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Monday, April 15, 2013

The New Chicken Farmer

I received a copy of the report New Farmers and Alternative Markets in Supply Management System, sponsored by the Metcalf Foundation.  It was very interesting reading.

In Appendix 7, on page 57 they present the typical capital costs for a new broiler chicken farmer, with 52,000 quota units, with 6.5 production cycles per year, would produce a total of 633,000 kg of live weight chicken each year, as follows:



The assumptions used in these calculations are as follows:




The pro-forma income and expense sheet for the typical broiler chicken farmer is as follows:



To invest $4.6 million and to get back $138,964 in profit gives a return of 2.99%.  After depreciation and taxes, it's not much to show for a year's hard labour.

Alternatively, you could put your money into a government guaranteed GIC and get 2.85% from ICICI Bank Canada, with absolutely zero risk and zero work.

So if these numbers are correct, and I look forward to a real chicken farmer confirming these numbers, it doesn't make much sense to be a chicken farmer today.

The number of chicken farmers is dropping each year.  The average age of chicken farmers is rapidly increasing.  The small guy is being bought out by the large operators and the huge agri-corporations.  Soon there will only be 3 chicken producers if this keeps up.  That will be the end of CFO and the supply management system, because we will produce the 3 "too big to fail" chicken producers, and then those 3 will fail us at the moment of our greatest need.

The Evil Quota Costs

But wait a minute, that chicken quota is what skews the numbers.  The quota is 83.2% of the total capital cost.  Ouch!

Let's say you got the chicken quota for free.  In this case, your capital costs are only $780,000  Now the same $138,964 annual profit gives you a simple return on investment of 17.82%.

Now we're talking!

That 17.82% is worth investing for.  That is worth the hard work and the cold nights, especially when it's pretty close to guaranteed.  Just don't have a power failure, or Avian Flu, and everything will be OK.  If you do fall into these major disasters, you'd better have insurance.

As it has been recognized for some time in the egg and milk supply management system, having quota assigned a financial value causes all kinds of dysfunctional effects.

Here is another reason the current supply management system is broken, and needs to be changed soon.

The problem is, many chicken farmers paid huge for their quota.  Many still have a loan taken out to buy their quota, or have used the quota as collateral to back a loan, in spite of rules not permitting this.  Changes in the value of quota at this late date will hurt many a chicken farmer, possibly crushing them permanently.

What will we do?

27 comments:

  1. Is this an older cashflow, I was just wondering where the $74 per unit came from, I believe quota is trading for closer to $130 right now.

    ReplyDelete
  2. Thanks for your inquiry.

    The report is dated June 2010, so it is only 3 years old.

    If current price of quota is $130 as you say, then this update makes my conclusions that much stronger and urgent.

    The supply management system is out of control; hurting new prospective farmers, Canadian consumers, and Canada.

    It's time we made changes for the better.

    ReplyDelete
    Replies
    1. I appreciate your research. Something I would like to see researched is the Export development program. It is discussed briefly on OMAFRA's website under how chicken is produced via the supply management system. No numbers are produced, probably a dirty little secret. From what I have heard, chicken is subsidized about 30cents a kilo for export. Of course, Canadian consumers are picking up this tab thanks to very high prices at the grocery store. Those are all the numbers I know at this time.

      Delete
    2. Thanks for your feedback. So far, I've seen many pageviews but few comments. It's always nice to get some feedback on the postings.

      I found this: http://www.omafra.gov.on.ca/english/farmproducts/factsheets/supply.htm#chicken

      It appears to be similar to what you mentioned. I have read the CFC (Chicken Farmer of Canada) method for doing allocations and market development. They require double and triple majorities to get enough votes on-side to be assigned quota. I read it 3 times and gave up trying to understand. I vowed to go back and try to understand again when I have more time. Once I understand it, I can post on it.

      I've asked CFC a number of questions on their processes, but they have yet to respond.

      Many others have emailed me or phoned, explaining that the assigning of extra quota, exports, and import for processing to re-export are very slimey subject ripe for investigation and exposure to sunlight.

      I'll do what I can. I'm working on a posting right now on what I was researching last week. When that is done, you're request is up next.

      This is where some specific hints and examples from the hands-on daily practitioners would really help me.

      Delete
  3. Here is a link to some interesting reading, read the comments under the story. google this-"the financial post terence corcoran-farm supply why wait for trade talks"

    ReplyDelete
    Replies
    1. Thanks for the tip. I found the article at http://opinion.financialpost.com/2012/06/25/terence-corcoran-farm-%C2%ADsupply-why-wait-for-trade-talks/

      Here is what I wrote to the author of that article, Terence Corcoran.

      Dear Terence Corcoran, Financial Post Editor:

      Thanks for the article on this important subject.

      I look at the modern technology in the picture with your article, and I know that only a few Canadian dairy operations have such technology. Chicken is a little more modern, but not much.

      In my Blog, I give the following example (see http://canadiansmallflockers.blogspot.ca/2013/03/why-not-export-canadian-chicken.html ):

      "For example, New Zealand chicken farmers have a FCR (Feed Conversion Ratio) as low as 1.38 while Ontario chicken farmers have an FCR around 1.82 which is 31.9% worse than world-class. Since feed costs are about 60% of the total live chicken price, the poor Canadian FCR raises our live bird price by 19.14%. No wonder Canadian prices are so high."

      I suggested that it takes 2 decades to slowly develop the expertise to achieve those kind of "improvements".

      While everybody allowed this bad situation to slowly develop over the last 50 years, to suddenly remove the protection of a roof and central HVAC from Canada's "Sleeping Beauty" [Supply Management industry], exposing her to the sudden onslaught of a full Canadian winter would be quite a shock to her system. Some may think she'd die of exposure before she was able to wake up and build herself a fire.

      Obviously, waking her up, sitting up in bed, and bringing her quickly up-to-date on the rough truths of life is an important first step, maximizing her chance of survival.

      In that regard, thanks for clanging on the casserole pot so as to raise Sleeping Beauty from her deep sleep.

      The same needs to be done for the Canadian public. Still got your casserole pot and spoon? Keep banging!

      Delete
    2. The reason I pointed out that article was because of the comments below between "John Stewart" and "physyk". Did you read that? That was the most interesting part. That is where I learned about the chicken export program, and according to that person, whatever is subsidized for export is done so at about 30 cents/kilo. Obviously it would have to be subsidized to access foreign markets because our chicken farmers operate at much higher profit margins than normal. The problem I have with this, is that canadian consumers are overpaying for chicken, even more so with this program, then the existing chicken producers continue to hand themselves quota 'increases'.

      Delete
  4. You are welcome. Be sure to click on our RSS Feed Button so that you get automatic updates from our Blog.

    ReplyDelete
  5. That's actually meat chicken. If you want egg chicken, it's higher - can get up to $400 per bird in "bunches" of 500 birds = $200,000. The limit is 100 HUNDRED laying chickens without quota in Ontario.

    Max egg price / dozen is 1.96 for 1,500 DOZENS = 18,000 eggs / 5 per week = 3,600 hens x 400 / bird = 1,440,000 for a profit of 2,940 / week of 152,000 give or take a year. Not including extra fees of course, loss of egg, etc. Means I'd take about 10 YEARS to even get out of the red, and THAT'S LUCKY.

    Sad thing is is that the Canadian government was giving out quotas like hot cakes in the 70s and any real "new farmer" that comes into the business is someone's kid striking out on their own or some immigrant with a LOT of money to waste.

    And cause of this it's the poor quality subpar [compared to other breeds] that is been produced by the bucketful.

    ReplyDelete
    Replies
    1. Thank-you for supplying this excellent information. Can we assume that you are a quota-based egg farmer in Ontario?

      Did I understand correctly that you suggest:

      1. commercial Ontario birds will lay 5 eggs per week (33.6 hrs egg cycle, 71.4% daily yield)?

      2. Best available egg price is $1.96 per dozen if you do 1500 dozen at a time?

      3. 1,500 dozen eggs per week requires you to have 3,600 laying hens

      4. Total bird investment for max. income is $1.44 Million

      5. Gross income for 3600 layers is $2,940 per week, or $152,000 per year assuming 52 weeks per yr operation.

      6. Assuming you don't do as LH Gray is alleged to do (put 10% cracked, dirty, or undersize eggs into cartons to unsuspecting consumers), you can have significant losses from eggs that don't meet spec, and this bites hard into gross income and end of year profits.

      Out of your $152,000 per year gross income, you still have to pay your feed bill, electricity, bank loan for building your barn, food for you, taxes, etc.

      Exactly how do you accomplish all that?

      For example, how is your feed bill? What do you have to pay $/tonne delivered? What is your Feed Yield (eg. kg/day/bird or kg/egg layed, etc.)?

      What do you feel needs to be done to improve the situation for Ontario egg farmers?



      Delete
  6. this is a joke and it feel unconstitutional cuz its way over price that is pure extortion I want to become a farmer im actually becoming one but I never knew the quota so high I am 19 yearsold and this is really sad and I just want to give up

    ReplyDelete
    Replies
    1. Welcome! Thanks for providing your comments.

      Yes, trying to become a quota-based chicken farmer is all but impossible; unless you win the 6-49 lottery, or you inherit the farm.

      You can make application to CFO as a "New Farmer" and get a lower cost loan of quota to help get you started, but even then it's very risky.

      Alternatively, you can become a member of SFPFC, and help lobby the government to change the rules.

      Glenn Black
      Small Flock Poultry Farmers of Canada ("SFPFC")

      Delete
  7. what about diversifying....maybe a few different types of poultry, or other animals, just under the quotas...maybe that would be a good way for the small newbies to start out...skip the quotas altogether perhaps...

    ReplyDelete
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