Broiler production is the third largest agricultural revenue generator in our state and represents one of the fastest growing industries in Oklahoma. Oklahoma broiler receipts in 1991 were $189.4 million compared with $81.2 million in 1970.

Contract broiler production is concentrated in the eastern tier of Oklahoma counties. The success of contract broiler production in eastern Oklahoma is directly related to the success of integrators located in Arkansas. Eastern Oklahoma is benefiting from the integrators’ expansion to capitalize on increased consumer demand for poultry products.

This fact sheet discusses factors which someone evaluating broiler production as an alternative and/or complementary farm enterprise should consider. Factors to consider range from the availability of an integrator to waste management and environmental considerations.

Availability of an Integrator

Commercial broiler production tends to be concentrated in a relatively small radius around an integrator’s feed mill and other facilities. Because the costs of building a hatchery, feed mill, and processing facilities can run into several million dollars, integrators will not likely build facilities in new areas unless a dramatic growth in demand for their product is expected. If integrators choose to expand, the profitability of both the grower and the integrator favors established growing areas. The poultry company will, if possible, operate multiple shifts and maximize use of their existing plant capacity. Since the integrator’s facilities tend to be centrally located, an expansion of the grower territory means higher transportation costs for the delivery of chicks, feed and for hauling broilers from the grower to the processing facilities.

The acceptability of a potential grower to an integrator will depend on how well the individual measures up to the integrator’s requirements for a new grower. Because the integrator’s success is closely tied to the performance of the growers, the integrator screens potential growers before contracting with them. Some integrators feel personality and attitude are more important than production experience in determining success. One integrator lists four traits that typify successful broiler producers:

1. Willingness to follow the instructions of the integrator’s technical representative or fieldman.
2. Pride in themselves and in their work.
3. Ability to pay close attention to detail.
4. Good management of water, feed, ventilation, and temperature in the broiler house.

Contract Production

Nearly all broilers grown in Oklahoma are produced under some type of contract between a poultry company (integrator) and the grower. The poultry company furnishes chicks and feed, supervises growth of the broilers through a service person, and may also provide a fuel allowance during winter months. The grower provides the broiler house, equipment, labor, and normal operating expenditures.

The grower is paid per pound of usable broilers produced. A payment incentive is usually included in the agreement between the integrator and the grower. The incentive payment may be based on feed conversion and/or cost of production.

Before agreeing to produce broilers under contract, the grower should thoroughly examine the contract and be familiar with its terms. Contracts are for the protection of both the grower and the integrator and should clearly spell out all important details. These details should include terms of grower payments, production practice requirements, incentive clauses, and production items to be furnished by each party and those to be jointly furnished. A potential grower should be aware of possible pitfalls (tornado destroys broiler house, integrator decides to reduce broiler production) and get firm written answers to any question about the integrator’s role or expectations. A well written contract which is understood by both parties is an essential beginning for successful long-term broiler production.

Advantages and Disadvantages of Contract Production

Advantages and disadvantages of contract production can be evaluated from several different perspectives: the producer/grower, the producer’s lender, and the integrator/contractor. Among the advantages for the producer are that market price risk is reduced, management assistance is provided as part of the contract, and a predictable cash flow is assured assuming the producer’s management capabilities meet with the approval of the integrator. Possible disadvantages for the producer include the elimination of extra profit opportunities, sharing or giving up some control of management decisions, and no equity in the livestock. When an integrator’s profit margins are being eroded, a legitimate concern may be whether the company will continue to supply birds, or how many batches the integrator will provide per year.

The grower’s lender may perceive as positive the decrease in market risk and management assistance. The negative aspects of contract broiler production from the lender’s perspective include the lack of equity in livestock and the dependence on contract continuation for loan repayment.

From the integrator/contractor’s viewpoint, contract production provides security, allows fast expansion of the company, requires less capital for growth, and may make growers more productive, since company representatives provide management assistance. It allows the company to maximize the use of plants and mills (thus reducing overhead costs per unit of production) by keeping all phases of the operation running at full capacity. The disadvantages for the integrator are few but may include taking all the short-term risk of low market prices and that growers may or may not be highly productive.

Financing for Broiler Buildings and Equipment

Lenders prefer to make broiler facility loans to a diversified farm operator that has been successful in other enterprises. Such an operation has to rely on in the event an integrator decides to reduce the number of batches per year or does not renew the grower’s contract. A reliable source of farm or off-farm income may be necessary to assure a lender of the ability to repay the broiler facility loan, as the returns from broiler production may not be sufficient in the early years to cover both the family living expenses and debt retirement.

The cost of a broiler house will vary with size and specifications. An estimate for fully equipped houses currently being constructed is $4 to $5 per square foot. This figure does not include the cost of the land and may vary with different building designs, equipment, and location with reference to water and roads. Unless integrators agree to help resell buildings and equipment, broiler facilities may have little value as collateral, since their use is so specific.

Building and Equipment Requirements

Each integrator will have specific building design, equipment specifications, and location requirements. Buildings generally run east and west, are built on a level pad above ground level, have a smooth level area at the end of the building for a mechanical loader, and must be accessed by a well graveled roadway with turnaround for large tractors and trailers. Houses must be sufficiently insulated to heat loss in winter and minimize heat buildup in summer. They must also have sufficient ventilation (natural and mechanical) for cooling the birds in summer.

New growers are usually required to construct at least two broiler buildings. Integrators prefer growers to have several buildings so that feed and chick delivery costs and broiler transportation costs can be minimized. Integrators fill all buildings of a grower with chicks of the same age, again so that the integrator can deliver one kind of feed, make a minimum number of delivery or pick up stops, and minimize transportation costs.

Approximately four-fifths of a square foot of floor space per chick are required. Most buildings currently being built are 40 feet in width and with sufficient length to give the desired broiler capacity. A 20,000 square foot house will handle 25,000 broilers. It is not uncommon for an integrator to overfill a building with chicks to allow for normal mortality. Additionally, an integrator may place more birds per square footage in the winter months as compared with the summer months.

The integrator will provide information on how many feeders, water founts/nipples, brooders, misters, fans, and lights will be required per building. Specific recommendations may be made on equipment brands and types of brooders (natural gas, LP gas, electric).

Labor and Management Requirements

The success of a broiler grower will depend to a great extent upon how well an integrator’s management program is carried out. Management of the broiler house is the responsibility of the grower with the assistance of the service person provided by the integrator. Some contracts include details on management related to feed, water, house temperature, vaccination, and disease control. The service person may assist the grower on decisions not specifically covered in the contract, such as ventilation, litter management, rodent and fly control, and dead bird disposal.

Broilers need daily attention and new producers may need to work closely with their field service representative to develop an appropriate care schedule. It may be appropriate to have several family members familiar with the poultry operation so that they can substitute for the primary care taker if necessary.

The first 10-14 days after the day-old chicks arrive are critical and extra labor is required during that period. The grower must be sure that feed and water are adequate, must maintain house temperatures at an appropriate level and see that the ventilation system is operating properly. In extremely hot weather the last 7-14 days of a growing period may also be critical. Extra time may need to be devoted to ventilation and any other method used to keep birds cool.

Daily chores for the broiler grower include checking mechanical equipment to insure correct operation, cleaning and disinfecting watering cups (where appropriate), adjusting ventilation, monitoring feed bins, removing dead birds and keeping records. Other routine chores include cleaning and repairing equipment, cleaning out houses, rodent control, preparing for chick arrival, and ordering feed.

Waste Management Regulations and Environmental Considerations

Waste management is an important component of poultry production. Unlike many of the equipment and inventory management issues, waste management is the sole responsibility of the grower. Current state regulations under the Oklahoma Feed Yard Act require growers to manage all waste materials, including litter and dead birds, to provide for the beneficial use of the waste, and also to prevent adverse effects to the environment. Waste management may represent production costs which are not always included in standard production budgets. However, with appropriate planning, poultry waste may be a valuable by-product of bird production.

The Oklahoma Department of Agriculture inspects poultry operations when water quality problems or complaints about pollution problems suggest a waste disposal problem may exist. If a poultry operation is found to be disposing of wastes in such a manner that surface or ground water contamination is occurring, that operation will be required to implement waste management practices to correct the problem. Failure to comply with this requirement could result in a fine for the grower.

Poultry litter may be applied to pasture or cropland according to guidelines for nutrient management. There may also be opportunities for selling litter to other producers for land application or to commercial composting facilities.

The Feed Yard Act also imposes restrictions on the disposal of poultry carcasses to prevent environmental and health problems. Under the law, acceptable disposal methods include posthole (burial) disposal, digestion or disposal pits, approved incineration, composting, and disposal in a rendering plant. Guidelines for approved burial, digestion, composting, or incineration can be obtained from the Oklahoma Department of Agriculture or from the OSU Extension Center. Growers have expressed considerable interest in composting dead birds because this method produces a product which, like litter, can be a valuable fertilizer and soil conditioner.

Profitability and Cash Flow

Two simplified broiler budgets are presented in Tables 1 and 2 (a more complete budget can be found in the OSU Enterprise Budget Book in your county Extension office). The two budgets represent production from 20,000 and 25,000 bird capacity houses, the two building sizes which are currently being constructed by new growers.

The budgets presented are to be considered a tool for potential growers to use in analyzing expected receipts and costs. The two budgets (given stated assumptions) suggest that the cash available as a return to labor, overhead, risk, and management is relatively low during the loan repayment period. No charge for land was made in the budgets. Costs in a given area and for a given producer will vary from the estimated values listed in the budgets.

The cash flow associated with the broiler enterprise is likely to differ from the economic returns because some of the associated costs such as depreciation do not require an annual outlay of cash. In Tables 1 and 2, a column labeled “Your Values,” is included to enable you to calculate either net returns or cash flows using the appropriate amounts based on your research.

Income

Broiler producers are paid on the pounds of usable broilers. The amount paid is frequently a contract amount which assumes middle cost production. The amount actually paid to the grower is dependent upon whether the grower’s production efficiency was above or below middle cost of production. Most grower contracts have a stated floor price which the grower is guaranteed regardless of production efficiency. The contract price is only paid on usable broilers; thus, a high death loss or high percentage of condemnation can substantially affect a grower’s income. The middle grower contract prices have remained about the same ($.035 to $.04 per pound) for the last five years.

Five and one-half to six batches of broilers can be grown per year on average. If 5.5 batches per year are produced on average, broilers weigh 4.5 pounds, the contract price per pound is $.04 per pound, and 94.5 percent of the broilers are usable, gross receipts from broiler sales would average $18,711 from a 20,000 bird building and $23,389 from a 25,000 bird building. It is common for an integrator to initially overfill a broiler building to allow for normal death losses.

Costs

Costs in the budgets are grouped into operating costs and fixed costs. Operating (or variable) costs change with the level of output (number of birds produced) and do not occur unless the producer attempts to grow broilers. Variable costs include the money outlays for purchased inputs that are used in a production period, e.g. litter, electricity, gas, fuel, labor. Fixed costs, on the other hand, do not change with the level of production. In fact, fixed costs remain the same whether or not any birds are produced. Fixed costs include depreciation on buildings and equipment, taxes, insurance, and principal and interest payments.

Labor was valued at $4.50 per hour in both budgets. If the operator provides all labor for tending the birds, maintaining the building and equipment, expected cash outlays will be approximately $4,106 and $4,928 less for 20,000 and 25,000 bird buildings, respectively. Utilities are the largest expected cash outlay if the operator provides labor for the operation. Growers outside established areas may have higher L.P. gas costs. Some integrators purchase gas in bulk for their growers in order to benefit from discounts from bulk purchases. The broiler house is assumed to have a life of 20 years, and equipment (feeders, waterers, brooders, etc.) is assumed to last 10 years. A grower can expect to replace one-quarter to one-third of the equipment after 10 years. If housing repairs, modifications, or improvements are needed or required, additional expenses could be incurred over time. If current roadways on the farm are not well gravelled, additional expenses may be incurred to upgrade and maintain these improvements. Insurance against many potential losses can be purchased. Ice damage insurance, however, is expensive and not included in all policies. The factors most likely to affect a broiler producer’s profitability are:

1. The grower’s management skills, which impact the broiler rate of gain and death losses. From a management standpoint, an operator can increase profits by watching for feed waste and making the necessary adjustments to reduce it, observing for overflow of waterers, keeping the litter dry and clean, staying alert to fan breakdowns, and paying attention to signs of stress and disease.

2. The bonus which the grower receives if the production efficiency is better than middle cost of production. Note that the bonus may not reflect a grower’s management ability versus that of an average grower, but of the other growers who sell birds the same week as he or she sells. If a grower is unfortunate enough to market birds at the same time as several above average producers, he or she may receive no bonus and may in fact be penalized for below middle cost efficiency.

3. The shrink in the birds from the farm to the processor.

Other Considerations

Other factors which a potential broiler grower must consider are rural zoning, air pollution laws, and “nuisance” laws, if neighbors are close to planned building sites. Two sources of water are preferred where possible, in order to ensure a supply of water for broiler houses.

Summary and Conclusions

Individuals who are seriously considering the broiler business should learn as much as they can about broiler production by talking with growers and integrators in their area. The potential broiler grower should determine whether an integrator services the area and if the integrator is taking on new growers. No one should buy land or move into an area expecting to grow broilers without a contract from an integrator. Contracts should be studied to determine their acceptability.

A lender should be contacted to determine the availability and terms of financing for a broiler enterprise. Individuals considering broiler production should discuss and evaluate with their families how the broiler enterprise fits into short and long term family and business goals. The family should discuss their willingness to commit time and energy to a seven day a week operation with breaks limited to periods between batches of birds. Because the broiler house is a specialized facility, the commitment to production must be long term in order to ensure that investment costs are recouped.

Further Information

To read the full document, including tables, please click here (PDF format)

Source: Oklahoma Cooperative Extension Service - Oklahoma State University - November 1992