The Finances for a Small Organic Broiler Flock
January 7, 2013/
by Mark Cannella
The expansion of production and markets for regional or locally produced poultry products is hot. Recent state processing exemptions that allow small farms to conduct business has opened the door for many small start-ups or add-on poultry enterprises to enter the marketplace. In Vermont, there are many farms now operating through a 1,000 or less bird exemption. This regulation allows farms to produce and sell broiler chickens through certain market channels without requiring the birds to be processed in a state or federally inspected facility. What are the business prospects for a farm seeking to sell up to 1,000 organic broilers? Are these farms viable stand-alone businesses or are they better left as add-on enterprises to an existing farm? Spend enough time with any farm business adviser and you get the standard yet thoughtful response, “It depends.” It certainly does depend on a number of factors, but the UVM Extension Farm Viability program set out in summer 2012 to develop basic poultry budgets to get a better answer. We reviewed finances with several farmers, reviewed older studies and vetted the template with agricultural specialists to develop an “average farm” financial projection for an organic 1,000 bird operation. The conclusion is that it still depends…but at least now we can tell you how much it depends on and what to be watching out for.
Financial performance for year one of an organic 1,000 bird operation showed a range of net cash income ranging from around $5,116 for a stand-alone operation (FARM A) to near $6,616 net cash income for an operation embedded into an existing business (FARM B). This net cash income describes real cash left in the owner’s pocket for an “owner draw” of for “profits to be re-invested” in the business. This is both the paycheck for your labor and the profit (the return for your investment or risk).We did not include real estate payments or rental rates in this budget, so that is an additional item that might come from this net cash income. This is not to be confused with an “enterprise analysis” which takes certain steps to pro-rate non-cash factors (like depreciation that estimates an annual expense for an item that has more than a one year lifespan). Our model is a cash in – cash out model. In either case: a $5,116 cash payout or $6,616 cash payout, we can conclude that this is a very part time occupation. This is an important realization for smaller producers who are currently selling 300-500 birds per year. Even if you have found a way to earn a small income now, we can say with certainty that expansion of the broiler operation to the 1,000 bird threshold in Vermont will not get you that much closer to achieving the full-time farm income that many people aspire to. Since this model assumes this is the first year, we have included the set-up of poultry housing into this budget as a one-time expense that won’t necessarily re-occur in year two. We expect cash based performance will improve in year two for this reason.
Conversation with several managers came to the same conclusion as our budget: a poultry set-up of this size can be a very nice complement to an existing business. Looking at an example of a vegetable farm (FARM B) with a CSA membership base and a slot at a farmer’s market, it is easy to see that much of the marketing expenses are already covered. Customer recruitment is covered, delivery vehicles or on-farm pick up investments are already made, websites are in place and the farm records systems are set up to track sales. The obvious question emerges for the stand alone business (FARM A). If FARM B is going to net $6,616 with all these potential expenses already covered by the base business, how much is it going to take in cash expenses, investments and owner labor to execute the marketing plan for 1,000 broilers? There is nothing wrong with a part time farm income as long as that is all you are expecting. It’s also important to factor how many hours you should realistically invest in this part time business, especially since you’ll need to devote time earning money elsewhere.
We also know that for FARM B the owner could use labor already present on the farm. It is true that a full analysis would quantify this borrowed labor as a real cost (or opportunity cost in economic-speak) but the gut reaction from the owners we spoke to revealed that they had naturally occurring down time for crews that meant labor could be easily borrowed. The stand-alone business will not have this resource. That means that the owner of FARM A might require a higher payout that reflects the extra labor he/she needs to contribute.
Now for the major considerations: operating capital, processing costs, feed price and the price of your product in the market place. These items have the largest potential to impact the financial performance of this enterprise. First off is start-up capital or cash. It is going to take about $15,000 in expenses over the whole year to run this. If we assume two batches it is fair to think you’ll need $8,000 -$9,000 to get the first batch to a sellable form. More batches will ease up the cash flow pressure by reducing the needed cash to start each batch. Plan accordingly. Start saving now, locate a source of cash or consider if pre-selling birds fits into your business plan. Just know that we can make cases for and against each source of cash. Make a plan that fits best for you.
Our budget used a cost of $3.50 per bird for processing. This reflected a mix of real-world responses from people who paid up to $5.00 per bird or as low as $2.00 per bird when excess labor was available. Basic math tells us that if the processing cost went from $3.50 to $5.00 per bird, then our projected net income of is reduced by $1,425 (we figure only 950 birds survive to processing). Consider your access to processing or what it will cost you to do the job.
Price points stand to have a significant impact on net cash income for this operation. Under our research, this operation gets 950 birds to slaughter with an average finish weight of 4.68 pounds each. That’s 4,453 pounds of meat. Every change of $0.25 per pound in price results in a swing of $1,113 up or down in net cash income. Prices under $4.00 in 2012 would result in a loss of money for the farms we studied. Price points matter, so make sure you revisit this often.
Now for the last number to write down, the impact of a change in feed price. For every increase of $100 per ton of feed ($2.50 per bag) your cost per pound of finished meat increases by about $0.20 per pound. Remember this calculation when you adjust your pricing for new feed prices in 2013. At $0.20 per pound, that hits net income with a decrease of ~$890 per year if you don’t adjust your prices. That’s real money!
I know that many of you are thinking these numbers don’t match your specific operation. That is why “it depends.” Estimates are just that, estimates….until you run the business and collect your own actual financials for the year. This budget model is built as a starting point for planning. You should take these templates and adjust them to reflect the reality for your business. To download details on this poultry budget and other farm business planning resources you can visit the UVM Extension Farm Viability website at: http://www.uvm.edu/extension/agriculture/?Page=farmviability.html.
Mark Cannella is a farm business management specialist for UVM Extension and director if the UVM Extension Farm Viability business planning program.