FCSAmerica Staff Reports
| Nov 09, 2016
We recently wrote about the impact several new pork processing plants will have on the industry and nearby producers. Two planned poultry processing plants offer additional opportunities to farm families.
Simply Essentials plans to reopen the former Cedar River Poultry processing plant in Charles City, Iowa, the first week in December. Costco will open a second, much larger plant in Fremont, Nebraska, likely in late 2018.
Both plants are vertically integrated and will rely on contract producers within a 60- to 100-mile radius to raise the boilers.
“Benefits of contract production can include a guaranteed market, steady cash flow throughout the year and, in some cases, company-supplied expertise that can make it easier for a farmer to step out of his or her comfort zone,” said Bob Campbell, senior vice president at FCSAmerica.
Other benefits, according to Campbell and Kelley Johansen, a financial officer in FCSAmerica’s Columbus, Nebraska, office:
- Expansion or diversification of operations.
- Makes room for the next generation or utilizes excess labor.
- Farm operating costs are controlled because poultry companies generally supply the producers’ feed, veterinary care and transportation.
Prairie’s Best Farms, a Minnesota-based company, will manage production for Simply Essentials, which is based in Kansas. The two companies have partnered in the past to bring flax-fed beef to market. As part of their poultry operation, they will use a proprietary diet that includes flax seed to tap into a niche market for meat which is touted as having more Omega-3 fatty acids and less cholesterol.
The Simply Essential plant will open with a one-shift capacity of 336,000 head a week. This amount is expected to double about the middle of 2017.
Prairie’s Best Farms is contracting with producers now. It anticipates signing 80 contractors when it is operating at full capacity.
The Costco operation plans to slaughter 2 million head a week to supply rotisserie chicken and ready-to-cook chicken to its club outlets. Costco’s ownership from egg to retail is unique in the industry; other companies typically sell at the wholesale level.
Costco foresees a need for 32 pullet houses (eight farms), 56 hen houses (14 farms) and 420 broiler barns. Nebraska-based Lincoln Premium Poultry LLC will manage production for Costco.
New contract terms
While both companies have an ownership structure similar to some other vertically integrated poultry companies, their contracts are unique. Both are writing 15-year contracts with a guaranteed base rate. More typical are poultry contracts that pay producers on “tournament” system, which is based on pounds sold and often leads to income volatility.
“We basically pay on a square-foot basis,” said George Peichel, CEO of Prairie’s Best Farms. “Most of a producer’s income is based on how many chicks the barn can hold. About 10 percent is in the form of an incentive for above-average production.”
Both companies say barns will be full - the market is there, reports Matt Mastney, another financial officer in FCSAmerica’s Columbus office.
“These contracts match the expected life of the barns and appear to offer predictable and dependable income,” he said.
The companies will supply virtually all the inputs. In addition, they will provide training and full grower support as producers learn the business.
Willow Holoubek, executive director the Alliance for the Future of Agriculture in Nebraska (A-FAN), said she routinely works with companies that contract with producers. This includes Lincoln Premium Poultry.
“I have never seen such dedication to the success of their growers,” Holoubeck said of Lincoln Premium. “They are one of the few that really understand that they must help farmers be successful if they are to be successful.”
Grain producers also will benefit from new demand created by the plants.
The Simply Essentials plant will need about 34,000 bushels of corn a year per 42,000-bird barn, according to Rick Orban, director of business development for Prairie’s Best Farms.
Costco plans its own feed mill, which will require about 300,000 bushels of corn and 3,000 tons of soybean meal per week.
Improved corn and soybean basis, in turn, could support land prices and rental rates, said Johansen. “There will certainly be a multiplier effect.”
FCSAmerica has extensive experience lending to contract finishers. About 1,000 of the Association’s customers are contract finishers, mostly for the pork and poultry industries. FCSAmerica supports contract growers through customized loan or lease terms that align payments with the contract terms. Our dedicated staff of appraisers know how to quickly and accurately value contract production facilities and equipment, avoiding delays on the front end. Call your local office today.