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Commercial Poultry

Compensation
Stephen L. Ott, Ph.D.
Appraisal-Indemnity-Compensation Specialist

February, 2010
Presentation Overview
Why Compensation
Compensation &
Biosecurity
How Appraisals Are Done
Indemnity Payments
Valuation Methodology
Appraisal Calculators
Data Sources
What Compensation is Not
Not required by U.S. Constitution,
taking clause 5th Amendment
Disease animals can be considered a
public nuisance and thus be ordered
destroyed by government through its
police powers
Not to provide income subsidies to
producers.
Not to put producers back into
business
It is a secondary benefit
If producers are concerned about getting
back in business or losses not covered by
government indemnity, then they should
purchase business interruption insurance
What Compensation Is
Compensation recognizes there is a
disconnect between producers
incentive not to report disease and
industry and governmental desire for
quick reporting to limit the spread of
disease
Known as an externality
Private behavior can be influenced through
taxes or income transfers (indemnity payments)
Thus, the economic reason for paying
indemnity for diseased animals is to
encourage rapid reporting to animal
health officials
Compensation Law & Regulations
Animal Health Protection Act 2002
Part of 2002 Farm Bill
Pay fair market value
Indemnity is for assets destroyed
Lost income not covered
Federal indemnity reduced by any
other indemnity received
Values not subject to judicial review
Title 9 Code of Federal Regulations
Part 53: Foreign Animal Diseases
Part 56: Avian Influenza
Compensation and Biosecurity
Does On-Farm Biosecurity
Increase or Decrease Profits?
Function of costs and benefits
Optimal biosecurity occurs
where costs equals benefits
Benefits function of
Effectiveness of biosecurity
measures to prevent disease
Amount of potential losses
Value per head
Number of head
Government Compensation
& Farm Biosecurity Expenditures
Q. What is the impact of government
compensation programs on optimal
on-farm biosecurity expenditures?
A. Indemnities paid reduce losses
realized
Which reduces benefit of biosecurity
Which reduces optimal on-farm biosecurity
expenditures
Conclusion: government
compensation programs reduce
private incentive to practice good
biosecurity
Government Compensation
& Farm Biosecurity Expenditures
Consequently, too high
indemnity payments can
contribute to future disease
outbreaks as biosecurity is
reduced
Thus, there is tension between
encouraging disease reporting
(high indemnity payments) and
encouraging disease prevention
through increased biosecurity
(low indemnity payments)
Poultry Appraisal
Poultry Appraisal
Use price lists developed from
appraisal calculators
Broilers: Meat & Breeders
Turkeys:
Meat: Hens & Toms
Breeders: Hens & Toms
Table Egg Layers: Layers & Breeders
Value by age
Meat: day-of-age
Breeders / Layers: week-of-age
Poultry Appraisal
Obtain bird count
and age from
owner or contract
grower
Look up per bird
value from price list
Total flock appraisal
value = count x
value per bird
Poultry Indemnity
Total indemnity = appraisal value x
indemnity percentage
Indemnity percentage may be less than
100% for large scale producers who do
not participate in the National Poultry
Improvement Program (NPIP)
Indemnity payment maybe split
between owner and contract grower
Contract grower indemnity payment =
(expected earnings (based upon
previous flocks) prorated by actual
production length any company
payments already received) x indemnity
rate
Company indemnity = total indemnity
any indemnity payments to contract
grower
Appraisal Valuation Methods
Two Basic Appraisal Methods
Revenue Minus
Start with value of final product and work backwards
subtracting costs and share of retained earnings for each
downstream production/processing phase
Cost Plus
Appraisal value is equal to cost of production plus
accumulated shares of retained earning for each upstream
production/processing phase
Both methods produce the same exact value, thus
provide internal check that spreadsheet equations are
correct
Cost Plus will be discussed
Cost Plus Appraisal Value
Valuation based upon cost of production and
allocated retained earnings
Retained earnings = net margin (gross profit)
income taxes return to owner equity
(dividends)
Assumed to be 1/3 of net margin, based upon US
Bureau of Economic Analysis data
If net margin is negative then retained earnings are
set to zero
This method guarantees companies at minimum will be
compensated for their unrecouped costs
Retained earnings are allocated across the
various production/processing phases based
upon each phases share of total cost
Appraisal Calculators
Spreadsheets used to determine value
Broilers:
Meat
Breeders (Parents)
Turkeys
Meat: Hens & Toms
Breeders: Hens & Toms
Table Egg: Layers
Uses national numbers so as not to identify any
one company
Updated Monthly
Meat & egg prices
Feed price index
Customized Values
A poultry company has the option of basing
appraisal value on their own cost of production
data where value equals unrecouped cost
Meat birds value = cost of production
Breeder/layers value = capitalization cost -
depreciation
Documentation
Computerized Records
Productivity data
Cost of production data
Grandparent Valuation
Grandparents and parent layers are generally
produced by a few genetic poultry companies
Valuation will have to be customized
Use same valuation approach as for parent/layers
Data requirements
Productivity data
Cost of production data
Revenue data

If unwilling to provide this data, then valuation


will equal that of parent/layers
Appraisal Calculators
For each species
Over 100 input parameters
Prices, Costs & Productivity data
Over 200 equations
With feed costs feedback loops
Broilers
3 sizes of meat birds
Breeder birds
Turkeys
2 sizes of hens and toms
Breeders: hens and toms
Layers
3 laying periods
Meat Bird Valuation
Slaughter Value = cost of
production + allocated retained
earnings of any upstream
production phases, e.g.
breeder birds & hatchery in an
integrated broiler company
Initial value: day-old chick cost
+ (slaughter value final
production cost) x livability %
Mid-Age Meat Bird Valuation
Linear interpolation between beginning value and
ending (slaughter) value
Beginning value + beginning age slaughter age *
(slaughter value beginning value)
Age expressed in days in barn
Breeder & Layer Valuation
Three valuation points
Initial (Day-old chick)
Maximum (Beginning of Lay)
Final (Salvage) = Spent hen
price
Breeder & Layer Valuation
Beginning of lay valuation
Value = capitalization cost + allocated
retained earnings from future egg
production
Retained earnings based upon 12 month
rolling average price
Value declines linearly to salvage
(spent hen) value
Day-old chick value
Value = day-old chick cost +
(beginning of lay value
capitalization cost) * livability %
Linear interpolation between day-old
value and beginning of lay value
Breeder & Layer Valuation
Broiler & Layer Breeders
all valuation is in the hen,
therefore, dont count
roosters in bird inventory
Assume a single lay
Value at beginning of lay
when molted
Capitalization cost (value at
molting age plus costs
during molting) plus
allocated retained earnings
of expected egg production
Brown & Organic Table Egg Layers

Brown Egg Layers


Value determine using
brown egg price and brown
egg layer productivity
Brown egg layer productivity
determined by comparing
breeding companies
production guides for white
& brown table egg layers
Organic: Value at
capitalization assumed to be
50% greater than that of
brown egg layers
Turkey Breeder Valuation
Turkey hens & toms valued
separately
Allocated retained earnings
divided evenly between hens
and toms
Since one tom services several
hens allocated retained earnings
per tom is greater than that of
hens
Thus toms have greater value
than hens
Cost Data
National productivity and cost data from 2005
Updating with 2009 data is planned
Monthly adjustments for feed costs based on changes in
feed costs used by USDA-NASS to calculate its broiler-
feed, turkey-feed, and market egg-feed ratios.
2005: broiler feed, $6.20/cwt, Dec 09, $10.69/cwt
10.69/6.20 = 172, i.e. feed cost up 72% since 2005
Changes in feed costs not only impact the cost of feeding a meat
bird or producing an egg, but also the costs to produce a
breeder/layer which impact bird depreciation cost in egg
production. The change in egg production costs in turn impacts
the cost of a day-old chick which changes total production cost
of a meat bird.
Day-old chick cost: annually NASS Agricultural Prices
Broiler Price Data

Meat: USDA-ERS monthly composite


wholesale price for broiler meat
Dec 09: current, $0.719/lb
12-month avg., $0.755/lb
Spent Hens: average of USDA-AMS
Monthly Heavy Hens, Southeastern &
South Central Regions
Dec 09: $0.1284/lb
Turkey Price Data
Meat:
Light Hens & Toms (up to 98 days old): USDA-AMS
Monthly Frozen Whole Body, Young Turkeys, Grade A
Dec 09 current 12-month avg.
Hens $0.8381/lb $0.7936/lb
Toms $0.8387/lb $0.7928/lb
Heavy Hens & Toms: Monthly composite price based
upon AMS National Young Turkey Parts and Bulk Meat
& AMS percent carcass breakout
Dec 09 current 12-month avg.
Hens $0.9936/lb $0.9107/lb
Toms $1.0011/lb $0.9160/lb
Spent breeder price = 2005 spent price * current NASS
live turkey price 2005 NASS live turkey price
Dec 09: Hens, $0.2396/lb; Toms, $0.2515/lb
Layer Price Data
Table Eggs
White & Brown Egg prices calculated from
AMS Monthly Trailer Load Egg Sales
Dec 09 12 month avg.:
white, $0.6723/doz; brown, $0.6893/doz
USDA-NASS market egg price, $0.656/doz
Spent Hens: normally a cost to remove spent
layers, assume minimum layer value of
$0.01/bird
Data Needs
Layers
Better brown egg layer cost & productivity data
Organic eggs: prices, costs & productivity data
Breeders: revenues, costs & productivity data
Broilers
Grandparent breeder information
Colored bird: meat & breeder information
Turkeys
Light tom productivity information
More breeder tom information
Grandparent breeder information