By Mark Cannella / January 27,
2014
Last week Kathy shared the budget
for a backyard broiler operation. Now, here’s a budgeting tool for doing it on
a larger scale to tell you what kind of profit you might expect from your own
operation. Does it pay to do this? Tell us!
Recent state processing exemptions
for small farms in Vermont have 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. (Each
state has different exemptions so check your local regulations.) 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 trying 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. So the UVM Extension Farm Viability
program developed poultry budgets to help us all get a better answer. We
reviewed finances with several farmers, reviewed older studies and vetted the
budget template with agricultural specialists to develop and “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 what it depends on,
and what you should watch 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 below) to $6,616 net
cash income for an operation embedded in an existing business (Farm B).
This net cash income describes real cash left in the owner’s pocket for
an “owner draw” or for “profits to be reinvested” 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. 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.
Can
You Make Money?
To see how the figures work out for
you and your operation, download this spreadsheet. It comes with a sample
budget and a budget you can adjust for your own operation.
For both Farm budgets, 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.
Conversations 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 Farm B, a vegetable farm 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 already made, websites are in place, and the farm
records systems are set up to track sales.
So, 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
to earning money
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 the crews that meant
labor could be easily borrowed. The stand-alone business will not have
this resource. This means that the owner of Farm A might require a higher
payout that reflects the extra labor he/she needs to contribute.
Start
Up Funding and Getting Paid
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.
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. (If pre-selling
remember the uncertainty of grain markets. You are absorbing the risk of
an unknown crop year and uncertain feed costs if you lock in payment early.
Remember 2007?)
Processing Costs
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 a bird, then our projected net income is reduced by $1,425
(figuring only 950 birds survive to processing). Consider your access to
processing or what it will cost you to do the job.
Pricing
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 per pound would result in a loss of money for
the farms we studied. Price points matter, so revisit this often.
Feed Prices
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. At $0.20 per pound, that hits net income with a
decrease of about $890 per year if you don’t adjust your prices. That’s
really money!
My
Operation is Different
I know that many of you are thinking
these numbers don’t match your specific operation. I agree, and that’s
why I started this article with “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 use these templates and adjust them to reflect the reality for
your business.
So go ahead! Click here and download your own budgeting template
and get started. Then let us know how it goes!
- See more at:
http://onpasture.com/2014/01/27/plan-ahead-for-broiler-profits/#sthash.MPvBW8QW.MjmcR6Jc.dpuf
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