Report highlights lack of investment in broiler growing sheds

A period of sustained loss between 2004 and 2008 has led to insufficient investment in rearing facilities, according toa reportcommissioned by the NFU and UK broiler growers.

The cost of investing in new poultry sites has more than doubled in the past 10 years with estimates of building costs ranging from £172 to £182/sq m for a greenfield poultry unit. And as poultry units don't have an alternative use, any rental value only relates to rearing broilers.

The report says: "It is reasonable to consider the investment as relatively high risk and, as such, should attract a budgeted return of 10-20%."

Looking at survey data covering summer 2008, it shows that even when accepting a return on investment of just 6%, a new unit would fail to generate a profit (see table). This means any commercially minded producer is unlikely to invest.

One fear is that the industry will shrink and lose critical mass, as highlighted by NFU poultry board chairman Charles Bourns. He points to the issue of food security with the world population set to increase, fuelling demand for chicken. "We can import from overseas to plug the shortfall in production. But is this going to be possible in 10-15 years time with the predicted increase in global population?

"If we want to keep the industry at home, investment is necessary. A lot of sheds were built in the 1970s, which will soon need replacing."

His fear is backed by DEFRA figures, which show that UK poultry meat production is at its lowest level since 1995, with the rolling six-month average down to 120,000 tonnes a month from a peak of 135,000.

NFU data obtained by the authors suggests the average producer has been reporting a loss from when NFU analysis started in December 2004 up to October 2008 with the losses peaking at 6.65p/kg in December 2007. Feed costs are the biggest variable, ranging from 28.03 to 45.64p/kg. Energy and water costs have also increased significantly.

Producer margins are not helped by retailers' high margin expectations. NFU chief poultry advisor Rob Newbery says the multiples expect about 30% margins on large volumes of sales, which makes chicken important to business. At the end of last year, producers were receiving 68.2p/kg, while the wholesale price was 126p/kg and the retail price of 279p/kg. This means that producers receive only a quarter of available margin compared with the retailer share of about 50%.

To address concerns over the sustainability of British chicken, the report has come up with a series of recommendations. First, it calls for a new approach to contracts between growers, integrators and retailers, as reinvestment in buildings require confidence in long-term relationships. Confidence is lacking where contracts can be terminated (by both parties) with as little as two crops notice, whereas any investment in buildings requires a 10-year write-off period.

For those contracts between integrators and growers, the report suggests a set of proposals, including a guaranteed payment per unit area of space made available. This should reflect the capital cost of the building and be revised annually for any new builds. While this payment provides the grower no profit, it underwrites some of the risk. However, the grower is still exposed if the contract is terminated.

Energy costs have been changing rapidly recently and growers' payments should reflect this change on a monthly basis.

Mr Bourns also believes there should be more emphasis on quality. "Producers should be paid more for better quality birds. Young farmers need an incentive, as someone producing poorer birds are paid the same."

A second recommendation is that the industry should introduce an independent costing service overseen by a trusted third party to enable informed decision making.

There is some understanding of average costs, but too little understanding of how these costs vary between producers and the potential to improve efficiency. While confidentiality may be an issue for some growers, one way around this is to use an independent firm to undertake the costings, reporting on a unit area basis. Or it could be in the form of benchmarking clubs, suggests Mr Bourns.

"Benchmarking is a good idea as many producers do not know enough about costs and whether their figures are good or bad. For example, there can be a discrepancy in costs such as shavings and sharing this would be of great use."

Finally, the report suggests looking into partnership arrangements between groups of growers and retailers, similar to milk producer groups operated by individual retailers. This will not only helps growers secure long-term relationships, it can also benefit others in the chain by providing the retailer with marketing edge and reinforcing the commitment between integrator and grower to the supplier.

Case study: Kinsey Hern, Herefordshire

Herefordshire broiler grower Kinsey Hern, who hopes to expand to 160,000 birds by the end of the year, believes the key message from the report is the need for better communication links between retailers and producers to enable more efficient responses to the effects of increased growing costs and legislation on UK farms.

"Liveweight prices for British chicken do not leave enough finance to cover investment in broiler chicken production over a 10-year period. Only substantial incentives above the market price make investment viable, which have recently surfaced because of grower awareness that investment was not possible at the current price. The incentive (which also falsely affects supply-and-demand dynamics, and undermines the viability of current broiler production space) does not go far enough in relation to the risk of investment.

"Questions might be raised as to why we are expanding when the figures do not stack up. It will enable us to be more competitive as British chicken producers than we are now, by spreading our fixed costs even thinner, with the hope that the market will improve to make our investment worthwhile.

"Alongside the NFU, I am carrying out a shed age survey across the country. This will hopefully be used as a tool to highlight how little investment has been made in the broiler industry lately, and create an understanding in the supply chain that more money needs to be filtered through to the British broiler grower.

"We have 81 farms and I would like to urge all growers to take part by sending their farm name, along with date and size of sheds built."

All farm data will remain confidential, for more details email kjhern@hotmail.com