News and analysis on the global poultry
and animal feed industries.
on January 10, 2007

A banker looks at the egg business

WATT 90th Anniversary Special: From Poultry Tribune, December 1967

In many areas of the country, large operations already are in existence and many are on the drawing boards. An egg operation for a half million laying hens has an initial cost in excess of $2.5 million. Who has the capital resources to construct such a unit? Not many individuals that I know. But many agriculturally-oriented companies have this amount of capital, and programs of integrated units can be budgeted to yield satisfactory returns on investment to interest some companies who are seeking diversity or expansive opportunities.

Operations exceeding 150,000 or 200,000 layers can be found in most egg production areas. These types of operations are looking toward complete ownership of their egg production facilities. These facilities include a hatchery, feed mill, and processing operation. Units of this size may not be large enough for complete integration. A feed mill often can be stepped up to provide feed for more than double this number of hens.

Chains watch production patterns

At the present time, several food retailers are participating in partial or complete ownership of egg production facilities, particularly in the Midwest. Other chains are watching closely the results of these programs and are very busy trying to program what types of egg purchasing or ownership operations will be the pattern of the future.

The trend of fewer and larger egg farms will continue for the next 5 to 10 years. I don’t expect to see the point reached when 75 farms of 4 million laying hens will provide all of our egg needs, but I do expect to see perhaps 15 or 20 farms appear within the next few years with upwards of 1 million hens per egg manufacturing unit.

The economies of scale may not be much different between an operation of 7,000 and 15,000 birds, but the differences between 7,000 and 25,000 can be significant. The production cost differences between 25,000 hens and an operation of 120,000 hens, or multiples of this figure, can amount to as much as 4 or 5 cents per dozen. These factors much be kept in mind in thinking of the future role of the egg business. The possibility of integrating further, back to the ownership of land resources for supplying the corn and soybean needs, will be the next biggest step in further reducing production costs.

It may surprise you to learn that many lending officers in New York City recognize the problem created by poultry waste disposal. They also understand that new production units must be planned while minimizing the costs of waste disposal and the possible legislative action that may arise concerning air and stream pollution.

What bankers expect from you

Bankers expect a borrower to have an up-to-date financial statement and good inventory figures. A certified statement is of greater value. He also should be able to show past performances and a cash flow statement for at least his three previous years. A cash flow statement for three future years is also desirable.

When a credit proposal comes into my office, I am not impressed by a voluminous feasibility study. Bankers don’t measure a project’s worth by the thickness of the proposal.

The tools necessary to obtain credit should include:

• An introduction and brief description of the proposal.

• A list of the pertinent economic factors such as labor sources, availability of input items, transportation costs, and advantages of location or markets.

• An operating and financial plan.

• A resume of key personnel.

• Other pertinent supplementary material.

Lenders are concerned with total credit needs and are interested in a financing plan for a complete operation. Repayment plans are being tailored to meet the cash flow of an entire operation.

Have plan for loan repayment

Lenders also are more concerned in knowing where the money to repay loans will come from than they have been in the past. They are concerned with marketing and sales. As the sales outlets move father away from some agricultural businesses, the need for more refined and, sometimes more complex, financing plans arise.

The financial community is concerned about the lack of knowledge that many producers have in regard to expansion plans. Often the only consideration given is to the original cost of money. Unfortunately, the true interest costs, depreciation costs, storage costs, and overhead expenses are often overlooked.

Expansion may create problems

Many producers generally have assumed that larger sized operations are more economical and therefore more profitable. Increasing the scale of operations will certainly affect profits in some way, but it also can lead to decreased profits rather than increased profits.

A better credit rating is not automatic as a result of expansion. Expansion demands better management and possibly the use of additional specialized experts. Expansion also can create labor problems as well as reduce labor costs.

Eggmen also show a great deal of confusion involving depreciation. It is important to understand that depreciation is a decline or loss in value. While depreciation is commonly listed as a source of funds, the only true source of funds is the excess of revenues over operating costs. It should be noted that depreciation expenses are legitimate expenses to be deducted before the determination of profit for income tax purposes, and they play an important role in expansion decisions. This item, however, is only useful for a profitable business.

Lenders also are concerned about the marketing of poultry and egg products. The ability to approach a retailer or wholesaler and offer a product below current market prices is not marketing. It is just plain “give-awaymanship” and helps reduce prices to new low levels which affect the entire industry.

Producers don’t know banking

The banking community has found that many segments of the egg business know and understand little about the commercial lending area. They have no concept of how money is created and are usually dumbfounded when it is suggested that they keep a compensating balance on deposit with their lender. Interest alone will not generate enough funds to keep the economy moving forward, and compensating balances generate additional sources of loanable funds. It also results in a higher cost of credit to the egg business. The larger egg businesses understand the balance concept and have accepted its principles as have other industrial corporations.

Commercial banks are faced with a challenge. They must develop programs that will suit the needs of the egg business. They must keep up to date on the latest technologies in the egg business, and they must be willing to help you accomplish the goals that you set for yourselves. Capital alone will not accomplish the job. The success of egg operations will require the management skills of outstanding people who are well trained, enthusiastic, and are business oriented.

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