Southern Ag Today

Author: Dennis Brothers

  • New Commercial Poultry Breeder Housing Under Economic Stress

    New Commercial Poultry Breeder Housing Under Economic Stress

    While the overall demand for chicken remains strong, a couple of production trends caught my attention last year that have continued into 2023. It seems there could be a new “normal” in the broiler industry – fewer chicks hatched per broiler-breeder hen placed. Breeder hens produce the fertile eggs that will be hatched to produce the broilers that are eventually slaughtered for chicken products. Figure 1 shows roughly a 6% drop from the long-term average in chicks hatched per hen per month. Multiplied across the industry’s breeder farms, that could result in millions fewer chicks per year. This could be caused by any number of factors. Whatever the cause, the industry needs the chicks to keep up with demand for chicken. To offset this loss, figure 2 shows that about 8% more hens are currently in the field than in the past. One could argue that this is the easy solution to make up the difference. However, that solution eventually requires additional breeder housing. That leads to a difficult economic situation for commercial poultry companies and their contract growers. 

    In my last article for SAT, I discussed the increasing cost of broiler housing and its impact on growers’ ability to build new farms or expand existing farms. Breeder growers are facing similar challenges. A typical breeder farm today consists of four to eight 40’ x 500’ houses with enclosed concrete hallways between the houses and cooled egg storage facilities. In addition to the normal environmental control systems, these farms have specialized equipment like nesting boxes, egg conveyors and split feeding / drinking areas for hens and roosters. The structures are also specialized for the task of keeping large hens and roosters comfortable and producing fertile eggs for 40+ weeks. To contend with labor shortages, growers and integrators have had to adopt labor saving equipment for egg collection and crating. All such specialized housing and equipment comes at a premium. Add the general increase in building materials and labor costs over the last few years and the resulting cost of a new four-house breeder farm in the southeast today is $32.50 per square foot or approximately $2.6 million or more. This does not include the cost of the land itself, extensive land prep, or any cost for ancillary equipment. 

    For example, if we assume a USDA Farm Services Agency guaranteed loan that reduces equity requirements down to 10% and include estimated additional costs and fees, a grower will need to borrow approximately $2,795,000 to get a new four house breeder farm up and running on land they already own. The corresponding annual payment (20-year loan, 8% APR) would be approximately $284,677. At an average annual income of $4.60 per square foot for new breeder farms (ref 2), the annual gross revenue would be $368,000. Annual operating expenses have been shown to cost approximately 25% of gross revenue on new breeder farms, or in this case, $92,000 per year. This leads to a shortfall in net revenue of ($8,677) per year for the grower. Integrators have recognized this is an untenable situation for growers and a barrier to obtaining additional breeder housing. In response, some have offered direct cash incentives that lower the effective cost of the new houses while others include additional pay per dozen eggs for new housing. These direct cash incentives must decrease loan amounts and increase net revenue to meet the typical bank requirement of a 1.30 debt service ratio if new loans are to be made. In the scenario depicted in table 1, a cash incentive of $7.00 per square foot combined with a revenue equal to $4.82 per square foot would result in a positive net return, meet debt service requirements, and allow for new farms to be built. It remains to be seen whether such incentives would support enough new housing to overcome what could become a serious challenge for some companies.  

    Figure 1:

    Figure 2.

    Table 1.

    Four New 40′ x 500′ Breeder HousesNo IncentiveIncentive
    Incentive Payment $7.00 per Square Foot$0 $560,000
    New Farm Loan 20-year, 8% APR, 10% Eq.$2,795,000 $2,215,400
    Interest Paid Over Loan Period $2,898,538 $2,297,468 
    Gross Revenue per Square Foot $4.60 $4.82 
    Annual Gross Revenue $368,000 $385,336 
    Annual Loan Payment ($284,677)($225,643)
    Annual Operating Expenses25% of Gross Revenue($92,000)($92,000)
    Annual Net Return($8,677)$41,923 
    Debt Service Ratio0.971.30

    Ref: 

    1. Livestock Marketing Information Center: www.lmic.info
    2. New Farmer’s Guide to the Commercial Broiler Industry: Farm Types & Estimated Business Returns: www.aces.edu/blog/topics/farming/new-farmers-guide-to-the-commercial-broiler-industry-farm-types-estimated-business-returns/

    Brothers, Dennis. “New Commercial Poultry Breeder Housing Under Economic Stress.” Southern Ag Today 3(40.2). October 3, 2023. Permalink

  • The Cost of Money and Commercial Poultry Growing

    The Cost of Money and Commercial Poultry Growing

    Historically, commercial poultry grower loans have been considered by lending institutions to be among the lowest risk agricultural loans due to the secure nature of the grower’s contract with poultry companies. However, the increasing cost of new facilities in the last few years has quickly outpaced the average farmer’s ability to obtain new loans without financial support. For example, a typical broiler farm consisting of eight houses, 54 feet wide by 550 feet long each (237,600 square feet), can easily cost $22 per square foot or over $5,000,000. This cost does not include a land purchase. A traditional 20% equity requirement would mean approximately one million dollars of mortgageable equity or cash influx would be required to secure such a loan. Thus, most of these loans now go through some government funded, farm-oriented program that helps growers obtain loans. 

    For example, the USDA’s Farm Service Agency loan guarantee program can effectively cut the equity requirement in half. There are fees and qualification guidelines for these loan programs, and not all applicants are accepted. Equity is not the only problem. Interest rates have become a significant obstacle. The FSA restricts the interest rates charged by banks for their guaranteed loans to a maximum of the 5-year constant maturity treasury (CMT) rate plus 5.5%.  Figure 1 illustrates the changes in this max rate since July 2022. According to farm financing institutions, loan rates for most growers in July of 2022 were averaging around 5%. Due to inflation and other uncertainties, as well as the rising CMT, the current average rate for poultry loans is now closer to 8%, with expectations of further increases by the Federal Reserve. A couple or three percentage points doesn’t sound like much, but in the case of these large loans over a typical 15-year term, it can mean an increase of 18-20% in annual payments, or over $100,000 per year.  

    At the same time, like all farmers, poultry growers are dealing with rising utility and labor costs. Higher loan payments combined with higher costs have a significant negative impact on the cash flow of new farms. Many potential new growers are unable to obtain funding at all due to the resulting low debt service margins. To help relieve the cash-flow pressure, many lending institutions have moved to offering 20-year terms on poultry loans. This decreases the annual payment but also increases the total interest paid over the term. If you combine increased interest rates with lengthier loan terms, the result has effectively doubled the overall cost of building a new farm from a year ago, making it extremely difficult for new growers. 

    To assist growers in securing the financing to build new housing, poultry companies are addressing farm cash-flow problems by supplying funding directly to the growers, either in the form of additional pay incentives over the loan period or in the form of up-front money used to pay down the initial loan, decreasing the equity required and the annual loan payment. These incentives have almost doubled over the last year due to the factors discussed (See Fig 2). Some obvious questions arise from the situation. For the industry, “How long can poultry companies continue to offer these increasing cash incentives before profitability begins to suffer?”, and for consumers, “At what point will housing difficulties impact supply, potentially increasing chicken prices?”

    Fig 1: Farm Service Agency Guaranteed Loans Maximum Interest Rate 

    CMT: “Constant Maturity Treasury” rates as defined by the U.S. Treasury https://home.treasury.gov/resource-center/data-chart-center/interest-rates
    Applies to loans with fixed rates of 5 years or more.  Actual lender rates may be less.

    Fig 2: Comparing Cash Incentive Payments and Total Interest Cost for a New 8-house (54’x550’) Farm in 2022 and 2023 Resulting from Changes in Interest Rate and Loan Term

    *The above numbers are estimates for informational purposes only. They are assuming $20/SF cost, average production returns, variable costs, integrator incentives and payment information.  They do not represent any specific farm or situation. 
  • Heating Fuel and Electricity Concerns for Commercial Poultry

    Heating Fuel and Electricity Concerns for Commercial Poultry

    Spring weather in the southeast can indeed be a mixed bag. Environmental control systems are strained as poultry growers in the southeastern United States can easily see temperature swings approaching 60 degrees Fahrenheit over 48 hours. While most modern houses today are capable of successfully handling such temperature swings and keeping the birds inside comfortable, the growers themselves feel the strain in the form of utility costs. Historically, the two largest variable costs contract growers must contend with are heating fuel used to keep birds warm and electricity used to keep birds cool. Luckily, falling propane and natural gas prices accompanied the latest cold snap. A relatively mild winter across the US and Europe facilitated this, leading to decreased usage. The results are increasing stocks of propane in the US starting in November ’22 up to the beginning of March ’23 (Fig 1). Increased supply has led to falling prices for propane. Comparing the previous year’s weak supply numbers to the current strong supply situation could indicate that the upcoming winter may also be met with lower heating fuel prices. This is good news for growers heating chicken houses in the U.S. this spring. This could of course change quickly if the winter of ’23 shapes up to be harsh, or if the crude oil prices again rise to higher levels (as propane is closely tied to crude oil production and price.) Even so, going into next winter with a strong supply of propane is a good sign for poultry growers. Natural gas supplies are also predicted to be higher and long-term prices NG are predicted to be down accordingly. 

    Alternatively, electricity costs are not looking as promising going into the summer when most electricity is used on poultry farms. As poultry houses have become better insulated and better managed to control heating costs, electricity has become the most prevalent cost factor for many growers. Electricity prices saw a significant 10% increase in 2022. While the projection for 2023 is lower at 2.5%, the long-term pricing trend is upward (Fig 2). The causes of this continued increase are varied, from general inflationary forces, increasing demand for electricity met with the increased cost of new generation facilities, to the increased cost for utility companies to implement carbon neutral generation goals. This makes it imperative for growers not only to focus on housing and equipment for heating purposes but also focus on electrical energy usage efficiency. While any money spent on energy efficient upgrades to equipment must be analyzed closely looking at initial cost versus payback over time, electrical efficiency upgrades look to be becoming more and more important going forward. 

    Figure 1.

    https://www.eia.gov/petroleum/weekly/propane.php

    Figure 2.

    https://www.eia.gov/outlooks/steo/images/Fig29.png

    Brothers, Dennis. “Heating Fuel and Electricity Concerns for Commercial Poultry.” Southern Ag Today 3(13.2). March 28, 2023. Permalink

  • Fuel Price Volatility a Growing Concern for Commercial Poultry Growers

    Fuel Price Volatility a Growing Concern for Commercial Poultry Growers

    Even as we are in the middle of the heat of summer, contract poultry growers should be concerned about fuel prices going into this winter. Propane prices have remained at a high level through the spring and into the summer. Looking ahead, evaluating the world market demand for energy and current US inventories suggests that prices could increase drastically. According to an analysis by Propane Resources LLC, a leading US propane marketing company, growers should expect a very volatile six to nine months in propane prices. Much of this will be driven by a very active European market with much instability being caused by the Ukrainian conflict, which is stifling natural gas trading. To help fill that void, sellers of liquid natural gas that would normally supply Asia are rerouting that LNG to a European market. That LNG will likely be replaced in Asia by propane. 

    As supply and demand for propane becomes an even more global market, a look at the current and projected US propane inventory for 2022-23 does not give one a good feeling for the upcoming winter’s prices, or even into next spring. The current peak projected inventory for the US comes in at about 3.25 billion gals, and drops off from there, staying at or below the historical monthly minimum inventory over the last five years. This simply means that the supply of propane does not look to be ample for the next several months. For poultry growers, this means the time to secure future pricing is now. Waiting around for a mid-summer price drop will likely mean you will be paying more, not less, for your propane this winter. 

    Brothers, Dennis. “Fuel Price Volatility a Growing Concern for Commercial Poultry Growers“. Southern Ag Today 2(35.2). August 23, 2022. Permalink

  • Net Farm Income Varies Widely in Commercial Broiler Production

    Commercial broiler chicken production is a staple of the farming community in the southeastern states, so much so that the area is often referred to as the “broiler belt.” Contract broiler growers have benefitted from the business arrangements between large poultry integrators, lending institutions and themselves for many decades. However, over the last decade or so, the investment cost of housing and the cost of utilities supplied by the growers has risen greatly, resulting in rapidly decreasing grower net incomes. Given the nature of most poultry contracts, growers only have a limited opportunity to positively affect revenues. Most profit improvement opportunities lie in lowering input costs, either by improving efficiency or simply by cutting back on inputs like heating fuel or electricity. However, choosing the latter has the potential to negatively affect the revenue side through bird performance losses, as well as negatively affect the competitive contract pay rate. As houses age, they typically become less efficient, requiring major house maintenance and equipment replacement or upgrade, adding to the cost of operation. The variable cost for a poultry farm is made up mostly of utility costs. On new farms, variable cost can be as low as 20% of revenue, while older farms can see as high as 40% or more. Therefore, a contract grower could be faced with shortages on the revenue side caused by lowered bird performance possibly linked to housing deficiencies, coupled with increased input costs stemming from the same deficiencies – all resulting in a fast drop in net farm income.

    By surveying southeastern poultry financing institutions for averages across farms, we see what seems like a tight range of revenue per square foot of broiler grow out space per year. However, when you apply these numbers to the thousands of square feet on a typical broiler farm, then apply known ranges for variable costs, the resulting spread in net incomes can be significant.

    Estimated Broiler Farm Income, 4-40’x500’ Houses

    Broiler Farm income Estimate 4-40’x500Square Feet “Old/Less Efficient”“New/More Efficient”
    80,000
    Gross Revenue per SF Range$2.75$3.25
    Gross Revenue$220,000.00$260,000.00
    Variable Expenses (High 35%, Low 25%)$(77,000.00)$(65,000.00)
    Income Before Debt Service$143,000.00$195,000.00
    Debt Service Assignement (50%)$(110,000.00)$(130,000.00)
    Net Farm Income$33,000.00$65,000.00
    Net Income per SF$0.79$1.55

    Sometimes growers face unforeseen risks from market changes and other outside forces, like the recent HPAI outbreaks, and COVID19 before that. Instances where fewer birds are placed or when out times increase between flocks negatively affect revenue. Some contracts have provisions that help mitigate these risks for the grower; however, some contracts have no such provisions and growers can suffer greatly. Poultry companies absorb much of the normal risks from changing markets and volatile feed prices. However, for the individual grower, a small change in bird density or placement schedule, for example, can have great impact on their individual farm operation which typically operates on a much tighter margin with little working capital to buffer the impact. Current proposed changes to the GIPSA (Grain Inspection, Packers and Stockyards Administration) regulations may offer some mitigation of these and other areas of risk, as well as provide for greater financial disclosures related to the tournament system. Growers should carefully read the proposal and offer comments at:  

    https://www.federalregister.gov/documents/2022/06/08/2022-11997/transparency-in-poultry-grower-contracting-and-tournaments

    Brothers, Dennis, and Paul Georinger. “Net Farm Income Varies Widely in Commercial Broiler Production.” Southern Ag Today 2(28.2). July 5, 2022. Permalink