The Crazy Business of Financing a Chicken Farm

[Terrel L. Shields]

Prior to the meltdown of housing, poultry growers were increasingly losing their rears. Natural gas prices were high, propane even higher and it is a major expense. Many integrators (chicken companies) own a propane business, and deduct the gas price from the batch settlement check. There were farmers who got red checks, they spent more on fuel than they made on the birds.

This cascaded into an avalanche of foreclosures - especially in the oldest barns (mostly built after a major ice storm that collapsed hundreds of barns circa 1989.) These were mostly 40' x 400' (steel truss frame) and built from 1989-1996. After 1996, few barns were built for a couple of years, then the new style was 43' x 500', steel truss frame, which quickly morphed into a wood frame construction with drop ceiling that was supposed to be more energy efficient.

By 2008, that changed to the 55' x 600' or the 66' x 600' wood truss barns...and the cost was about $12 a SF, so you easily got $400,000 in the larger barns and most farms had a minimum of 4 barns. But about the same time, beef prices begin to rise. Now beef is horribly expensive and the glut of chicken that was in frozen storage and selling overseas for as little at 5¢ a pound net, evaporated. In the past couple of years grain prices have fell along with energy costs thus, the profit margins are high. Now the integrators are talking more rubes into building the large barns as a fast clip to meet demand...which eventually will lead to another bust, of course. And much of the margin of profit can be attributed to lower natural gas prices.

Today I got a call about a farm that I appraised last summer. It had 4 older barns (40x400) and 2 newer 43'x500' barns. The bank appraisal-ordering dept. seemed to be oblivious to the fact that the farmer had walked and another farmer was watching the place. He, in turn wanted the farm and was willing to upgrade the place. After some going back and forth, I valued the barns as a dark farm with the knowledge that these barns were quickly being bought up and upgraded, often with additional new barns. My comps suggested same to a point, but some older sales still reflected them as pariahs on the market. The transition from one to the other was quick.

I valued the farm with the assumption that it would sell quickly and be restored to service with the possible addition of more barns. The banker confessed they had people bidding for many of these kinds of farms. But they wanted me to look at the appraisal and perhaps lower the value???? using the assumption that it would be foreclosed and sold as totally distressed.???? It appears to have been an 8 month process to go through foreclosure.

Seems the ordering guy (an appraiser) had been asked to talk to me about it by a senior reviewer. What the heck is that all about? I told him, I saw nothing that would change my opinion and I certainly was unwilling to change the value of that farm, but would consider re-valuing it, but could not think of any reason why I would not lean towards the idea it would sell pretty well and quickly. I just saw one nearby sale of land for at least $2,000 premium per acre over prices only one year ago, and later went by and they were building pads for new poultry houses. Demand for these houses are out of proportion to common sense which tells me a high percentage of these will fail over the next 5 to 8 years when the market will once again turn as beef and pork numbers ramp up and grain and energy prices increase.

Perhaps this is the result of FSA or SBA stepping in and wanting it looked at again, but normally they require one look at the cost of bringing these dark farms up to snuff and selling them as opposed to treating them as unusable which is what I did. I think the farm will be revived. I don't know what the bank wanted. I don't understand why the bank would want a lower value for their books or why they thought I would change it. The guy I spoke to understood my position, but I really wonder why they bothered to even call me.

 

[leasedfee]

I thought of you the other day at the supermarket. The price of eggs has really gone up. $2 for a dozen at the Kroger branch. And up to $5 for cage free eggs at Whole Foods! I was surprised you wrote 5c/Ib. for chicken when I've been paying $1.50/Ib. for legs and it goes up from there. . . . . Why the difference between vendors? Red-something charges much more than Perdue.

 

[Terrel L. Shields]

People prefer light meat over dark. The modern chicken has been engineered to have big breasts The Chinese market was hot to absorb wings, dark meat and even "paws" (feet) as they liked them. But that market is much worse as China (and Russia for that matter) try to build their own chicken industry by claiming some "problem" (disease, etc.) with our chicken. At one time, we had a whole mountain of frozen chickens ... and I do mean mountain http://www.zeromtn.com/lowell

But "hot wings" solved the wing over-supply and now high beef prices are solving the dark meat issue. People are eating more chicken.

Therefore, egg producers are shifting from table eggs produced by a pint sized chicken that will hatch 300 eggs per year to a breeder hen eggs which makes more chickens (and are bigger hens which produce fewer eggs - say 180 - 240 a year). So keeping up with demand is one item. Number 2 is that caged layers are efficient and produce a lot of eggs. OK. They cannot be all that distressed can they? Unhappy chickens lay NO eggs. But California in the infinite wisdom of Disneyism (attributing human qualities to animals) has decreed that chickens must have a much larger space - apparently they believe the poor bird agonizes over same. (In reality, when young birds are put in a barn, the grower uses only half the house and has to put migration fences (big plastic tubes) across the houses to keep birds from ganging up on one end or the other - they like company. Organic and "free range" eggs are grown with extra space and access to outside. And they produce far less eggs. And the farms have much less eggs to sell, and yet the fuel bill and the electric bill is much the same. The labor, if anything, is more. Picking up eggs laid outside is a hands on business (and they will lay some eggs outside) unlike nest eggs which can be gathered mechanically.

And environmentalists don't want them to go thru molting - a temporary stressing of the birds and changing the light regime so they shed feathers like it is changing to spring. That increases production since birds slowly produce fewer eggs, then in spring "ramp up" production. Controlling the light makes them think summer is longer. If they don't molt then the birds go to slaughter...which is why I question the sanity of environmentalists. ...whatever.

The recent increase is largely due to the California requirement since producers in any number of other states must comply, thus produce fewer eggs from fewer birds. So the law affects people in Iowa, Arkansas, wherever eggs are produced and sold in California.

Almost all of our eggs are produced here as "cage free" and they produce close to the level of caged layers. I think it a waste of money to buy "organic" or "free-range". And there is also a very expensive egg - the "vegetarian" egg - so those birds are held in house so they don't eat any insects, but with lots of space, and are feed organic grains, etc. Never mind the tiny bits of insects that is found in all grains.

The average grower of table eggs here will get about 25¢ or less per dozen. The egg company pays for the birds and the feed. A bonus is paid if you don't waste the feed (feed conversion). And if you grow breeders, it is closer to 45¢ per dozen for breeder eggs, or 60¢ for a dozen "grandparent" eggs (eggs that produce the breeder hens that become egg layers). You can't run as many birds as in the caged or cage free houses because the birds are bigger. Finally, the organic, free range egg producer will have about 25% of the birds a caged house will, and gets about 90¢ per dozen for the eggs...Since they cost about 4x the regular table egg you can see the middle man is making up the difference by a large measure.

 

[Tim The Enchanter]

You got me thinking bout getting a backyard chicken or 2 for our own egg eating needs.
Turns out you can even adopt from the animal shelter. How much trouble could 1 or 2 be?
Probably more than I'm guessing.

http://www.adoptapet.com/pet-adopti...hicken&include_mixes_p=1&sex=f&family_id=1266

 

[Elliott]

I went to a course about 35 years ago put on by the Department of Revenue on Chicken Processing Farms. As I recall, its 4 birds to a cage and there were a couple of designs. The ones with better automation moved the dead chickens via a conveyor belt.

My son, his wife, and little daughter live in the suburbs and followed the current foodie trend of having chickens in his backyard. He has 4 chickens and lots of eggs.

But getting back to your question about people ordering appraisal and review.....I had a request for a 5-year retro appraisal for estate tax purposes. I review the sales, and find a few that are close to the date of death, but it was during the time nothing, and I mean nothing was selling. I figure out my values and send it off. I get a call from the PR and she's an attorney, and she tells me she has shown the report to another attorney and another appraiser, and they both tell her there is no way she will sign the tax return because I used a sale that is post-date of death. I tell her, look, if there were sales pre-date of death, I'd have used them.....but the reality of the market at the time was the sales I used were the most recent and best indicators of value. She doesn't budge. I tell her, I feel sorry that she can't look at appraisals in a logical way. We agree to disagree, but I tell her, look, I stand behind my reports and if there is someone who wants me to explain why I used a post-date sale, I will tell them why. I think she was just looking for a way to bill more hours. I wanted to tell her, look, the tax man just wants the money, if they don't get it with this bite at the apple, they'll get it next time, but eventually they get most of it. Go figure.

 

[Tim The Enchanter]

. I think she was just looking for a way to bill more hours. Go figure.

OK, 30 minute discussion with appraiser: $200.

 

[Doug DeMars]

I went to a course about 35 years ago put on by the Department of Revenue on Chicken Processing Farms. As I recall, its 4 birds to a cage and there were a couple of designs. The ones with better automation moved the dead chickens via a conveyor belt.

My son, his wife, and little daughter live in the suburbs and followed the current foodie trend of having chickens in his backyard. He has 4 chickens and lots of eggs.

But getting back to your question about people ordering appraisal and review.....I had a request for a 5-year retro appraisal for estate tax purposes. I review the sales, and find a few that are close to the date of death, but it was during the time nothing, and I mean nothing was selling. I figure out my values and send it off. I get a call from the PR and she's an attorney, and she tells me she has shown the report to another attorney and another appraiser, and they both tell her there is no way she will sign the tax return because I used a sale that is post-date of death. I tell her, look, if there were sales pre-date of death, I'd have used them.....but the reality of the market at the time was the sales I used were the most recent and best indicators of value. She doesn't budge. I tell her, I feel sorry that she can't look at appraisals in a logical way. We agree to disagree, but I tell her, look, I stand behind my reports and if there is someone who wants me to explain why I used a post-date sale, I will tell them why. I think she was just looking for a way to bill more hours. I wanted to tell her, look, the tax man just wants the money, if they don't get it with this bite at the apple, they'll get it next time, but eventually they get most of it. Go figure.

I would go as far as telling her that not including a credible post-date transaction in the absence of pre-date transaction data would be irresponsible. For retrospective appraisals, I almost always try and include one post-date transaction. Bracketing all relevant factors that is germane to value (including market conditions); this is simply good methodology. Of course, we don't have this luxury for current valuations.