Poultry farmers are part of agriculture’s most vertically integrated supply chain.
Farmers provide the facilities including specialised housing, management and energy to grow birds using feed that are sourced through the processor.
The farmers investment is time plus whatever capital expenditure that is required to put in place suitable housing.
That means once the facilities are in place – usually after at least a six figure investment – farmers are no longer involved in trading, either buying or selling. Their role is providing management and labour that delivers the maximum amount of poultry meat possible from each intake of birds.
As with any farm asset that involves large capital expenditure, it is necessary to have it used to its maximum potential. In poultry production that means that once a house is emptied and cleaned, get another crop of birds in immediately to start the cycle again.
This has been generally lucrative for farmers in recent years but is not without risk. If the processor for any reason decides to cut back on their intake, it reduces the ability of the farmer to utilise their expensive asset as without birds it has no other means of generating revenue.
Utilisation of the asset
For this model to work successfully for farmers, a guaranteed minimum of production cycles each year is necessary and if this is not possible there should be a compensation payment mechanism. As the model currently operates farmers are taking the risk of the investment in buildings as well as committing their own time to the business. Whatever the possibility of securing alternative employment during a shut down, there is no possibility of getting an income from a poultry house in another business.
It has to be emphasised that the model has served poultry farmers well to date, operating at close to full capacity with minimal disruption. However, should farmers be required to reduce production significantly over a prolonged period, then farmers become exposed by having an expensive asset that cannot readily be used to generate an alternative income.
Application to other sectors
While poultry production is totally integrated, the pig production model is less so in that farmers own their pigs as well as the infrastructure and in most cases make their own decisions on diet and where to sell.
However, they do invest in providing expensive housing and management of waste.
Beef producers on the other hand have no forward integration
Similarly with beef and dairy. Dairy farmers own or lease the land, invest in the buildings and breed and maintain their cows. They are in some ways the opposite of the poultry model integration as many are invested in the coop they sell their milk to.
Beef producers on the other hand have no forward integration in that the processing sector is privately owned.
Farmers provide the land, labour and capital through their stock and have complete autonomy on how they run their business provided they deliver the specification the factory wants.
Poultry farmers have conceded their independence over recent decades in return for an integrated model in which they secured a stable income that funded repayments on the capital investment required.
This model requires full utilisation of the asset but when the asset isn’t being used the poultry farmer isn’t generating an income. Beef and sheep producers have complete independence but have full exposure to market conditions.
If they are in a better position to sustain low incomes, it is usually because they own with little if any expenditure, the main asset required, the land. Dairy farmers possibly have the best balance, autonomy to own their farm business with a foot in the processing end through the coop model.