Introduction

Georgia is the number one broiler producing state in the United States, growing approximately 15 percent of all the broilers produced. Poultry meat production has grown steadily over the years as consumption has increased. As a result, Georgia’s poultry industry has experienced significant new growth and expansion programs to meet consumer demands for more product.

Virtually all of the broilers produced in the United States and Georgia are grown by contract producers. The raising of broilers via contractual arrangements with integrated companies has been a primary component of the poultry meat industry for more than 50 years and has been a contributing factor in the growth and success of this business for both integrators and growers.

Contract production has played a significant role in continuing the tradition of the family owned and operated farm for poultry growers. While poultry contracts offer benefits to growers such as reduced market risk, reduction of production responsibilities, lower operating capital, and relatively predictable incomes, broiler production operations require substantial investments for growers. Because poultry houses represent long term investments (30 years or more), individuals need to understand the long term business potential of these commitments before building.

The cash flow estimates provided in this analysis are designed to demonstrate potential cash flow scenarios for facilities constructed and financed with current (2003/2004) costs and contracts. The values used are considered reasonable representations of a grower’s costs and returns for the situations presented, but they are not intended to be representative of all growers’ situations. Growers may do better or worse than the examples presented here.

Considerations Before Investing

Before investing in a poultry production unit, consider the cash flow potential of that unit. Cash flow refers to the amount of income generated compared to expenses paid from cash accounts over time. Generating a positive cash flow is essential to the long term success of any business including poultry farming. Broiler production may represent either a primary or supplemental income for farmers depending on the number of houses owned. As the attached cash flow projections indicate, returns to contract poultry producers may be modest while the units are being paid for.

Once the debt is retired on a poultry house, a substantial amount of what was returned to the bank as principal and interest payments are returned to the grower as additional income. As a result, many poultry producers in Georgia have started with smaller production units that have grown over time as equity and success in the business have accrued. It is also important to realize that during the productive life of a poultry facility, additional investments in new equipment will be necessary to maintain production efficiencies and competitiveness. These upgrades usually result in improved performances, reduced labor, increases in contracts, or a combination of these factors that offset the capital costs required.

Cash Flow Projections

Cash flow budgets can be set up in many ways. Thus the rates for loan repayments and depreciation methods (amortization schedules) used will influence the amount of interest and taxes paid. These factors, as well as individual grower performances, will influence the cash flow of an enterprise.

Projecting cash flow into the future is complicated by unforeseen circumstances such as changes in income and cash costs that normally occur year to year. Thus, any cash flow projection is only an estimate of what may be reasonably expected to occur given the input factors available at that time. For the cash flow analysis used in these example budgets, a 16-year projection with a 15-year pay-back period has been used. Sixteen years is used to demonstrate the potential for improvement in cash flow after debt retirement. Poultry houses, however, typically have productive lives of 20-30 years or more, so most of the returns are generated during the second half of their existence.

The investments in these houses are fully financed at 100 percent to offset the necessity of calculating an opportunity cost of tying up the grower’s own capital in this investment. The cash flow projections here do not include any estimates for technological upgrades of equipment or housing that might be required during the 15 years projected, as these changes are often accounted for by improvements in performances and increases in contracts.

Equipment replacement for poultry houses occurs periodically as needed. Equipment replacement costs are difficult to project due to variability from grower to grower and differences in ages of facilities. Nevertheless, an annualized charge was included in the grower’s cash costs in these examples to account for this eventuality.

The necessity for additional farm equipment such as a tractor, manure spreader, cruster, etc., depends on the litter management program and the availability of services to provide this activity. For many growers in Georgia, this equipment is not needed as the manure is traded to a removal businesses in exchange for this service. If additional equipment investments are required for manure removal and disposal, these investments can range from $ 15,000 to $30,000, resulting in additional annual costs of $1,500 to $5,000. If the manure can be effectively used as a fertilizer or if a market for litter is available, the value of the manure will generally offset this additional cost.

If not, the additional costs for this equipment will have to be factored into a grower’s budget. As a result of increased environmental concerns and issues related to animal manure applications, it is imperative that growers develop manure management and nutrient management plans before building production houses. Assistance in developing nutrient management plans can be obtained from local Cooperative Extension Service offices.

Example Budgets

The budgets in these examples were designed to demonstrate potential grower returns with three different performance scenarios (i.e., expected, above expectation and below expectation). The estimates provided in these budgets were derived from information provided by samplings of growers, integrators, bankers and contractors in Georgia. Above and below expectation budgets were derived by increasing and decreasing gross income projections each year by 5 percent from the expected values. An analysis of grower returns in Georgia (Bulletin 1228) from 1992-2002 indicates an average annual increase of 2.0 percent in net incomes during this period. Thus, cash flow projections for years beyond year one were derived by increasing net incomes by 2.0 percent annually to account for changes over time. In addition, the following criteria and assumptions were employed:

Annual Net Income. Derived by subtracting annual cash expenses from gross income. Increased at an annual rate of 2 percent to account for changes over time.

Depreciation. Uses the Modified Accelerated Cost Recovery System (MACRS). Depreciation used only to determine taxable income.

Interest. Calculated at 7.0 percent for 15 years. Taxable Income. Net income minus depreciation and mortgage interest.

Taxes. Federal and state income and social security taxes combined at 35 percent.

Net Cash Flow. Net to grower’s land, labor and management (i.e., costs for land, labor and management not included). Obtained by subtracting interests, taxes and debt retirement from net income.

Labor. Assumes use of family labor without the need for hired labor. Some larger operations use hired labor which could add an additional $1,500 to $2,500 to annual operating expenses per house.

Land. Assumes land owned by grower with no associated cash cost. Land requirements for poultry houses are relatively small (e.g., four houses may be placed on as few as 20-30 acres).

Value of Litter. The value of litter at clean out is assumed to at least equal the cost of clean out and is not counted as an income factor for this analysis. However, for some growers, used litter can result in additional net income ranging from $1,000 to $2,000 per house per year.

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Source: University of Georgia - Poultry Science - July 2004