Broiler Production Systems in Georgia: Costs and Returns Analysis 2011-2012

17 December 2011, at 12:00am

A guide for producers to understand the long-term business potential of the financial commitments before building a new broiler house in Georgia by Dan L. Cunningham and Brian D. Fairchild, Extension Poultry Scientists at the University of Georgia, US. Included in the calculation is the value of the manure.

Georgia is the number one broiler producing state in the United States, growing approximately 15 per cent 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 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 60 years. 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, they do not guarantee success nor do they eliminate all risks. In addition, poultry operations require substantial investments. 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.

2011 Economic Conditions

The general economic downturn experienced for most of the 2008-2011 time period resulted in very difficult business conditions for poultry producers. Poultry growers have experienced significant increases in operating costs primarily due to increased heating fuel and litter costs. Poultry growers reported propane gas prices ranging from a low of $1.40 per gallon to a high of $2.10 per gallon for the 2010-2011 period. Increased energy and feed costs combined with weak consumer spending produced negative returns for most broiler integrators. To combat this difficult business situation, many integrators reduced bird placements and/or bird weights to contract farmers. Reduced bird placements and/or bird weights in turn impacted returns for contract growers. In a few cases, growers lost their contracts due to company cutbacks in production or closing of processing facilities. As a result of cutbacks in production, some companies may return to profitability during the second half of 2012.

The economic conditions experienced during 2008-2011 are not typical of the history of this business. For the vast majority of the past 60 years, contract broiler production in Georgia has been a relatively successful agricultural enterprise providing positive fiscal returns for both integrators and contract growers. The recent unprecedented economic conditions, however, emphasise the fact that poultry contracts are not guarantees of success and that risks are associated with this business. Thus, prospective growers should investigate and consider carefully the risks and rewards of contract poultry production before committing the sizable investment required to participate in this business.

The cash flow estimates provided in this analysis are designed to demonstrate potential cash flow scenarios for facilities constructed and financed with 2011-2012 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 cash flow projections in the report indicate (see link given below), returns to contract poultry producers may be modest while the units are being paid for. In addition, it is typical for contract growers to experience marginal cash flow situations during the later stages of debt retirement as a result of increases in taxable income. However, once the debt on a poultry house is retired, 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 realise that during the productive life of a poultry facility, additional investments to upgrade the houses will be necessary to maintain production efficiencies and competitiveness. These upgrades usually result in improved bird performances, improved energy conservation, reduced labour, 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. The rates for loan repayments and depreciation methods (amortisation 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 30-year projection with a 15-year pay-back period has been used. Thirty years is used to demonstrate a significant upgrade at the end of year 15. Poultry houses typically have productive lives of 30 years or more, so most of the returns are generated during the second half of their existence.

The investments in these houses are financed at 100 per cent of cost, assuming enough equity in land to secure the loan. It is common practice for poultry producers to invest in a substantial upgrade of their facilities at least once, and sometimes more often during the life the operation. The cash flow projections in these examples include a $45,000 upgrade per house in year 15 to demonstrate the effect of this recapitalisation on the cash flow projections. Equipment replacement and repairs for poultry houses occur periodically as needed, but are difficult to project due to variability from grower to grower and differences in facility age. Nevertheless, an annualised charge for these expenses was included in the growers’ cash costs in these examples.

Value of Manure

Broiler operations produce two products of value: meat and manure. The manure removed from poultry operations has significant value in Georgia as an organic fertiliser. Broiler litter contains the nutrients nitrogen (N), phosphorus (P) and potassium(K) at levels of approximately 3.5, 3.0 and 2.5 per cent, respectively.

Traditionally, this material has been applied to pastures and croplands as a replacement for commercial fertiliser. The value of poultry manure to a grower depends on how it is used. For some growers in Georgia, the manure has been traded to a removal business in exchange for clean-out and disposal service. This practice eliminates the necessity for additional farm equipment and labuor associated with manure handling and application that can increase farm investments by $15,000 to $30,000. Many of the growers that do invest in manure handling equipment for their farms also haul and sell this product as an additional income aspect of their operation, while others share the equipment to reduce these costs.

When poultry manure is used as a fertiliser, the value of this product depends on the utilisation of the nutrients N, P and K. Depending on the soil condition and crop grown, P and K may have little or no value as nutrients. Under these situations, only the N value and enhanced soil productivity due to micronutrients is captured by manure application. If, however, the manure is used on cropland deficient in P and K, the value of the application is increased.

A study in 2002 (Litchtenberg et al.) placed the value of poultry litter at zero to $3.90 per ton net of costs when only nitrogen value is derived. When used on cropland utilising N, P and K components, the net value ranged from just under $4.00 to almost $23.00 per ton. More recently, Kissel, et al. (2008) estimated that in addition to the N, P and K value, poultry manure has a liming value of $3.00 per ton. Thus, a reasonable average estimated net value for poultry litter state-wide for most years would be $10.00 to $12.00 per ton. The increased costs of commercial fertiliser in recent years have increased poultry litter values beyond these historic levels. During 2008-2009, poultry litter for crop production in Georgia sold for $40.00 to $60.00 per ton delivered. As a result, the value of poultry litter at the farm has substantially increased for most poultry producers.

The typical broiler house will produce approximately 170 to 200 tons of litter per year depending on clean-out schedules. Thus, the net litter value added to poultry operations for most years may be in the range of $1,700 to $2,400 per house. Due to the variability in clean-out schedules and the utilization and value of poultry litter, the cash flow budgets here take a very conservative position on the value of the poultry litter. For the examples given in the full report, it is assumed that the value of the litter removed from the houses only offsets the costs of removal. As presented above, this will underestimate the value of this product for many growers.

Further Reading

- You can view the full report by clicking here.

December 2011