Group Title: Economic information report
Title: Economic analysis of Big Bend contract broiler production
CITATION THUMBNAILS PAGE IMAGE ZOOMABLE
Full Citation
STANDARD VIEW MARC VIEW
Permanent Link: http://ufdc.ufl.edu/UF00026488/00001
 Material Information
Title: Economic analysis of Big Bend contract broiler production
Series Title: Economic information report
Physical Description: 16 p. : ill. ; 28 cm.
Language: English
Creator: Zimet, David J
Ouart, Michael
Odegaard, W. M ( Wayne M )
Publisher: Food and Resource Economics Dept., Cooperative Extension Service
Food & Resource Economics Dept., Cooperative Extension Service, Institute of Food and Agricultural Sciences, University of Florida
Place of Publication: Gainesville Fla
Publication Date: 1988
Copyright Date: 1988
 Subjects
Subject: Broilers (Poultry) -- Economic aspects   ( lcsh )
Genre: government publication (state, provincial, terriorial, dependent)   ( marcgt )
non-fiction   ( marcgt )
 Notes
Statement of Responsibility: David Zimet, Michael Ouart, Wayne Odegaard.
General Note: Cover title.
General Note: "September 1988."
General Note: IFAS Editorial Special Series #SS FRE 801.
 Record Information
Bibliographic ID: UF00026488
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved by the source institution and holding location.
Resource Identifier: notis - AHG0395
alephbibnum - 001546860
oclc - 22687050

Full Text





HISTORIC NOTE



The publications in this collection do
not reflect current scientific knowledge
or recommendations. These texts
represent the historic publishing
record of the Institute for Food and
Agricultural Sciences and should be
used only to trace the historic work of
the Institute and its staff. Current IFAS
research may be found on the
Electronic Data Information Source
(EDIS)

site maintained by the Florida
Cooperative Extension Service.






Copyright 2005, Board of Trustees, University
of Florida





(Q9


David Zimet Economic Information
Michael Ouart Report 250
Wayne Odegaard (IFAS Editorial Special Series #
SS FRE 801)




Economic Analysis of Big Bend
Contract Broiler Production












LibLrary


c 'i of -







Food & Resource Economics Department
Cooperative Extension Service
Institute of Food and Agricultural Sciences September 1988
University of Florida, Gainesville 32611








ABSTRACT

An economic analysis for a newly constructed broiler house in the Big Bend

area of Florida is presented. The analysis is based upon a contract broiler

operation; the assumptions about the house, production and income are based

upon information that was reviewed by the major broiler contractor in that

area. The analysis shows that a respectable return on investment could be

earned by the contract grower and that sufficient cash would be generated to

repay loans for constructing and equipping the broiler house.

Key words: enterprise budget, cash flow, loan repayment









ECONOMIC ANALYSIS OF BIG BEND CONTRACT BROILER PRODUCTION
by

David Zimet, Area Economist, FRED/NFREC, Quincy, IFAS
Michael Ouart, Extension Poultryman, IFAS, Gainesville,
Wayne Odegaard, formerly CED, Lafayette County, IFAS, Mayo
INTRODUCTION

Broiler production in Florida has been expanding in recent years.

(Broiler production in Florida is limited to north Florida.) Florida broiler

production increased from about 416,800,000 pounds in 1985 to about

479,600,000 in 1987. Broiler processing in north Florida has increased

through increased speed in the processing plants. As the industry continues

to expand, current contract broiler producers will continue to expand their

facilities and/or new contract producers will be sought. The analysis present

in this document evaluates the long term profitability and cash flow of a new

broiler house. Profitability is examined first because if a new broiler house

is not profitable it would be superfluous to examine the ability of loan

repayment as is done by a cash flow analysis.

It is assumed that the quantities and values used in this analysis are

typical of current costs for contract broiler producers in the Big Bend area

of Florida (Figure 1). The authors have prepared the data as a means to

perform the analysis for the area as a whole. It is intended that individuals

change specific values in order to describe their own situations as best as

possible and therefore a set of blank forms is provided. The two types of

budgets that form the analytical base -- a cash flow budget and an enterprise

budget -- are not equal. Because the cash flow budget includes only

out-of-pocket costs, it can be used by lenders and borrowers to determine

whether or not an enterprise will generate enough cash to repay loans.

Because non-cash costs are excluded, however, the cash flow budget does not










deal with profitability. Thus, producers should be interested in the

enterprise budget as well as the cash flow budget. The two costs that are

included in the enterprise budget but not in the cash flow budget are

opportunity cost and depreciation charges. The latter is a charge that is

based upon the realization that equipment must be replaced from time to time

and that the enterprise should be self perpetuating if it is truly profitable.

Thus depreciation is viewed as an economic cost even when no funds are expend-

ed to replace the equipment. In a similar way, opportunity cost does not

entail cash outlay. It is the economist's way of playing "what if". It deals

with the question, "How much money would I have made if I invested my money in

another way?" The income that could have been earned from the next best

alternative is the opportunity cost of the enterprise being analyzed.



























2








Assumptions

A list of assumptions that are used to perform the analysis is presented

below. They are divided into three groups. Those pertaining to the broiler

house, those pertaining to the birds and those regarding income.


House
Dimensions: 40' x 480' = 19,200 square feet
Costs $3.30 per square foot fully equipped
a. building: $34,600
b. equipment: $28,800
c. total: $63,400
Economic life:
a. building 20 years
b. equipment 10 years

Birds
Stocking capacity of houses per batch:
a. warm season (0.75 sq. ft. per bird) or
25,600 birds/batch for 6 months.
b. cool season (0.72 sq. ft. per bird) or
26,660 birds/batch for 6 months.

Number of batches:
a. warm season 3.0
b. cool season 3.0

Total placement is 156,780 birds
a. warm season: 76,800 birds
b. cool season: 79,980 birds

Mortality: 2%

Income
"Number of birds sold (98% of placements): 153,644
Weight per bird 4 pounds
Base pay per pound 3.4 cents
Gross base income per house $20,896

Other assumptions are made explicitly within the context of the budgets. For

example, it is assumed that utility costs are $1,800 per house per year and

they are presented as such in the budgets.





3










Enterprise Budget and Profitability

The enterprise budget for the broiler house and operation described is

presented in Table 1. The budget is divided into two sections -- the cash

operating cost section and the fixed cost section. The fixed cost section is

a summary of the investment, depreciation and opportunity cost calculation

presented in Table 2 in addition to taxes and insurance. A charge of 8% on

average investment is used to estimate opportunity cost. That value is used

because it is greater than a passbook savings account but is a conservative

value. The total cost per bird is $0.083 or $83 per thousand.

The gross return per bird is $0.136. Thus the net return per bird is

$0.053, or a total of $8,143 per house per year. This is a return on total

investment of about 12.8%. As the enterprise is profitable, its ability to

repay a start-up loan in a timely manner should be analyzed. This is done in

the following cash flow analysis.

Cash Flow Analysis

Table 3 summarizes the various types of cash costs that would be incurred

to repay a loan used to build a 40 x 480 foot broiler house and to operate

that house. Part A (Table 3) includes operating costs only while Part B

refers to the costs of construction and loan repayment. In order to analyze

different loan situations two levels of down payments -- 50% and 20% -- are

used as are two different interest rates (10% and 14%). It is assumed that

the interest rates for the construction and equipment loans are equal. The

effects on cash costs of the various down payment and interest rate

assumptions are substantial (Table 4). During years 1-5 the total cost per

bird sold when a 20% down payment and 10% interest are assumed is over 17%

greater than when a 50% down payment at 10% interest is assumed.


4








Over the life of the house loan, the importance of the different amounts

paid annually for loan repayment at different down payment rates is tempered

by the differences in the size of down payments (Table 3). The differences

are, however, quite large. A comparison between Tables 5 and 6 shows that the

loan interest rate can have a large impact on the cash flow. Year 11 is the

first year that does not require loan repayment. The cumulative net cash flow

at the end of year 11 is about $17,000 greater at 10% interest than at 14%

interest when 20% down payments are compared. The difference is less when 50%

down payments are used.

Summary

Given present costs and returns, the construction of a broiler house for

contract production is a good investment for a person capable of attaining

average management parameters (pound gain : pound of feed, for example). In

the long term the investment has a respectable return of over 12%. It can

meet loan repayment commitments with no problem. Indeed, upon completion of

equipment and well loan payments, annual cash flow ($10,000 or more, depending

upon loan situation) is well above most part time jobs in north Florida (based

on $4.50 per hour, five hours per day and 260 work days per year, part-time

employment would earn $5,850 annually.) The situation would improve after the

house loan is paid.













5









Table 1. Enterprise Budget for 40' x 480' Broiler House, Contract Production
in the Florida Big Bend.

Price
Cash Costs per
Item Unit Quantity Unit Cost
($) ($)
Fuel House 1.0 1,500 1,500
Utilities House 1.0 1,300 1,300
Maintenance House 1.0 500 500
Bedding House 1.0 900 900
Labor Hrs. 1.0 0 0

Subtotal per house 4,200


Fixed Costs

Insurg9ce-/ dollars (house value) 70,000 12.80/1,000 896
Taxes-' 17.986 mil 22,280 0.01 401

House house 1.0 3,114 3,114
Equipment
and well house 1.0 4,032 4,032
Subtotal per house 8,443

TOTAL ANNUAL COSTS PER HOUSE 12,643

TOTAL COST PER BIRD SOLD 0.083

t/Based upon discussions with Farm Bureau agents.

















6










Table 2. Investment, depreciation, opportunity and total costs per bird for a
40" x 480' broiler house.
Annual
Years Annual a opportunity Cost/bid
Item Investment of life depreciation- cost" sold'-

($) ($)($) ($)
House 34,600 20 1,730 1,384 0.020
Equipment 28,800 10 2,880 1,152 0.026
and well
Total 63,400 4,610 2,536 NA
Total annual depreciation and opportunity cost 7,146 0.047
Annual production costs (from Table 1) 0.036
Total annual production, depreciation and opportunity cost 0.083


!/Straight-line depreciation is used.
/'Based upon 8% of the average cost of investment. The average cost of the
investments = investment 2. For example, $1,384 = ($34,600 2) x 0.08.
./Cost/bird is calculated by summing depreciation and opprotunity costs and
dividing by 153,644 birds.
d/Due to rounding, numbers do not sum exactly.

















7








Table 3. Cash Expense Budget

A. Variable and fixed production costs

Price
per
Item Unit Unit Quantity Cost


Insurance House 12.80/1,000 70,000 896
Taxes 17.986 mil 0.01 22,280 401
Fuel House 1,500 1.0 1,500
Utilities House 1,300 1.0 1,300
Maintenance House 500 1.0 500
Bedding House 900 1.0 900
Labor Hrs. 0 1.0 0

Total per house 5,497





B. Annual loan payments

10% interest 14% Interest
20% 50% 20% 50%
Down Down Down Down
Item Value Years payment payment payment payment


House $34,600 1-10 4,505 2,815 5,307 3,317

Equipment $28,800 1-5 6,078 3,799 6,711 4,194
and well

Total 1-5 10,583 6,614 12,018 7,511

Total 6-10 4,505 2,815 5,307 3,317












8










Table 4. Annual Cash Out of Flow Per Bird Sold-/


Cash House, Equipment and Well
production 10 Interest 14% Interest
Year costs 20% Down- 50% Down' 20% Down- 50% Down-

1 0.036 0.069 0.043 0.079 0.049
2 0.036 0.069 0.043 0.079 0.049
3 0.036 0.069 0.043 0.079 0.049
4 0.036 0.069 0.043 0.079 0.049
5 0.036 0.069 0.043 0.079 0.049
6 0.036 0.029 0.018 0.035 0.022
7 0.036 0.029 0.018 0.035 0.022
8 0.036 0.029 0.018 0.035 0.022
9 0.036 0.029 0.018 0.035 0.022
10 0.036 0.029 0.018 0.035 0.022
11 0.036 0 0 0 0

!/Does not include down payments.

/Includes $0.040 for equipment during years 1-5.

"/Includes $0.025 for equipment during years 1-5.

d/Includes $0.044 for equipment during years 1-5.

"/Includes $0.027 for equipment during years 1-5.




















9








Table 5. Projected Annual Cash Flows per House, 10% Interest


Annual Income = $20,896
(153,644 birds x 4 Ibs. x $0.034/1b.)
20% Down8/ 50% Downb/
-------------------------$-----------------
Year Annual Cumulative Annual Cumulative
0 -12,680 -12,680 -31,700 -31,700
1 4,816 7,864 8,785 -22,915
2 4,816 3,048 8,785 -14,130
3 4,816 1,768 8,785 5,345
4 4,816 6,581 8,785 3,440
5 4,816 11,397 8,785 12,225
6 10,894 22,291 12,584 24,809
7 10,894 33,185 12,584 37,393
8 10,894 44,079 12,584 49,977
9 10,894 54,973 12,584 62,561
10 10,894 65,867 12,584 75,145
11 15,399 81,266 15,399 90,544

"/For years 1-5 annual costs = $5,497 (cash costs) + $10,583 (loan payment).
For years 6-10 annual costs = $5,497 (cash costs) + $4,505 (loan payment).
b/For years 1-5 annual costs = $5,497 (cash costs) + $6,614 (loan payment).
For years 6-10 annual costs $5,497 (cash costs) + $2,815 (loan payment).




















10










Table 6. Projected Annual Cash Flows per House, 14% Interest.


Annual Income = $20,896
(153,644 birds x 4 lbs x $0.034/lb.)
20% DownV/ 50% Downb/
Year Annual Cumulative Annual Cumulative
--------------------------------$-----------------------
0 -12,680 -12,680 -31,700 -31,700
1 3,381 -9,299 7,888 -23,812
2 3,381 -5,918 7,888 -15,924
3 3,381 -2,537 7,888 -8,036
4 3,381 844 7,888 -148
5 3,381 4,225 7,888 7,740
6 10,092 14,317 12,082 19,822
7 10,092 24,409 12,082 31,904
8 10,092 34,501 12,082 43,986
9 10,092 44,593 12,082 56,068
10 10,092 54,685 12,082 68,150
11 15,399 64,777 15,399 83,549

S/For years 1-5 annual costs = $5,497 (operating) + $12,018 (loan payment).
For years 6-10 annual costs = $5,497 (operating) + $5,307 (loan payment).

b/For years 1-5 annual costs = $5,497 (operating) + $7,511 (loan payment).
For years 6-10 annual costs = $5,497 (operating) + $3,317 (loan payment).






















11















OLUES JACK SO


.'I S17A


Ci guU N .ER ,,FT B
SJL A ;TAYLO COLU MBIAC



$ RADFORO


BIG BEND Y.< jL^

'i' LEVY
MARION





SuMTER LAKtE



HERNANDO





MILLSBOIOUGM



INMlAN RIVER



Figure 1. Florida Big Bend.









Your Costs



Following are a series of blank forms that will help the new or expanding

contract producer develop an enterprise budget and project a cash flow.

Before filling out any of the forms, the (prospective) producer should obtain

a description of the broiler house and equipment requirements from the

processor. Then estimates for start-up and the various house-related costs

that do not depend upon the specific loan obtained can be made. These costs

include all the variable costs in Part A of the first form and the investment,

depreciation and opportunity costs of the last form. You should decide the

interest rate based upon your own experience and expectation and what you

consider to be a good return on a fairly secure investment. Your lender will

be able to provide you with the loan-related information -- term, interest,

down payment requirement, and total annual payment. Additionally, you could

subtract all cash costs other than loan payment requirements from your pro-

jected income to determine how much you would care to assign to loan payment.

That calculation could be performed before you speak to a lender.



















13









Cash Expense Budget

A. Variable and fixed production costs

Price
per
Item Unit Unit Quantity Cost


Insurance House

Taxes 17.986 mil

Fuel House

Utilities House

Maintenance House

Bedding House

Labor Hrs.

Total per house


B. Annual loan payments

% Interest


_% %
Down Down
Item Value Years payment payment


House 1-?

Equipment 1-?














14











PROJECTED CASH FLOWS PER HOUSE


Annual Income $
( birds x lbs x cents per pound)
Percent Interest __% Down Payment

Years Annual Annual Cumulative
Return per House Return per Bird Return per House


1 (Start-up)

2

3

4

5

6

7

8

9

10

11

















15
15









Investment, depreciation, opportunity and total costs per bird for a 40" x
480' broiler house.
Annual
Years Annual opportunity Cost/b d
Item Investment of life depreciation- cost- sold-

($) ($) ( ) ($) ".
House 20
Equipment 10
Total

Total annual depreciation and opportunity cost NAz/
Annual production costs
Total annual production, depreciation and opportunity cost


V/The method should be consistent with your present method of accounting.
"b/Based upon % of the average cost of investment. The average cost of the
investments = investment 2.
S/Cost/bird is calculated by summing depreciation and opprotunity costs and
dividing by number of birds sold.
-NA = not applicable.


















16





University of Florida Home Page
© 2004 - 2010 University of Florida George A. Smathers Libraries.
All rights reserved.

Acceptable Use, Copyright, and Disclaimer Statement
Last updated October 10, 2010 - - mvs