Saturday, February 14, 2009

Contract Chicken Growers' "Housing Crisis"

A Wall Street Journal article earlier this week, Farmers Face Empty-Nest Syndrome Amid Chicken Housing Crisis, offered the sad tales of contract chicken growers who have lost their contracts. Faced with multiple empty chicken houses - structures that often cost over $200,000 each to build - these farmers are left without a stream of income to pay their six figure mortgages. The article evidences both the vulnerability of these growers and the rather astonishing willingness of these farmers and their lenders to take on this risk.

Many of the growers contracted with Pilgrim's Pride, the second-largest chicken company in the United States. Pilgrims Pride recently filed for relief in bankruptcy under Chapter 11 and has now terminated contracts with at least 300 farms in Arkansas, Florida and North Carolina.

Although sometimes touted as a possible "risk management strategy," production contracts in the chicken industry are structured in such a way that the growers assume tremendous financial risk. Under these contracts, farmers receive a set price per pound for raising chicks that are owned and supplied by the chicken processor. Although the farmer bears the financial risk associated with the construction and maintenance of the chicken houses, the contract is frequently "flock to flock." A typical flock matures in 4-6 weeks. This means that even when verbal assurances are given, the contract provides that the farmer has no guarantee that he or she will have any stream of income to support the debt less than two months in the future. And, without a contract, chicken houses have virtually no value. In fact, because of issues of aesthetics as well as environmental contamination, an unused chicken house is likely to actually lower the property's value.

Even so-called "long term" contracts are for only several years - hardly sufficient to pay off a debt of several hundred thousand dollars under long term mortgage. Moreover, many of the contracts have "economic necessity" clauses that the processors claim allows them to cut production and terminate the contract early. And, then there is the risk of processor bankruptcy.

Consider the problem faced by one of the farm families described in the article. Young Arkansas farmers Darris Dixon and his wife built three chicken houses on their farm, taking out a $532,000 loan from Farm Credit Services. They did quite well for three years, until last May when a tornado destroyed two of the houses.
Their $370,000 insurance payment wasn't enough to rebuild; they grappled with whether to quit.

Mr. Dixon says he received a visit from a Pilgrim's representative who said, "Build them back as quick as you can and get 'em rolling again."

The Dixons tapped their savings to rebuild. On Aug. 1, a fresh batch of Pilgrim's chicks took up residence. Ten days later, Pilgrim's called to say those chicks would be the last.
The Journal reported that a Pilgrim's Pride spokesman said that, "At the time of the May tornado, the company was in need of square footage for housing. . . . But no one could have foreseen the dramatic changes that occurred in the U.S. chicken industry last summer."

A complaint alleging fraud on behalf of a group of Arkansas growers has been filed against Pilgrim's Pride. Growers argue that they are misled by verbal assurances that they will continue to be provided with chickens.

One might wonder why are banks willing to lend over a half a million dollars to a farmer with a contract that only guarantees an income stream for a month or two at a time. Some of the loans are guaranteed by the USDA's Farm Service Agency, but that is a story for another post . . .


Anonymous Anonymous said...

The largest growth sector for meat in the USA has been poultry. This has all been grown by growers. As Americans have moved from beef and pork to poultry there has been a huge demand for poultry per capita. Growers and the poultry industry have been developing this industry since after WWII. It takes about 15 years to pay off a poultry house, after which time it should produce between $50k to $75k per house per year, for part time work for a farming family. Prior to paying these assets off they too, like small apartment buildings, produce modest income, $15k to $25k per house, per year. So farming families with idle land or land not suited to crops, assuming such land is suitable for growing poultry, can use that land to create a tremendous family or retirement asset as source of income not otherwise available from such a small amount of land. So, a three house investment, after being paid off, can yield $150k to $225k free cash flow per year. The situation with Pilgrim's Pride is unique in that the poultry industry has been expanding year after year even thought from time to time there are issues with companies. The national financial crisis affected Pilgrim's Pride, and one can review their public financial statements. Many of us have been adversely affected by today's impacts in the financial markets. The USA's population has passed 300,000,000 and will be over 400,000,000 in less than 34 years according to the census. Thus, more and more poultry will be needed despite this brief issue with Pilgrim's Pride, it is inevitable. Also, poultry converts grain to pounds of meat far more efficiently than beef or pork, making poultry more environmentally friendly. The poultry houses in the article will certainly be needed in the not too distant future. One cannot perdict exactly when but it is inevitable that as the US population increases so will the demand for poultry, dramatically. Many, many farmers have stabilized their families, their income, increased their options and kept alive their farming lifestyle because of the income of poultry houses. The article is akin to asking someone who has been evicted, why own a house or bother trying. Yet, we either do or strive to own a houses. If all the population knew of the potential income from poultry houses, many more individuals and many other investment sources would be interested in them. Individuals like those discussed can moderate the risk through any of the techniques of investment. If a person can't afford to buy a small apartment house all alone, then he or she can put together a small group to do so; ditto so could a land owner. The fact that an individual decided to take on all the potential return in exchange for all the potential risk is just a reflection of the particular decision of those individuals, and is not necessarily the outcome or structure of other transactions.

8/05/2009 12:24 AM  
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