Qeuuw, 1957 Financing tho Production and Marketing oi Texas Broilers TEXAS AGRICULTURAL EXPERIMENT STATION ‘ R. D. LEWIS. DIRECTOR, COLLEGE STATION. TEXAS “ ducers return for their labor and capital. . indicated less savings and higher costs to the grower, but there were less physical and price” SUMMARY A A study was made during 1955-56 0n the needs, sources and terms of credit used J production and. their effect on the production, marketing and returns of the grower. Most of mation was obtained directly from broiler producers and commercial feed dealers in the Ce; zales and Waco producing areas of Texas. 1. ‘ In addition to a good demand for broilers and increasing efficiency in prodliction, the (g structure for broiler production has been a primary reason for the recent rapid growth of industry in Texas. I a The amount of investment and working capital needed in broiler production is relati as compared with most other farm enterprises. At present prices, a capital investment of approximately $4,500 is required to ‘cons equip a 6,000-bird-capacity broiler house, or about 75 cents per square foot. For each capacity house, a producer will need operating capital by marketing time of approximatelyf 60 cents per bird. ‘ r; Investment capital is obtained principally from individuals and lumber companies, w 3‘ cally all operating capital is supplied by feed dealers. Producers usually give real estate s a their broiler-house cost and the birds as security for their production costs. Investment ca _ p generally draw 6 percent interest, are payable in installments and mature within 5 years. '_ capital, principally in the form of chicks andlfeed, is paid for in the markup of the dealer and’ extent by financing charges. Settlement on operating loans is made in accordance with the] particular financing plan when the birds are sold. . - Broiler producers shift from one financing plan to another in meeting their prod’; penses. Producers tend to shift their risk of loss to the dealers by operating under one of t‘, or guaranteed income plans during low price periods for broilers. A ' ' A producer’s cost of financing under the open-account plan averages about 1 cent per , and additional 1 cent added for a no-loss plan. Under the other plans of financing, a grower’s v charged with at least as high a price for the chicks as under the no-loss plan. Under an] plans, feeds are charged to growers’ accounts at no discount in price. Dealers charge more *7 their margins on chicks and feed in proportion to the amount or risk involved and in guarant ‘I No significant differences were found in the production efficiency of the open-account‘, producers considered in this study. In either case, however, the producer assumed all the risk provided the same services, including marketing, to their open-account and cash customers they financed under heavier risk to themselves. Substantial savings were made by producers who paid cash for their feed and chicks; basis of each 1,000 birds produced, they saved, on an average, $24 in feed cost and $13 in c“; over the open-account producers. On the basis of each pound produced, cash producers saved 1i per pound, excluding hired labor and overhead costs. Any of the other financing plans usedby them to assume. Net return to cash growers as. compared with credit growers was considerably higher. N ,_ justing for price differences, the cash growers received a net return of $30 per 1,000 birds” than the open-account credit growers. A producer, in deciding between operating on a cash - -' any of the credit plans, should consider the higher return assured on a cash basis as compared, open-account plan. i‘ COVER PICTURE Broilers ready for market. Picture courtesy of Texas Farm Products Company, Nacogdoches. MMERCIAL BROILER PRODUCTION IN TEXAS has i increased rapidly during the past 10 years. exas produced 12 million broilers in 1946 and arly 80 million in 1955, more than 7 percent of e U. S. total production, Table 1. A further crease occurred in 1956. , This increase in broiler production has pro- 'ded farmers with profitable employment and vorably affected the commercial feed industry, ick hatcheries and processing plants. The owth of the broiler enterprise increased the comes of most farmers and others engaging it. Feed manufacturers and dealers played an portant role-in the recent development of the dustry by providing most of the required pro- uction and market financing. While adequate ‘ d liberal credit, principally on the part of feed ealers, has been a major factor in the expansion f Texas broiler production, an increasing market emand and important technological advances "production also contributed. OBJECTIVES Objectives of this study were: 1. To examine the financial requirements of he production and marketing of Texas broilers. 2. To ascertain the extent to which producers re financed, the sources, cost and terms of the redit used, and the effect of financing on their roduction and marketing practices. 3. To compare the costs of production and ‘arketing by producers using credit arrange- ents with those operating on a cash basis to xplain the effects of paying cash on the growers’ eturns. s 4. To weigh the advantages and disadvantages f a dealer credit plan of financing and a cash lan of operation. 5. To determine the extent to which lenders xercise control over the production and market- ng of the birds they finance and to what extent he producer shares in the production and market- ng decisions. NUMBER OF BROILERS PRODUCED IN TEXAS, 1946-55 Y Broilers, Percent of s ca‘ thousands g U. S. total a 1946 12,474 4.53 ‘ 1947 10.603 3.59 1948 14,208 3.99 1949 25,290 5.04 1950 33,383 5.53 ' 1951 50,408 6.26 1952 60,994 » 6.88 1953 65,264 6.82 1954 71,790 6.85 1955 79,687 v7.39 Financing the Production and Marketing of Texas Broilers HARLEY BEBOUT, Assistant Professor Department of Agricultural Economics and Sociology METHODS OF STUDY Grower questionnaires were obtained from 41 cash producers in the Center, Gonzales and Waco areas on 84 broods of birds produced in 1955 and the first 5 months of 1956. These questionnaires reflect individual items of cost and total cost of production on a‘ cash basis. Cost-returns rec- ords also were obtained in the same areas on 45 open-account credit broods to facilitate valid comparisons of financing costs. Twenty-five feed dealers in the three areas were interviewed regarding their financing ar- rangements with producers. Records of customer cost of production were obtained, including financing charges made on credit customer ac- counts, discounts on chicks, feed and supplies to cash growers, marketing and other services to their producers. FINANCING BROILER GROWING Financing is a significant aspect of the broiler-growing industry 1n Texas. ‘More than 90 percent of the growers use credit to cover their CONTENTS Summary ________________________________________________________________ __ 2 Introduction ____________________________________________________________ __ 3 Objectives .............................................................. __ 3 Methods of Study ................. _____________________________ __ 3 Financing Broiler Growing ________________________________ __ 3 Capital Requirements __________________________________ __ 4 Sources and Terms of Investment Capital 4 Sources and Terms of Operating Capital.-.. 4 Financing Plans for Operations ________________________ __ 5 Open Account _________________________________________________ __ 5 Guaranteed No Loss ____________________________________ __ 5 ‘Flat Fee __________________________________________________________ __ 5 Labor Contract _________________ __§ __________________________ __ 5 Feed Conversion ____________________________________________ __ 5 Broiler Marketing _________________________________________________ __ 6 Marketing Decisions ____________________________________ __ 6 Integration in Selling _________________________ _; _______ __ 5 Age and Weight of Birds at Sale ______________ __ 6 Transportation a ______________________________________________ __ 5 Cost of Handling __________________________________________ __ 6 Price Determination ____________________________________ __ 6 Culling and Grading ____________________________________ __ 7 - Outlets ____________________________________________________________ 7 Effects of Financing __________________________________________ __ 7 Open-account and Cash Growers ______________ __ 7 Cost per Pound ____________________________________________ __ 3 Prices Received ______________________________________________ __ 3 Returns to Growers ____________________________________ __ 3 production expenses and most of the new growers require credit in acquiring needed facilities. The amount 0f investment and working capital needed in broiler production. is relatively high as com- pared with most other farm enterprises. Capital Requirements This survey showed that the approximate in- vestment capital needed for a modern broiler plant, exclusive of land, was about $4,500 for a 6,000-bird-capacity house, or about 75 cents per square foot of floor space. A full-time operator would need at least three such houses to utilize fully his time, which would represent an invest- ment of $13,500. Growers who entered the broiler business several years ago had facility cost as low as 25 cents per bird. Smaller houses and lack of automatic equipment accounted, in large part, for the lower costs. a A While these capital outlays represent the re- quirements for a full-time producer, actually the greater part of the production is carried on by part-time producers with much less capital in- vestment. In addition to investment in facilities for growing broilers, the producer must have operat- ing capital for the purchase of chicks, feed, supplies, medicines, litter and utilities and hired labor if any is used. For each 6,000-capacity house, the average producer in 1955-56 needed by marketing time approximately $3,600 operat- ing capital, or 60 cents to produce each 3-pound broiler. The greater part of this capital would not be needed until the latter, part of the production period when feed requirements are greatest. A full-time operator producing 18,000 3-pound birds for market would need, on this basis, $10,800 operating capital. Sources and Terms of Investment Capital High building and equipment costs make it necessary for most producers entering the busi- ness to borrow the long-term investment capital. Most of the original broiler growers in Texas provided their own capital to buy land and to build and equip broiler houses. With the proved Figure 1. Modern broiler house. Picture, courtesy of Texas Farm Products Company, Nacogdoches. soundness of the industry, individuals and . agencies now are providing adequate and lit credit for house construction and equipment. Of the 4-1 cash producers covered in this? vey, 75 percent had provided their own f for house and equipment expenditures. producers had been in business an average years. f Generally speaking, a qualified farmer ing to go into the broiler producing bus‘, and with sufficient equity in his farm can at reasonable cost, the long-term capital n; to construct and equip his broiler houses. growers interviewed in this study owned farms, which average 157 acres. Most of. borrowed capital for broiler-growing faciliti provided by individuals or lumber dealers. A‘ commercial banks and some feed dealers sup y‘ a part of the needed finance. The Federal f ing Administration finances a small percenta The borrower owning his land, usually alr, improved, ordinarily gives his real estate‘ the newly built and equipped broiler houseun a mechanics or materials man’s lien as secu for the loan. The loans usually mature withi years and most carry a 6 percent annual ra, interest. Repayment generally is made in eq quarterly installments plus the interest forth months’ period. Since most borrowers prod four broods per year, their repayment sched“ in iliisually coincides with broiler sales. Sources and Terms of“? Operating Capital Broiler producers must have funds of th i‘ own, or borrow and pay cash, or obtain their p duction items from a supplier on some kind» credit arrangement. Less than 10 percent of the Texas broiler pg. ducers provide their own funds for producti y expenses or borrow the funds and pay cash fi production items. Eight percent of the. c i producers included in this study borrowed fu, to pay cash; 92 percent used their own funds carry on a cash operation. The few that borro t , t did so from commercial banks on general securif at regular bank rates and terms. Some produce" though they could pay cash, preferred to use a dealer-credit arrangement to avoid the risk volved. Most dealer-lenders were willing to sorb this risk. a Over 90 percent of the-Texas broiler pro- cers are financed for most of their production penses by dealers supplying feed and other roduction items to the growers. A few large ixed-feed manufacturers, supplying principally lk feed direct to growers, provide considerable edit. Most of the dealers, however, are local iddlemen handling sacked feed for manufac- rers or buying the ingredients for mixing and lling direct to local growers, most of whom they so finance. ’ t Hatcherymen and processors seldom finance roiler growing in Texas as they do in some other ates. Commercial banks do little direct financ- g of the grower although indirectly-they provide ost of the operating capital through loans to alers who in turn finance the growers. p Feed dealers provide most of the operating pital to broiler producers in Texas, in the form ‘f the cost of chicks, feed and other production ems, because it assures them of a market for ese production items in which they have a argin of profit. Dealers, eager to expand sales, ave been willing to provide complete financing, ull production and marketing services. As ompetition has increased in the industry, they lso have assumed more and more of the pro- uction and price risk. FINANCING PLANS FOR OPERATIONS A number of operating capital financing plans a ave been devised by dealersfor growers. Under 1 ll financing plans, the dealer exercises consider- ble control over the production and marketing f the birds, and producers generally welcome and A a ely on help from their dealers. Such decisions s the number to buy and when to start the chicks,» ype of broiler to grow, type of feed to use and , hen to sell generally are joint decisions. Dis- greements between a grower and his dealer are rare. Growers generally, including cash growers, epend heavily on dealer services other than a urely financing services. Open Account The open-account plan of financing is offered 1 by-most feed dealers and is the only credit plan offered by many. Under the open-account plan, the grower buys his chicks, feed, medicine and other supplies from his dealer on open account and pays the account A when the broilers are marketed. oThe dealer ordinarily takes a éhattel mortgage on the birds. If the returns from the sale of broilers do not cover the amount of the credit extended, the producer is liable and pays the difference from his next sale of broilers. The financing charge made under the open-account plan averages about 1 cent per chick started with no discount on feed. Guaranteed No Loss The guaranteed-no-loss plan of financing has been widely used in Texas during the past few years especially during periods of low prices. This arrangement is similar to the open-ac- count plan except that should the returns from the sale of broilers be less than the credit ex- tended, the dealer absorbs the loss and closes the account. The producer still would receive the full difference between the amount of his account and the proceeds of the sale when the proceeds were greater than the amount of his account. The cost to the grower for the no-loss-guarantee is generally 1 cent per chick in addition to the usual 1 cent per chick for open-account financing. i Flat Fee ~~ The dealer under the flat-fee plan furnishes the feed, chicks, medicine and other production items; the producer furnishes the house, equip- ment and labor. The dealer retains title to the birds and pays the producer a flat fee per bird or a flat fee per pound of live weight sold. This plan assures the grower of some return for the use of his facilities and for his labor, with the dealer absorbing any losses which occur. Labor Contract Under the labor-contract arrangement the grower is paid so much per 1,000 birds started for the use of his broiler-growing facilities and for his labor during the production period. The dealer furnishes all production items and assumes all risks of loss should the proceeds from broilers sold not equal the charges against the grower’s account. The grower receives his fixed guaran- teed wages from the dealer, which usually are paid to him weekly. Feed Conversion The feed-conversion financing plan is offered by some dealers. Under this plan, the dealer furnishes the chicks, feed and medicine and the grower the houses, labor and other supplies. The dealer retains title to the broilers which are grown under contract with the producer. The grower is Figure 2. Producers arrange their credit with dealers. 5 paid a fixed amount per pound according. to a schedule based on the feed-conversion ratio =ob- tained by‘ the grower. If the grower does a good managerial job, he receives a higher return with his goodfeed conversion; his returns are 10W for a poor feed conversion. _ Broiler growers have shown a definite tendency to shift from a cash or open-account plan of financing to one of the no-loss-,__limited- loss or guaranteed-income plans during ~a period of low or prospective low price periods for broilers. During price improvement periods, growers have a tendency to ‘assume more risk with prospects of higher returns. Growers selecting the flat-fee, labor-contract or feed-conversion plans actually are not con- cerned about the cost of items supplied by the dealer unless ‘poor management by them‘ runs the cost too high and the dealer drops them as customers. - ‘ BROILER MARKETING Practically all live broilers in Texas are sold directly from farm to processor by the feed dealers who have supplied the needed production items and most of the necessary financing. This is the procedure even for the small proportion of the producers who have paid cash for their chicks, feed and other supplies. Marketing Decisions The dealer and the grower, having a close working relationship during . the production period, determine jointly when the birds are ready for. market and mutually agree on the time of selling. Since the dealer’s serviceman frequently visits the producer and sees the birds, he is in an excellent position to know when the birds are ready for market. When the selling time has been decided, the dealer contacts processor buyers for bids on the producers’ birds, or the birds being grown for the dealer, makes the sale to the highest bidder and a_time for delivery to the processor is fixed. Pro- cessors need regular supplies of live birds and by purchasing from dealers rather than directly from growers, they generally are assured of the number and quality of birds needed for their continuous operations. Integration in Selling There" is linuchless integration in the selling of broilers or in the performance of the other marketing functions in Texas than in some of the other importantbroiler-producing states. ~ While practically all growers depend on the local feed-dealer or supplier to sell their birds, there ‘is no formal” or legal agreement referring specifically to selling, unless the grower is on a fixed or guaranteed-return basis from the dealer. A grower could sell his own birds just so he paid his account or fulfilled his dealer agreement from the proceeds of the sale. This is rarely the case 6 because the dealer is in better position to . selling. . » Most dealers sell to more than one w" depending on location and where he canf u", for himself or his grower. Usually a deal =4; a complete brood or at least a ‘full house o to one buyer. m " There is little integration of owners i; control among chick hatcheries, feed‘ " facturers, local dealers and processors in ; as compared with other states. , Age and‘ Weight of Birds at Sale i‘ Broilers usually are sold at about 6Q; days of age when, under good managemen weigh 3 pounds. The 84 cash broods cov" this survey ranged from 54 to 81 days a The average age at which the birds were ni_f was 66 days and the average weight was a" mately 3 pounds. i" Transportation A few processors transport the bird purchase and some independent trucke _, broilers for resale to processors. Most b‘ however, are delivered to the processing’, by the grower’s feed dealer in his own “.5 trucks. The dealer usually sends his tru 5 a catching crew to the grower’s broiler b9 in ' with the help of the grower, the birds areQ A loaded and moved to the processing plantu; essing ‘plants are located in all the co producing areas to which most broilersa q The birds maybe weighed‘ in transit ‘on i‘ or other scales agreed on, or may be weigh‘ the processor’s scales. ' ., Cost of Handling _ The cost of handling broilers from the, to the processor consists of the cost of usfj catching crew and transportation. Ca _ crew expense averages about $3 per 1,000.1 Transportation cost ranges from one-ha cent per pound, depending on the distance f processing plant. y Catching-crew charges are paid by pr who operate on a cash or open-account,‘ under all other "financing arrangemen ; expense is paid by the dealer. The pr‘ usually pays the dealer for delivering the‘. to his plant. Dealers owning the birds " grower contracts and growers retaining“_t the birds receive the same market price. Price Determination Texas. dealers use the Federal-Staten‘; Broiler Market News report and quotatio‘ vice from Austin in agreeing on prices i received from processors. The price pa', broilers usually is the quoted price, which: farm price in the three areas for which" 1" are quoted. The prices quoted are dete from processor reports to the Market News; vice in Austin. ' a». " ulling and Grading Broilers generally are culled by producers uring the production period and by market time ttle additional culling is necessary. The catchers enerally take out any undergrade birds that ould not be acceptable to~ a processor. Better hicks, feed, new medicines and better manage- ent have raised the general level of quality in cent years, resulting in a greater percentage f birds of higher grade going to market. utlets Over 95 percent of Texas-produced broilers re sold to processing plants Within the State. >0 ost of the broilers are bought by local processing lants which are located within the major broiler- roducing areas of the State. Ready-to-cook broilers, ice packed or quick rozen, are moved from local processing plants it wholesale houses or direct to retail stores in he larger consumer areas, mainly within Texas. EFFECTS OF FINANCING p Most broiler growers in Texas by early 1956 ‘ ere operating under one of the guaranteed yinancing plans previously described. Competi- ion has forced most dealers to offer growers one "pr more of the various financing plans, whichare commonly referred to as “deals.” While there are some differences in the pro- uction cost of growers operating under the various financing plans, they all necessarily in- crease the cost of production over a, cash 0perator’s cost. This is caused by the necessity of making a financing charge which reflects the risk assumed by the dealer. Under any of the guaranteed or fixed-income plans, the producer does not actually pay any of the higher costs. The dealer, is compensated in the form of higher a chick and feed prices charged to the grower, and i in some instances by the addition of extra financ- ing charges. Open-account and Cash Growers ' In this analysis of cash and open-account growers, special attention was given to how much a grower saved by paying cash for his chicks, feeds and other necessary production items as compared with open-account producers. Costs of credit under the other plans of financing are based on these cash costs to the producer or to the dealer’s cash cost. Through any of the fi- nancing plans offered, dealers must eventually recover their costs of doing business plus the cost of items- supplied their growers. Under com- petitive conditions. dealers will charge out the chicks and feed tofwtheir growers at prices suf- ficiently above cash prices to cover the added risk under the various financing arrangements with the growers. In addition to cost-returns records obtained < from producers on 84 cash broods, cost-returns a records also were obtained from producers and Figure 3. Loading broilers for market. dealers on 45 open-account broods. The dif- ferences in production costs and returns of cash producers and open-account credit producers are shown in Table 2. The average size brood under the open-account plan of financing averages about the same as for the cash producers in this random sample of pro- ducers. The average age of birds at time of sale, the average weight per bird and the feed-conversion records were practically the same for the open- account and cash producers. The mortality rate was slightly less for the cash producers. This indicates scarcely any difference in the production efficiency of open-account and cash producers. Dealers provided the same services for their cash growers as for growers they financed. The comparison between feed and chick costs showed significant differences. The open-account producers paid an average of $5.19 per hundred- weight for their feed while cash producers paid an average of $4.88 per hundredweight, a saving of 31 cents per hundredweight for the cash pro- ducers. The open-account producers paid an average of 16.39 cents per chick started, whereas the cash producers paid 15.10 cents per chick started, a saving for the cash producers of 1.29 cents per chick. Using these data as a basis, a cash producer could save approximately $24 in feed cost and $13 in chick cost, a total of $37 per 1,000 3-pound Figure 4. Trucks are weighed empty and after load- ing broilers. . 7 birds produced, by paying cash for his feed and chicks. This is a substantial saving for producers in position t0 operate 0n a cash basis. Cost per Pound On the basis of cost per pound, little difference was found in the cost of production items other than on chicks and feed. The cost for the open- account producers was slightly higher for fuel, electricity, litter, medicine, vaccine and insur- ance; the cost of hired labor was a little more for the cash ‘producers. Supply costs were negligible on a per-pound basis for both types of producers and usually could not be charged ac- curately to single lots of birds. These calculations did not include interest on the grower’s invest- ment, depreciation, taxes or other overhead costs of the grower. The cost per pound of the open-account lots ranged from 19.64 to 21.89 cents per pound. The TABLE 2. COMPARISON OF GROWERS OPERATING UNDER THE OPEN-ACCOUNT FINANCE PLAN AND GROWERS OPERATING ON A CASH BASIS, 1955-56 Item aggflgt ‘ Cash Birds in sample 254,950 454,300 No. of broods 45 84 Av. size brood (without extras) 5,665 5,408 Av. no. birds sold 5,447 5,246 Mortality, percent’ 5.84 4.99 Av. age at sale, days 67.25 66.08 Av. wt. per bird, pounds 2.9936 2.9988 Feed conversion, pounds 2.6295 2.6345 Feed cost per cwt., dollars 5.19 4.88 Chick cost, cents 16.39 15.10 Av. price per pound, cents 22.94 23.36 Costs per pound, cents Chick 5.4750 5.0353 Feed 13.6471 12.8563 Fuel and electricity ' .3464 .2848 Litter .2230 .2082 Medicine and vaccine .5198 .4610 Insurance .0512 .0510 Hired labor .1601 .5138 Total cost per pound, cents, exclusive of overhead costs 20.4226 19.4104 Cost per pound, cents, exclusive of hired labor and overhead cost 20.2625 18.8966 Return to grower, exclusive of overhead cost Per pound sold, cents 2.52 3.95 Per bird sold, cents 7.54 11.84 Per thousand birds sold, dollars 75.40 118.40 ‘ Two percent extras included in percent mortality. Figure 5. Packing dressed broilers for delive u: retail stores. average cost was 20.42 cents per pound. the cash lots, the range was 17.13 to 25.32 per pound, an average of 19.41 cents per po Excluding hired labor, the average cost was i cents per pound for the open-account lots 18.89 cents per pound for the cash lots. A average savings for the cash producers amou * to 1.01 cents per pound including hired labor i 1.36 cents per pound excluding hired labor. ' Prices Received Prices received by cash growers aver, slightly higher than prices received by open; count growers for the broods on which data w collected. If records could be obtained on a la “ number of broods for both types of growers, I probably would reveal little difference in pr received by cash growers and credit grow Dealers generally did the selling for both t cash and credit customers, with no evidenc dfferences in prices received by their grower Returns to Growers The average return to the open-account g o ers was approximately 2.52 cents per poun 7.54 cents per bird, while the return to the. ~ growers was 3.95 cents per pound, or 11.84 ~. per bird. The open-account growers receiv return of $75.40 per 1,000 birds while cash 1 ers received $118.40. This difference of $431’; 1,000 for cash growers was not adjusted to? price difference received by the cash and c . growers. When adjustments were made for u difference, the cash growers received $30.40 .5 per 1,000 birds than the credit growers. q analyses showed that the highest returns , obtained by the cash producers during this per -; During periods when returns fail to cover cash‘ open-account production costs, the grower 1,; find it advantageous to operate under one of‘ guaranteed-income plans offered by dealers._ a