792 19, , ,223 7,551 18,684 22, ,776 76,447 40,816 13,540 62,907 35,631 28,014 18, , ,476 1,510 18,684 23,732 99,813 82,663 42,394 14,488 68,175 40,268 93,319 60, , ,684 24, ,246 83,511 44,033 15,502 68,009 39,478 93,445 59, ,066 18,684 25, ,692 84,374 45,736 16,588 67,787 38, ,058 63, ,405 18,684 26, ,007 84,398 47,504 17,749 66,649 36, ,082 61, ,772 18,684 27, ,404 84,368 49,340 18,992 65,377 35, ,052 60, ,170 28,688 91, ,967 51,248 20,321 82,646 51, ,967 58,626 1 Increases at 1.125% per year. 2 Increases at 3.9% per year. 3 Includes property taxes and other expenses in addition to interest, depreciation and labor expenses. Other expenses are $1,500 per broiler house per flock and increase at 2.6% per year. 4 Net farm income equals gross revenues minus total expenses before income taxes. 5 The allowance for the contribution of management (mgmt.) increases at 3.9% per year. 6 Opportunity cost of equity capital is the initial equity of $75,000 times the average 10-yr Treasury bill rate for 1990 to 1999 (7%), compounded annually. 7 Returns to management equals net farm income minus the allowance for unpaid labor and the opportunity cost of equity capital. 8 Return to equity capital equals net farm income minus the allowance for unpaid labor and allowance for unpaid management. 9 Net cash flow equals gross revenues plus off-farm income minus family living expenses, principal payments, interest expense, hired labor expense, property taxes and other expenses. Off-farm income is assumed to equal family living expenses. 10 Net cash flow is deflated by the average percentage of change in the gross national product index for 1990 to 1999 (2.7%).
6 GOODWIN ET AL.: RETURNS FOR BROILER PRODUCERS 111 TABLE 4. Returns and cash flows using unpaid family labor Loan Net Opportunity Returns Returns Net Adjusted principal Gross Interest Depreciation Labor Total farm Mgmt. cost of to to cash net cash Year owed revenue 1 expense expense expense 2 expenses 3 income 4 allowance 5 equity 6 mgmt. 7 equity 8 flow 9 flow , ,454 50,400 36,036 13, ,811 23,643 24,000 5,250 4,958 (13,792) 37,994 36, , ,347 48,448 36,036 13, ,530 26,817 24,928 5,618 7,245 (12,065) 39,216 37, , ,264 46,321 36,036 14, ,112 30,152 25,892 6,011 9,648 (10,233) 40,424 37, , ,205 44,002 36,036 15, ,539 33,665 26,892 6,431 12,179 (8,282) 41,618 37, , ,170 41,475 36,036 15, ,797 37,373 27,932 6,882 14,855 (6,195) 42,799 37, , ,159 38,720 36,036 16, ,864 41,295 29,012 7,363 17,691 (3,958) 43,966 37, , ,174 35,717 36,036 16, ,722 45,452 30,134 7,879 20,704 (1,551) 45,120 37, , ,214 32,444 36,036 17, ,348 49,866 31,298 8,430 23,914 1,046 53,214 42, , ,279 29,502 36,036 18, ,344 53,935 32,508 9,020 26,716 3,228 54,342 42, , ,370 26,295 36,036 18, ,113 58,256 33,765 9,652 29,703 5,589 55,457 42, , ,487 27,120 18,684 19,632 96,137 75,350 35,071 10,328 45,390 20,647 46,486 34, , ,630 22,841 18,684 20,391 92,886 80,745 36,426 11,050 49,303 23,927 47,602 34, , ,801 18,177 18,684 21,180 89,290 86,511 37,835 11,824 53,507 27,496 48,703 34, , ,998 13,092 18,684 21,999 85,316 92,682 39,297 12,652 58,032 31,386 49,790 34, , ,223 7,551 18,684 22,849 80,927 99,296 40,816 13,537 62,910 35,631 50,863 34, , ,476 1,510 18,684 23,732 76, ,395 42,394 14,485 68,178 40, ,052 76, , ,684 24,650 76, ,161 44,033 15,499 68,012 39, ,095 74, ,066 18,684 25,603 77, ,977 45,736 16,584 67,790 38, ,661 79, ,405 18,684 26,593 78, ,990 47,504 17,745 66,653 36, ,674 77, ,772 18,684 27,621 79, ,989 49,340 18,987 65,381 35, ,673 76, ,170 28,688 62, ,655 51,248 20,316 82,651 51, ,655 74,961 1 Increases at 1.125% per year. 2 Increases at 3.9% per year. 3 Includes property taxes and other expenses in addition to interest, depreciation and labor expenses. Other expenses are $1,500 per broiler house per flock and increase at 2.6% per year. 4 Net farm income equals gross revenues minus total expenses before income taxes. 5 The allowance for the contribution of management (mgmt.) increases at 3.9% per year. 6 Opportunity cost of equity capital is the initial equity of $75,000 times the average 10-yr Treasury bill rate for 1990 to 1999 (7%), compounded annually. 7 Returns to management equals net farm income minus the allowance for unpaid labor and the opportunity cost of equity capital. 8 Return to equity capital equals net farm income minus the allowance for unpaid labor and allowance for unpaid management. 9 Net cash flow equals gross revenues plus off-farm income minus family living expenses, principal payments, interest expense, hired labor expense, property taxes and other expenses. Off-farm income is assumed to equal family living expenses. 10 Net cash flow is deflated by the average percentage of change in the gross national product index for 1990 to 1999 (2.7%).
7 112 JAPR: Research Report TABLE 5. Efficiency and repayment capacity Hired labor No hired labor Net farm Term debt Net farm Term debt Year income ratio 1 coverage 2 income ratio coverage NA NA NA 0.59 NA NA 0.58 NA NA 0.68 NA 1 Net farm income ratio equals net farm income divided by gross revenue. 2 Term debt coverage equals net cash flow plus annual principal and interest payments on term debt all divided by annual principal and interest payments on term debt. 3 NA = the ratio is undefined because it requires dividing by zero. and repairs for the period 1990 to 1999, as derived from the USDA-National Agricultural Statistical Service s Agricultural Prices. Specific increases are not assumed for fuel prices separate from the increases indicated for total other costs, as conditions are rapidly changing due to political and economic forces worldwide. Net farm income before income taxes is gross revenue minus depreciation, interest expense, property taxes, other expenses, and hired labor. Net farm income before income taxes is interpreted as the return to the grower for unpaid labor, management, and equity capital [8]. If hired labor is used on the farm operation, net farm income before income taxes starts out at $10,208 and slowly rises through the 10th year, averaging $24,015 per year (Table 3) [12]. A significant jump in net farm income occurs in the 11th year because the depreciation expenses for the original poultry equipment and support equipment are completed in the 10th year. Another significant jump in net farm income occurs in the 21st year. Again, the primary reason for the increase is depreciation. The houses and replacement equipment are fully depreciated in the 20th year. Similar changes in net farm income occur for the broiler farm when unpaid family labor is provided instead of hired labor (Table 4). Net farm income is greater under this scenario, starting at $23,643 for the first year and averaging $40,045 for the first 10 yr. A net cash flow analysis is important to determine if the broiler farm with or without hired labor is financially feasible. Net cash flow is gross revenue plus off-farm income minus family living expenses, principal payments, interest expense, hired labor, property taxes, and other expenses. Both nominal (unadjusted for inflation) and real (adjusted for inflation) cash flows are shown for each scenario. Annual family living expenses are assumed to be offset by offfarm income. Results for the hired labor scenario in Table 3 indicate that net cash flow averages $28,749 for the first 15 yr. The primary changes to net cash flow over this period occur in the eighth year when net cash flow increases because
8 GOODWIN ET AL.: RETURNS FOR BROILER PRODUCERS 113 the loan for the support equipment is paid off and in the 11th year when net cash flow decreases after the loan for replacement equipment is acquired. Net cash flow increases substantially in the 16th year after the house and original equipment debt is retired and again in the 18th year after the loan for replacement equipment is paid. To account for the effects of inflation over time, net cash flow is put in terms of current dollars by discounting projected cash flows by the average percentage change in the gross national product index for 1990 to 1999, an estimate of inflation. All other values in Table 3 are in nominal or unadjusted dollars. A similar net cash flow analysis of this operation with the contract grower providing all labor is shown in Table 4. The contribution of labor by the grower is assumed to be the same as hired labor in Table 3, although there is no cash outflow associated with the labor. The difference in net cash flow reported in Table 4 from that reported in Table 3 is attributable to the saving of hired labor. Since the projected net cash flows in Tables 3 and 4 are positive each year, the broiler farm is financially feasible with or without hired labor under the assumptions of this study. Although net farm incomes are estimated for the broiler farm with and without hired labor, they do not specifically identify the return to management and the return to equity capital; net farm income is the return to the grower for unpaid labor, management, and equity capital. In this analysis a management charge is used to reflect grower efforts in the production process so that this necessary function is not ignored in the return calculations. Additionally, the equity investment of $75,000 (land) assumed earlier is used to compute an opportunity cost of the equity as an allowance for this capital. It is possible, therefore, to calculate return to management and return to equity. Return to management is net farm income minus unpaid labor and the opportunity cost of equity capital. Return to equity is net farm income minus unpaid labor and management [13]. The return to management is $4,958 in the first year and increases over the first 10 yr, averaging $12,468 per year (Table 3). The return to equity is negative for the first 7 yr before turning positive, averaging ($8,011) per year over the first 10 yr. Because the opportunity cost of equity capital is less than the allowance for unpaid management, the return to management is greater than the return to equity. The significant changes in these returns over time are primarily the result of changes in depreciation expenses, as was the case for significant changes in net farm income. The returns to management and the returns to equity capital are identical for the 2 scenarios, with hired labor and with unpaid family labor, presented in Tables 3 and 4. The returns are identical because an allowance for the unpaid labor provided in the second scenario, equal to the amount of hired labor in the first scenario, is deducted from net farm income to adequately account for the contribution of this resource. One additional level of analysis was performed to gain insight regarding the relative efficiency of broiler production and the ability of a grower to service their loan. Table 5 contains the results of this analysis for both scenarios (with and without hired labor). Regarding efficiency, the net farm income ratio in Table 5 is calculated as net farm income before income taxes divided by gross revenue [8]. The net farm income ratio measures how efficiently net farm income is generated from gross revenue. Net farm income ratios for the 2 scenarios are 0.07 and 0.16, 0.23 and 0.34, and 0.32 and 0.44 in yr 1, 10, and 11. The large increase in yr 11 is attributable to the reduction of depreciation expense associated with the initial equipment; a second large increase occurs in yr 21 once assets are fully depreciated. The term debt coverage ratio (a sum of net cash flow and principal and interest payments divided by the sum of principal and interest payments) indicates the ability of the broiler grower to make payments to the lender each year. For example, a term debt coverage ratio of 1.40 indicates that the grower could experience an unexpected cash shortfall of 40% of principal and interest payments, and there would still be enough cash available to meet the payments. Up until 1999, the USDA, Farm Service Agency, had required a minimum term debt coverage ratio of 1.10 for loans receiving USDA guarantees. In 1999, the minimum ratio was lowered to 1.0. The term debt coverage ratio for operations with hired labor ranges from 1.34 to 1.39
9 114 JAPR: Research Report over yr 1 to 7; for operations without hired labor, the ratio ranges from 1.53 to 1.63 for the same period. The ratio increases in yr 8 due to the payoff of the support equipment debt. After yr 15, when the house and original equipment debt is paid off, the ratio exceeds 2 and is relatively less important to lenders at that point unless additional debt is secured outside the assumptions within this report. CONCLUSIONS AND APPLICATIONS 1. The historical perspective this study brings and the simple economic analysis completed for the 2 scenarios gives a relatively accurate picture of the economic returns that can be expected for a contract broiler production operation given the assumptions of the study, which are no attempt has been made to pay for farmland in this example, e.g., the assumption is that sufficient capital is available for collateral to enable lending on the poultry operation. no significant technological changes requiring major grower investment will occur during the period for which the analysis is based. individual results may vary based on the conditions in which each grower operates and based upon their financial situation separate and apart from the poultry operation. inclusion of income taxes for each grower will also alter these results. 2. Results of this analysis indicate that contract broiler production continues to be competitive with other farming operations, especially compared with options available for small family farms and lower volatility of poultry production compared with other traditional forms of small farming also makes it an attractive alternative option. 3. The analyses reflected herein are to be used as general representations of past and future returns from broiler production. Potential producers should visit with broiler integrators and lending institutions and review their own individual farming operation, labor situation, and other factors. 4. Based upon past performance, the existence of green contracts assuring purchase of broilers by the contract integrator and the collateral provided by land and associated assets, most lending institutions view contract broiler production loans favorably as a good investment opportunity for their particular institution. However, lending institutions should recognize that their loan repayment schedules are for up to 15 yr, whereas grower contracts are for less than 1 yr. REFERENCES AND NOTES 1. Gallimore, W. W., and J. G. Vertrees A comparison of returns to poultry growers under contract and operating independently. MRR-814. US Department of Agriculture, Economic Research Service., Washington, DC. 2. Vukina, T., and W. E. Foster Efficiency gains in broiler production through contract parameter fine tuning. Poult. Sci. 75: Tsoulouhas, T., and T. Vukina Regulating broiler contracts: Tournaments versus fixed performance standards. Am. J. Agric. Econ. 83: Knoeber, C. R., and W. N. Thurman Don t count your chickens risk and risk shifting in the broiler industry. Am. J. Agric. Econ. 77: Perry, J., D. Banker, and R. Green. Broiler farms organization, management, and performance. Agriculture Information Bulletin 748. Econ. Res. Service, USDA, Washington, DC. 6. Cunningham, D. L Contract broiler grower returns: A long-term assessment. J. Appl. Poult. Res. 6: There are many potential depreciation methods and depreciation periods. However, the straight-line method and 20 yr for broiler houses and 10 yr for equipment are appropriate for economic returns analysis. Depreciation for an economic analysis is the allocation of the expense of a capital asset over its useful life [8] as is done in the study presented here. Using an accelerated method or shorter depreciation period would understate economic returns in the short run. Depreciation can also be used to expense a capital asset for tax purposes. Generally, depreciation for tax purposes may accelerate the expensing of an asset by shifting more of the expense to the early years than later years (e.g., declining balance method) and by having shorter depreciation periods (e.g., 7 yr for farm machinery and equipment) [9]. The returns computed by using depreciation for tax purposes will be less than the returns presented here for economic analysis. 8. Farm Financial Standards Council Financial Guidelines for Agricultural Producers II: Recommendations of the Farm Financial Standards Council. Dep. Agricultural Economics and Agricultural Business, New Mexico State Univ., Las Cruces, NM. 9. US Department of the Treasury, Internal Revenue Service Farmer s tax guide for use in preparing 2003 returns. Publication 225. IRS, Washington, DC. 10. US Department of Agriculture, National Agricultural Statistical Service Agricultural Prices, 1997 Summary. Pr 1 3 (98). USDA, Washington, DC.
10 GOODWIN ET AL.: RETURNS FOR BROILER PRODUCERS US Department of Agriculture, National Agricultural Statistical Service Agricultural Prices, 2001 Summary. Pr 1 3 (02). USDA, Washington, DC. 12. Alternative asset lives for computing depreciation expense, 15 yr for the broiler houses and 7 yr for all equipment, were also used in the analysis. These shorter asset lives are more appropriate for tax purposes. Net farm income was significantly less using the tax analysis approach, averaging $4,883 for the first 7 yr as opposed to $18,959 over the same period for the economic analysis approach presented herein. Returns to management and returns to equity are also sensitive in the early years to the assumed asset lives for computing depreciation. However, net cash flow is not sensitive to depreciation assumptions. Readers interested in seeing the results from the tax analysis may contact the authors. 13. Lee, W. F., M. D. Boehlje, A. G. Nelson, and W. G. Murray Agricultural finance. 8th ed. Iowa State University Press, Ames, IA.
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