Southern Ag Today

Author: Dennis Brothers

  • Humanely Processed Chicken May Bring a Premium Price

    Humanely Processed Chicken May Bring a Premium Price

    In 2023, food scientists from Auburn University’s Poultry Science Department conducted a survey to ascertain the perception of poultry processing, specifically stunning processes, among American chicken consumers (“Consumer Perception Survey of Animal Welfare in Broiler Stunning.”, Linda Barahona; Sungeun Cho, Ph.D.) The full survey data are currently being evaluated, but some preliminary findings are especially intriguing on the economic front. 

    The following two survey questions were of specific economic interest: A. “Humanely processed (chicken) are animal derived products from animals that have been treated ethically. Are you willing to pay more for humanely processed(chicken)?” – to which respondents could answer Yes, No or Maybe. The next question related to the previous by asking: B. “If the answer to the previous question was ‘Yes’ or ‘Maybe’, how much more are you willing to pay?” Respondents had six choices for B: Less than 10%, 10-50%, 51-100%, 101-200%, 201-300% and Greater than 300%.

    Of the 986 respondents, 699 of them (71%) answered Yes (358) or Maybe (341). Of those 699 Yes/Maybe’s, almost 85% were in the first two categories and willing to pay at least 10% more, with half of those willing to go up to 50% more in price for humanely processed chicken. To put the choice ranges in perspective, at the time of this writing, the average regular pack of boneless/skinless breast in the Southeast U.S. was $3.21 (USDA National Retail Report – Chicken, May 17, 2024.) Using the upper end of the ranges above, the respective increased prices someone might be willing to pay chicken would be: $3.50 (<10%), $4.81 (10-50%), $6.42 (51-100%), $9.63 (101-200%), $12.84 (201-300%), or $14.45 (>300%, estimated at 350% increase). Applying these prices to the results would suggest only 15% of those willing to pay more would accept more than an additional $1.60 ($4.81 compared to $3.21) per package of humanely processedchicken breasts. 

    While this survey seems to suggest that consumers are indeed willing to pay for chicken that was processed in a perceived more humane fashion, several questions remain. The above prices in dollars were not shared in the survey, those are extrapolations of this author. Further work is planned to evaluate consumer choices with products visually before them with the dollar prices clearly marked, and with one package clearly labeled and understood as “Humanely Processed”. Would the breaking point remain at 50% price increase, or would consumers make different choices with more information? Some of the current survey data suggests increased knowledge of poultry production in general leads to willingness to pay more. Would a clearer understanding of a specific “humane process” in question also impact willingness to pay? All of these are questions being considered for further expanded study.

    The results of this work will be important for poultry companies as they consider implementing processes that might be considered more humane, like controlled atmospheric stunning, but can be costly to implement and have increased management requirements. If consumers are willing to pay enough, it might be possible for poultry companies to work with their wholesale and retail customers, like grocery and fast-food businesses, to pass the increased cost of production directly to end consumers. 

    Brothers, Dennis. “Building Equity.” Southern Ag Today 4(23.2). June 4, 2024. Permalink

  • New Poultry Contracting Regulation’s Potential Effects on Broiler Growers

    New Poultry Contracting Regulation’s Potential Effects on Broiler Growers

    The USDA’s Transparency in Poultry Grower Contracting and Tournaments ruling became effective on February 12, 2024. This ruling modifies the Packers and Stockyard Act by adding several additional requirements to be met by “Live Poultry Dealers,” or what most contract growers know as integrators or poultry companies. The rule requires integrators to provide two disclosure documents: The “Live Poultry Dealer Disclosure Document” and the “Tournament Specific Input Disclosure.” A fact sheet covering the rule and its requirements can be found here: https://www.ams.usda.gov/sites/default/files/media/PoultryGrowerFactSheet.pdf

    The USDA also has a webinar that goes into further detail about the rule:  https://www.youtube.com/watch?v=ndz_gw4dpfM   In this webinar, USDA states that they expect implementation to evolve for each company as they make changes to comply, and they will work with companies to assist in compliance. 

    One of the requirements of interest is for integrators to guarantee an absolute minimum number of flocks per year and a minimum number of birds placed, or pounds of birds produced, per year on the contract grower’s farm. The results of this part of the ruling could be both positive and negative for growers. 

    On one side there is the contract broiler grower who has invested a large amount of capital to build a farm. A new broiler farm consisting of four 54’ x 500’ barns can cost $2 million or more to build and get ready for birds. The grower then must cover the utility and labor cost of growing the birds, both of which are steadily increasing. With interest rates above 7% currently, a grower would face over $400,000 in annual costs for his loan and expenses. This makes any form of income guarantee important to growers, as well as lenders. Before the new ruling, the best information available was company-provided estimates for grower income based on averages over time. The new ruling requires companies to guarantee a minimum number of birds per flock and flocks per year but not flock payments or final gross revenue. Under typical competitive pay programs, final flock payments are affected by bird growth, which is affected by on-farm management and cannot be guaranteed. Thus, the final flock payment to a specific farm could still vary significantly from company averages and is unknown until the end of the flock. This kind of income risk can make farm budgeting difficult and can drive growers to a defensive cost-saving posture as their only predictable form of income protection. Such cost-saving management decisions can negatively impact the birds’ performance and decrease the income potential for the grower and increase cost of production for the company. In such cases, a guarantee of income could be beneficial if it were sufficient to cover all or most known cash flow needs. Some companies had begun implementing modified pay programs with some income guarantees before this ruling came out. 

    On the company side, the placement guarantee rule leaves out the biological variability of producing broilers. There is an old saying, “don’t count your chicks before they hatch.” Poultry companies must plan months ahead and “count the chicks” before the eggs are laid. Sometimes, these expectations are not met for uncontrollable biological reasons, and there just aren’t enough chicks to go around. There is no language in the ruling that takes this into consideration. 

    There is also no language that addresses problems that can and do occur at the farm and company level that could interrupt timely placement and affect a farm’s number of flocks placed per year – whether that be planned, like plant maintenance or holidays, or unavoidable, like an HPAI outbreak. Sometimes, individual farms must perform maintenance or repair damage that would delay flock placement for several days or longer on that farm. Sometimes, integrators may need to respond to market downturns with placement changes. Such situations would typically only affect a percentage of a company’s broiler growers and only for a short time as well, though longer impacts have been known to occur in times of severe market struggles, like what happened with COVID-19. If the timing of any of these situations were right, they may keep an affected farm from getting the stated minimum number of flocks in one year.  

    These real-world situations may result in companies not contractually guaranteeing what they normally may expect growers to receive, nor what they desire to process through the plant, but instead guaranteeing significantly less to avoid running afoul of the rule. This makes obvious sense and protects the company, but creates additional problems for the grower, especially when it comes to securing financing for new facilities. There is a significant possibility that financial institutions would only be able to calculate income potential generated from the guaranteed minimums. Such a decreased income could hinder growers from obtaining loans. 

    Another important requirement is that companies must provide average grower revenue numbers per square foot by housing type, low to high by quintile, and across time. These could be used as a basis of income for financial determinations. It could be argued that, except for house type and quintile breakdown, this is the same as the overall average gross returns that integrators have been providing in pro forma documents before the ruling. The biggest difference is that this would give potential growers a snapshot of what pay could be, both high and low, and how it can vary rather than a single-point average. The problem is that under typical competitive pay programs now, grower income is subject to change for every flock. Therefore, a farm could and likely will fall within each of the quintiles at some point in time. Therefore, if a grower was wanting to estimate revenue based on the least risk, he would be forced to only consider the lowest quintile pay as his basis for a decision. This conservative evaluation may project an artificially negative outlook on starting a poultry farm both for growers and financial institutions.  

    Brothers, Dennis. “New Poultry Contracting Regulation’s Potential Effects on Broiler Growers.” Southern Ag Today 4(19.3). May 8, 2024. Permalink

  • Incentives Help Solar Battle Electricity Cost Increases on Commercial Poultry Farms

    Incentives Help Solar Battle Electricity Cost Increases on Commercial Poultry Farms

    As commercial poultry growers have improved housing insulation and tightened up old leaky houses, heating efficiency has improved, and fuel costs have declined. However, as overall bird size has increased across the U.S., keeping larger birds properly ventilated and cool with exhaust fans has driven electricity costs up. The short-term forecast for electricity may be positive, but the overall trend is increasing prices. Small scale solar has also increased across the country and is one of the ways poultry growers have explored to lower their power bill by offsetting utility grid power usage. Currently there are significant federal incentive programs that make solar on poultry farms more attractive. Some solar components have decreased in price as well. However, as with many things, buyers should do their research. 

    Current solar incentives have the potential to pay for a large percentage of a solar project. The most impactful incentive is the USDA’s current Rural Energy for America Program, commonly known as a REAP grant. Currently, the REAP program offers up to 50% of the installation cost of a qualifying project to be covered by the grant. It is important to understand that these grants are competitive, and the funding is limited. They are also not funded up-front but are reimbursement grants. Go to https://www.rd.usda.gov/programs-services/energy-programs/rural-energy-america-program-renewable-energy-systems-energy-efficiency-improvement-guaranteed-loans for more information. The REAP grant is by far the most available opportunity for poultry growers to obtain assistance for their solar project. It is advised that a grower obtain the services of an experienced grant writer or technical service provider (TSP) to help complete the grant application. Oftentimes a solar installation company will have secured the services of a grant writer or have someone skilled to do so on staff. These services usually carry a fee that is often not charged unless a grant is secured.

    Next to consider is the Federal Income Tax Credit (FITC) available for qualifying solar energy projects. Currently the FITC is set for 30% of the installation cost taken off owed taxes. The tax liability can be taken forward 22 years and look back 3 years. There are additional discounts added if certain system criteria are met. There is an additional 10% tax credit applied based on the use of qualifying U.S. made materials. If the system is being installed in a historically “low income” area, an additional 10% credit is applied. The problem for many poultry growers is that they typically do not have high tax liability until later in the farm’s life after depreciation is used up. Then this usually coincides with the need for equipment replacement and heavy maintenance requirements, which often require refinancing or additional loans. This is one reason the FITC incentive portion of the solar option may be more fitting for farms that have paid off their houses and are expecting to incur increasing tax liabilities. However, there is now an opportunity for growers to sell the unused tax credits at a reduced cash value as part of the Clean Energy Tax Credit program passed under The Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169, 136 Stat. 1818 (2022)).

    The final thing to discuss here, but the most important to consider with the solar option, is what kind of solar deal a grower has with their current utility company. If you have anything less than one to one net metering, then it is most likely that a system that offsets less than 100% of your total power usage will be best suited to a poultry farm. Due to the irregular usage patterns of poultry houses, large systems have the potential to put a lot of power back into the grid for low prices buy-back to the grower. In most situations examined where there is something less than full net metering, poultry farms optimally achieve 60% or less power offset, depending on the cost of the electricity and the price given to the grower for excess power. Therefore, growers should not think of the incentives as a way to offset more power by installing larger systems but use the incentives to pay off an optimized system sooner rather than later. 

  • Holiday Baking Gets a Boost

    Holiday Baking Gets a Boost

    Many baking recipes call for eggs. Americans love to bake, especially during the holidays. This seasonal demand typically causes a short but often sharp uptick in table egg prices around this time of year, as seen in figure 1. Egg markets also typically experience a short price spike in early Spring corresponding with the Easter holiday. These price spikes are mostly demand driven but can certainly respond to supply pressure as well. We saw this distinctly around this time of year in 2022 when the egg inventory reached a historic low as Highly Pathogenic Avian Influenza (HPAI) decimated the layer populations in the egg producing states, losing more than 43 million laying-hens and producing almost 30% fewer eggs. Concurrently, Americans were entering holiday demand. High demand with low supply almost always produces increasing prices. Prices reached as high as $5.30+ per dozen during this time. 

    A quick study of figure 2 shows that the current egg inventory (red bars) has rebounded strongly and is higher than both 2020 and 2021. Conversely, it is easy to see how the inventory shortage we suffered in 2022 contributed to the aforementioned high prices. When hen numbers rebounded, and HPAI impact subsided, egg prices went from the historic highs of 2022 to historic lows of below $0.90 per dozen after Easter 2023 and have stayed relatively low up until the current typical holiday increase began. Looking at the inventories currently on hand, consumers should reasonably expect egg prices to stay within “normal” ranges for the season and likely drop quickly back to the recent lows – all assuming HPAI does not cause the great loss of hens we saw last season. 

    Unfortunately, HPAI is resurging again in commercial and backyard flocks, with 47 U.S. states reporting impacts and 24 states having confirmed infections in the last month. So far, the massive laying-hen losses of 2022 have not occurred. Only 5,108,800 commercial laying hens have been impacted in 2023 at the time of this writing. However, harsh weather has yet to spur on the major migration of wildfowl, HPAI’s primary vector for spreading the virus. It is yet to be seen if increased bio-security measures and ever improving quarantine procedures can keep the worst impacts at bay. But so far, holiday baking season looks to be in good shape for eggs!

    Figure 1.

    Figure 2.

    Brothers, Dennis. “Holiday Baking Gets a Boost.” Southern Ag Today 3(50.2). December 12, 2023. Permalink

    Photo by Lukas: https://www.pexels.com/photo/eggs-in-tray-on-brown-surface-518538/

  • Comparing Liquified Propane to Natural Gas for Heating Fuel Cost Management in Poultry

    Comparing Liquified Propane to Natural Gas for Heating Fuel Cost Management in Poultry

    As winter approaches the broiler belt, it brings with it increased heating fuel bills for poultry growers. Most modern poultry houses in the southeast use liquified propane (LP) or natural gas (NG) to keep birds warm during the winter months, as well as during brood phases year-round. In many areas of the southeast, growers can choose one fuel over the other. However, this is a long-term choice requiring equipment conversions and plumbing changes. The cost of heating their poultry houses is usually a primary driver of this choice. LP and NG prices have proven to be volatile at times. Historically, LP price lags but roughly follows crude oil price changes, as it is a by-product of crude oil production. NG prices also have a crude oil production component but react more to international events and trading. The development of domestic gas fracking has made it more available and advanced NG as a competitor to LP in the U.S. However, access to NG pipelines is a limiting factor for many poultry producers. Also, NG customers generally do not have the ability to lower costs via pre-purchase agreements, volume purchases, or other negotiated price strategies that LP users have. Natural gas users simply pay the provider’s price at the time of billing. LP users must monitor fuel stocks and schedule deliveries to maintain adequate supplies at the farm. NG users do not have this worry as they always have pipeline access to gas. Hence, there is also no storage cost to consider when using NG. Farm trials have shown that, if NG is readily available, and prices are at their normal comparative levels, it is generally less costly to heat a poultry house with NG. But with recent NG price volatility, this could vary. 

    When comparing the costs of these two fuels, it is important to compare them on an equal basis in terms of heat energy output per unit. For this, British Thermal Units, or btu’s per unit is used. (One btu is roughly equivalent to the heat of a single matchstick flame.) LP is traded and sold to growers by the liquefied gallon and contains approximately 91,452 btu’s per gallon, with slight variations in actual product delivered. NG is traded and reported in one thousand cubic feet (MCF) units, which equals one million btu’s. It is often sold to retail customers by the “therm” or CCF (one hundred cubic feet), which is 100,000 btu’s of energy. For a quick comparison, you can take the LP price, multiply that by 1.093 and get the rough equivalent price of NG on a per btu basis. For example, if NG is priced at $1.17/CCF or $11.70/MCF (current trend price in Fig 1a), LP would need to be priced at approximately $1.07 per gallon to be equal in cost per btu. LP has not been at that low of a price in the southeast in recent history. Conversely, $1.20/gallon LP (trend forecast price in Fig 2b) is roughly equal to $1.31/CCF natural gas. Recent history has shown that NG prices are trending below that level, but from the spring of 2022 to the spring of 2023, prices were well above the trend, with commercial rates hitting a high of $1.45/CCF in September ‘23. LP prices at that time were approximately $1.52/gal ($1.66/CCF equivalent). These were the national averages; some users may have paid higher local rates for either fuel. Some local providers have varying rates for farms versus residential or commercial for LP or NG. Although NG has generally stayed on the less expensive side of this relationship, it may not always be the case for a specific farm or specific providers. 

    When looking at these variations, it is important to note that LP prices tend to react more to locally occurring events like weather and the short-term impacts of those events on supply than NG. However, the overall U.S. supply of propane does affect the market prices nationwide, as seen in figures 2a and 2b below. Luckily for poultry growers using LP, the current U.S. supply is strong and suggests lower winter prices are possible this year. NG is widely traded internationally, and prices are more reactive to international events like the war in Ukraine or Chinese economic strength and purchasing of the commodity. Even so, NG prices are forecast to remain soft for the coming winter as U.S. production looks strong and growing (fig 1b). Overall, with propane stocks high and natural gas production strong, U.S. poultry growers may be getting a welcome relief this winter from the high fuel costs of recent years, no matter which fuel source they choose. 

    NOTE: Any poultry grower considering making a switch from one heating fuel source to another needs to consider all costs, both short and long term, like equipment changes, plumbing upgrades, and pricing flexibility. Click HERE  for detailed information on NG conversion in poultry houses.

    Fig. 1a & b: Natural gas prices have been volatile recently in response to international events and trading. However, long-term forecasts are lower than the high prices of 2022. U.S. production looks to be strong and increasing over time.

    Brothers, Dennis. “Comparing Liquified Propane to Natural Gas for Heating Fuel Cost Management in Poultry.” Southern Ag Today 3(48.3). November 29, 2023. Permalink