Cooperative Extension Service
The University of Georgia College of Agricultural and Environmental Sciences
PDF

2005-2006
Broiler Production
Systems in Georgia
Costs and Returns Analysis

 

Dan L. Cunningham, Ph.D., Extension Coordinator
Department of Poultry Science
226 Poultry Science Building, Athens, Georgia 30602-4356
Office: 706/542-1325
E-mail: dcungham@uga.edu

Introduction
Considerations Before Investing
Cash Flow Projections
Example Budgets
Companion Publications
North Georgia Broiler Unit
Northeast Georgia Broiler Unit
Southeast Georgia Broiler Unit
Southwest Georgia Broiler Unit
North Georgia Hatching Egg Unit

Contributors:

Clark Beusse, County Extension Coordinator, Dawson
Mike Dollar, County Extension Coordinator, Evans County
Norman Edwards, County Extension Coordinator, Walker County
Lanier Jordan, County Extension Coordinator, Baker County
Brad Mitchell, County Extension Coordinator, Mitchell County
Steven Moraitakis, County Extension Coordinator, Gordon County
Steven Patrick, County Extension Coordinator, Habersham County
Roger Sinyard, County Extension Coordinator, Marion County
Carl Varnadoe, County Extension Coordinator, Madison County

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 (2005) 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 30-40 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 pro-vided 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 7.5 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 $3,000 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 cleanout 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.

Companion Publications

Cunningham, D.L. 1998. Guidelines for Prospective Contract Broiler Producers. The University of Georgia Cooperative Extension Service, Bulletin #1167, April.

Cunningham, D.L. 2002. Guidelines for Prospective Hatching Egg Producers. The University of Georgia Cooperative Extension Service, Bulletin #1214, May.

Cunningham, D.L. 2003. Cash Flow Estimates for Contract Broiler Production In Georgia: A 20-Year Analysis. The University of Georgia Cooperative Extension Service, Bulletin #1228, March.

North Georgia Broiler Unit
(15 year amortization)

Four house contract broiler production unit with tunnel ventilation, solid walls and cool pads
(40' x 500') (24,000 capacity/house).


Initial Grower Investment:
Housing and Equipment
(includes grading, roads, well and generator)		 $660,000 (8.25/sq ft)
Fixed Costs
(principal + interest @ 7.5%)		 $73,420/year

 

First Year Grower Income:   First Year Grower Cash Expenses:
4 House capacity 96,000 - Litter1 $3,200
Batches/year 5.5 Electricity $11,600
Bird weight (lb) 5.8 Fuel $13,400
Capacity marketed (%) 95.5 Insurance & property taxes $8,000
Contract payment ($/lb) 0.05 Repair and miscellaneous $3,000
Fuel or electrical bonus $5,600 Equipment replacement $4,000
Total Gross Income $151,830 Total $43,200
1The value of litter at cleanout is assumed to offset the cost of removal.


First Year Annual Net Return to Capital, Land, Labor and Management: (gross income - cash expenses) $108,630


First Year Net Cash Flow2:
Above expectations Expected Below expectation
$35,077 $31,547 $26,781
2Determined from cash flow projections on the following pages.


North Georgia Broiler Cash Flow Projections (Expected Performance)
Year Net Inc.
(Gross-Cash Costs)		 Depr.1 Int. Debt Ret.
(Principle)		 Tax Inc.2 Taxes3 Net Cash
Flow4
1 108,630 49,500 48,660 24,759 10,470 3,665 31,547
2 110,803 91,608 46,738 26,681 0 0 37,384
3 113,019 77,814 44,667 28,752 0 0 39,600
4 115,279 66,132 42,435 30,985 6,712 2,349 39,510
5 117,585 57,684 40,029 33,390 19,872 6,955 37,211
6 119,936 57,684 37,437 35,982 24,815 8,685 37,832
7 122,335 57,684 34,644 38,775 30,007 10,502 38,414
8 124,782 57,684 31,634 41,768 35,464 12,412 38,949
9 127,277 57,684 28,390 45,030 41,203 14,421 39,436
10 129,823 57,684 24,894 48,525 47,245 16,536 39,868
11 132,419 28,842 21,127 52,293 82,450 28,858 30,142
12 135,068 0 17,067 56,352 118,001 41,300 20,348
13 137,769 0 12,692 60,727 125,077 43,777 20,573
14 140,524 0 7,978 65,441 132,546 46,391 20,714
15 143,335 0 2,898 70,522 140,437 49,153 20,762
16 146,202 0 0 0 146,202 51,171 95,031
Total 2,024,786 660,000 441,290 660,000 960,501 336,175 587,320
1Depreciation; uses the modified accelerated cost recovery system (MACRS). (Depreciation is a non-cash cost used only for tax purposes.)
2Net income minus depreciation and interest.
3State, federal and social security taxes calculated at 35%.
4Net to growers land, labor and management.


North Georgia Broiler Cash Flow Projections (Above Expectations)
Year Net Inc.
(Gross-Cash Costs)		 Depr.1 Int. Debt Ret. (Principle) Tax Inc.2 Taxes3 Net Cash Flow4
1 114,061 49,500 48,660 24,759 15,901 5,565 35,077
2 116,342 91,608 46,738 26,681 0 0 42,923
3 118,669 77,814 44,667 28,752 0 0 45,250
4 121,042 66,132 42,435 30,985 12,475 4,366 43,256
5 123,463 57,684 40,029 33,390 25,750 9,013 41,032
6 125,933 57,684 37,437 35,982 30,812 10,784 41,730
7 128,451 57,684 34,644 38,775 36,123 12,643 42,389
8 131,020 57,684 31,634 41,786 41,702 14,596 43,004
9 133,641 57,684 28,390 45,030 47,567 16,648 43,572
10 136,313 57,684 24,894 48,525 53,735 18,807 44,087
11 139,040 28,842 21,127 52,293 89,071 31,175 34,445
12 141,821 0 17,067 56,352 124,754 43,664 24,738
13 144,657 0 12,692 60,727 131,965 46,188 25,050
14 147,550 0 7,978 65,441 139,572 48,850 25,281
15 150,501 0 2,898 70,522 147,603 51,661 25,420
16 153,511 0 0 0 153,511 53,729 99,782
Total 2,126,016 660,000 441,290 660,000 1,050,541 367,689 657,036
1Depreciation; uses the modified accelerated cost recovery system (MACRS). (Depreciation is a non-cash cost used only for tax purposes.)
2Net income minus depreciation and interest.
3State, federal and social security taxes calculated at 35%.
4Net to growers land, labor and management.



North Georgia Broiler Cash Flow Projections (Below Expectations)
Year Net Inc.
(Gross - Cash Costs)		 Depr.1 Int. Debt Ret.
(Principle)		 Tax Inc.2 Taxes3 Net Cash
Flow4
1  101,299 49,500 48,660 24,759 3,139 1,099 26,781
2 103,325 91,608 46,738 26,681 0 0 29,906
3 105,391 77,814 44,667 28,752 0 0 31,972
4 107,499 66,132 42,435 30,985 0 0 34,079
5 109,649 57,684 40,029 33,390 11,936 4,178 32,053
6 111,842 57,684 37,437 35,982 16,721 5,852 32,571
7 114,079 57,684 34,644 38,775 21,751 7,613 33,047
8 116,361 57,684 31,634 41,786 27,043 9,465 33,476
9 118,688 57,684 28,390 45,030 32,614 11,415 33,853
10 121,062 57,684 24,894 48,525 38,484 13,469 34,173
11 123,483 28,842 21,217 52,293 73,514 25,730 24,333
12 125,953 0 17,067 56,352 108,886 38,110 14,424
13 128,472 0 12,692 60,727 115,780 40,523 14,530
14 131,041 0 7,978 65,441 123,063 43,072 14,550
15 133,662 0 2,898 70,522 130,764 45,767 14,475
16 136,335 0 0 0 136,335 47,717 88,618
Total 1,888,141 660,000 441,290 660,000 840,029 294,010 492,841
1Depreciation; uses the modified accelerated cost recovery system (MACRS). (Depreciation is a non-cash cost used only for tax purposes.)
2Net income minus depreciation and interest.
3State, federal and social security taxes calculated at 35%.
4Net to growers land, labor and management.


Northeast Georgia Broiler Unit
(15 year amortization)

Four house contract broiler production unit with tunnel ventilation, solid walls and cool pads
(50' x 500') (29,760 capacity/house).



Initial Grower Investment:
Housing and Equipment
(includes grading, roads, well and generator)		 $782,000 (7.82/sq ft)
Fixed Costs
(principal + interest @ 7.5%)		 $88,329/year


First Year Grower Income: - First Year Grower Cash Expenses:
2 House capacity 119,040   Litter1 $9,000
Batches/year 5.7 Electricity $12600
Bird weight (lb) 5.75 Fuel $14,500
Capacity marketed (%) 95.0 Insurance & property taxes $8,600
Contract payment ($/lb) 0.052 Repair & miscellaneous $3,000
Fuel or electrical bonus $5,000 Equipment replacement $4,000
Total Gross Income $197,736 Total $51,700
1The value of litter at cleanout is assumed to offset the cost of removal.


First Year Net Return to Capital, Land, Labor and Management:
(gross income - cash expenses)		 $146,036



First Year Net Cash Flow2:
Above Expectations Expected Below Expectations
$52,727 $47,981 $43,234
2Determined from cash flow projections following pages.


Northeast Georgia Broiler Cash Flow Projections (Expected Performance)
Year Net Inc.
(Gross - Cash Costs)		 Depr.1 Int. Debt Ret.
(Principle)		 Tax Inc.2 Taxes3 Net Cash
Flow4
1  146,036 58,650 59,599 28,731 27,787 9,725 47,981
2 148,957 108,542 57,292 31,038 0 0 60,627
3 151,936 92,198 54,799 33,531 4,939 1,729 61,877
4 154,975 78,356 52,106 36,224 24,513 8,579 58,065
5 158,074 68,347 49,196 39,133 40,531 14,186 55,559
6 161,236 68,347 46,053 42,276 46,836 16,392 56,514
7 164,460 68,347 42,658 45,671 53,455 18,709 57,422
8 167,749 68,347 38,990 49,339 60,412 21,144 58,276
9 171,104 68,347 35,028 53,302 67,729 23,705 59,069
10 174,527 68,347 30,747 57,583 75,433 26,401 59,795
11 178,017 34,172 26,122 62,207 117,723 41,203 48,485
12 181,577 0 21,126 67,203 160,451 56,158 37,090
13 185,209 0 15,729 72,601 169,480 59,318 37,561
14 188,913 0 9,898 78,431 179,015 62,655 37,929
15 192,691 0 3,599 84,730 189,092 66,182 38,180
16 196,545 0 0 0 196,545 68,791 127,754
Total 2,722,007 782,000 542,942 782,000 1,413,942 494,880 902,185
1Depreciation; uses the modified accelerated cost recovery system (MACRS). (Depreciation is a non-cash cost used only for tax purposes.)
2Net income minus depreciation and interest.
3State, federal and social security taxes calculated at 35%.
4Net to growers land, labor and management.


Northeast Georgia Broiler Cash Flow Projections (Above Expectations)
Year Net Inc.
(Gross - Cash Costs)		 Depr.1 Int. Debt Ret.
(Principle)		 Tax Inc.2 Taxes3 Net Cash
Flow4
1 153,338 58,650 59,599 28,731 35,089 12,281 52,727
2 156,405 108,542 57,292 31,038 0 0 68,075
3 159,533 92,198 54,799 33,531 12,536 4,388 66,815
4 162,724 78,356 52,106 36,224 32,262 11,292 63,102
5 165,978 68,347 49,196 39,133 48,435 16,952 60,697
6 169,298 68,347 46,053 42,276 54,898 19,214 61,754
7 172,683 68,347 42,658 45,671 61,678 21,587 62,767
8 176,137 68,347 38,990 49,339 68,800 24,080 63,728
9 179,660 68,347 35,028 53,302 76,285 26,700 64,630
10 183,253 68,347 30,747 57,583 84,159 29,456 65,467
11 186,918 34,172 26,122 62,207 126,624 44,318 54,271
12 190,657 0 21,126 67,203 169,531 59,336 42,992
13 194,470 0 15,729 72,601 178,741 62,559 43,580
14 198,359 0 9,898 78,431 188,461 65,961 44,069
15 202,326 0 3,599 84,730 198,727 69,555 44,443
16 206,373 0 0 0 206,373 72,230 134,142
Total 2,858,111 782,000 542,942 782,000 1,542,598 539,909 993,259
1Depreciation; uses the modified accelerated cost recovery system (MACRS). (Depreciation is a non-cash cost used only for tax purposes.)
2Net income minus depreciation and interest.
3State, federal and social security taxes calculated at 35%.
4Net to growers land, labor and management.

 

Northeast Georgia Broiler Cash Flow Projections (Below Expectations)
Year Net Inc.
(Gross - Cash Costs)		 Depr.1 Int. Debt Ret.
(Principle)		 Tax Inc.2 Taxes3 Net Cash
Flow4
1 138,734 58,650 59,599 28,731 20,845 7,170 43,234
2 141,509 108,542 57,292 31,038 0 0 53,179
3 144,339 92,198 54,799 33,531 0 0 56,009
4 147,226 78,356 52,106 36,224 16,764 5,867 53,028
5 150,170 68,347 49,196 39,133 32,627 11,420 50,422
6 153,174 68,347 46,053 42,276 38,774 13,571 51,274
7 156,237 68,347 42,658 45,671 45,232 15,832 52,077
8 159,362 68,347 38,990 49,339 52,052 18,209 52,824
9 162,549 68,347 35,028 53,302 59,174 20,711 53,508
10 165,800 68,347 30,747 57,583 66,706 23,347 54,123