Technical and Economic Analysis of the Potential for Conversion of Poultry and Swine Production Facilities to Greenhouses and Mushroom Houses

Final Report for LS03-145

Project Type: Research and Education
Funds awarded in 2003: $17,448.00
Projected End Date: 12/31/2003
Region: Southern
State: Arkansas
Principal Investigator:
Michael Evans
University of Arkansas
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Project Information

Abstract:

Our objective was to organize a team and develop preliminary information required to develop future grant proposals designed to examine the technical and economic feasibility of converting poultry and swine production structures into greenhouses and mushroom houses and develop marketing cooperatives. These activities would help farmers previously involved in contract poultry and swine production find other means of agricultural production in which to become involved. This would aid farmers in diversifying and improving income. We conducted a survey of existing structures with potential for conversion and assessed the general condition of structures with an emphasis on the attributes of the structures that would be important in their conversion. This information was critical in designing a full proposal, because we did not know the types or condition of structures potentially available for conversion. We conducted focus groups with farmers, financial institutions and retailers. The objectives of these focus groups were to determine the receptiveness of farmers to alternative businesses and define the information that would be needed for them to convert facilities. We also conducted focus groups with financial institutions to determine the type of information that a farmer would need to present in order to obtain financing to conduct such conversions. These focus groups allowed us to determine the types of questions that we would need to address in future proposals.

Project Objectives:

The following objectives were identified for this planning project:
1.Develop an appropriate team of researchers and a framework for producer input to conduct the study.

2.Identify the range in condition and types of production facilities that could be converted to greenhouse/mushroom production facilities.

3.Identify issues and constraints perceived by producers that will affect their interest and success of conversion to greenhouse/mushroom production.

4.Identify issues and concerns of financial institutions that would potentially finance conversions.

5.Identify issues and concerns of greenhouse/mushroom retailers regarding market channel penetration and coordination.

6.Develop a full research proposal to study the technical and economic feasibility of conversion of poultry/swine facilities to greenhouse/mushroom facilities and successful market organization.

Introduction:

Depressed agricultural commodity prices severely restrict income potential of poultry and swine farmers in the southern U.S. These industries are vertically integrated and a downturn typically results in farmer-growers being shutdown, thereby bearing a large share of the costs of a production adjustment. Because of the investment in facilities that have been specifically designed for poultry or swine production, these farmers are often locked into their current production systems and diversification potential is limited. In addition, those producers desiring to exit contract poultry and swine production in the south are often met with a lack of existing market infrastructure should they desire to stay in poultry and/or swine production in a smaller, less intensified manner.

Asset fixity and specificity are fundamental physical and economic characteristics of modern poultry and swine production. The concepts of asset fixity (Galbraith and Black, 1938; Johnson, 1958; and Edwards, 1959) and asset specificity (Williamson, 1979, 1989) help explain low returns to contract poultry/swine producers. Asset fixity refers to the tendency to continue to produce in the face of lower poultry/hog prices when asset (production facilities) values at acquisition and salvage are markedly different. Asset specificity refers to the tendency to continue to produce in the face of low returns when the transaction costs of converting the assets to alternative use exceed their value in current use. In addition to the production trap of asset fixity and specificity, contract poultry and hog producers are vulnerable to non-renewable production contracts and highly variable production costs (such as propane or natural gas). One poultry contract grower stated “One thing that stays in my mind is that the Company says if you don’t do what we say in regard to equipment or equipment placement changes we will not give you anymore chickens. The Grower/Producer has to give a 60-day termination notice before terminating their contract with the Chicken Company, but the Company can terminate a Grower/Producer anytime.” (Million, 2000).

Greenhouse/floriculture production (i.e. annual/perennial flowering plants) is one of the fastest growing segments of the agricultural economy and has grown to approximately $5 billion in farm gate revenues (USDA, 2002a). Mushroom production in the U.S., valued at $865 million per year, is also a growing area of horticulture with the value of sales increasing by 5% in 2001. Sales of agaricus mushrooms reached a record 695 million pounds in 2001 (USDA, 2002b). Because of the increasing consumer demand, cropping intensity and rapid crop turnover, these two areas of horticultural production have significant income potential for small farmers attempting to diversify.

If poultry and swine producers could convert structures (and use many of their current assets) into greenhouses or mushroom houses and develop local or regional marketing cooperatives to market their products, they could diversify and develop alternative income sources. Alternative products and markets would help small farmers diversify and become more profitable. By forming local or regional greenhouse cooperatives, farmers might have advantages in production and marketing including specialization, and reduced cost of packaging and shipping. They would also have greater market power in negotiating contracts with retailers.

Research

Materials and methods:

1. Conduct meetings with potential team members to determine expertise required and determine breakdown of responsibilities.

The team consisted of Dr. Michael Evans (Department of Horticulture, University of Arkansas), Dr. Eric Wailes (Department of Agricultural Economics and Agribusiness, University of Arkansas), Dr. Michael Schnelle (Department of Horticulture, Oklahoma State University), Dr. Thomas Costello (Department of Biological and Agricultural Engineering, University of Arkansas) and Dr. Richard Harkess (Department of Crop and Soil Sciences, Mississippi State University).
Team members met prior to the implementation of the proposed research to determine which personnel were needed to achieve each objective, timelines and specific issues that need to be addressed. Team members met again to discuss the results of the structures survey and the focus groups. We met to develop a plan for a full proposal and determine specific responsibilities and whether we had the appropriate personnel or groups incorporated into the team to conduct the proposed research.

2. Survey types of structures and equipment and condition of structures and equipment potentially available for conversion.

Team members toured swine and poultry facilities in eastern Oklahoma, Arkansas and Mississippi. The team evaluated the types of structures that were available for conversion and their condition. Structural components, types of foundations, drainage, water availability, fuel sources, fans, heating systems, and electrical capacity were determined.

3. Conduct focus groups with farmers to determine potential farmer interest and needs

Three farmer/producer focus group meetings were conducted, one each in Arkansas, Mississippi and Oklahoma. The focus groups include 4-12 producer/growers. They were be led by a facilitator (with a recorder) to identify issues and constraints for facility and enterprise conversion perceived by producers. The meetings included a meal during which the facilitator explained the purpose and procedures of the focus group study, followed by a 1-2 hour focus group discussion.

4. Meet with financial institutions (commercial banks and farm credit associations) to identify issues and concerns related to facility conversion.

Meetings with loan officers of financial institutions were conducted to inform us of the information gaps and financial information that would be necessary to secure adequate financing for conversion.

5. Meet with greenhouse/mushroom retailers to identify issues and concerns regarding market channel penetration and coordination.

Individual meetings were held with retailers to determine market feasibility issues for greenhouse/mushroom production by previous poultry/swine producers. Issues of market size, producer coordination (cooperatives), logistics and other market channel relationships were discussed.

Research results and discussion:

Technical and Economic Analysis of the Potential for Conversion of Poultry and Swine Production Facilities to Greenhouses and Mushroom Houses for Alternative Marketing Opportunities.

Final Report for a Planning Grant Funded by SR-SARE

Project Participants:

Michael R. Evans, Department of Horticulture, University of Arkansas, University of Arkansas, Fayetteville, AR

Eric Wailes, Department of Agricultural Economics and Agricultural Business, University of Arkansas, Fayetteville, AR

Thomas Costello, Department of Biological and Agricultural Engineering, University of Arkansas, Fayetteville, AR

Michael Schnelle, Department of Horticulture, Oklahoma State University, Stillwater, OK

Richard Harkess, Department of Plant and Soil Sciences, Mississippi State University, Starkville, MS

Project Number: LS03-145 (Planning Grant)

Background and Overall Project Objective:

The overall objective of this planning proposal was to develop the appropriate team, determine the types of structures available for potential conversion and general condition of structures available, conduct focus groups with farmers to determine interest level and issues for their entry into such projects, conduct focus groups with financial institutions to determine potential and conditions for funding conversions, conduct focus groups with marketers to determine market penetration potential and logistics requirements.

Major Conclusions:

· Poultry and swine production facilities could not be effectively and economically converted to greenhouses.

· Poultry and swine production facilities could potentially be used for mushroom production.

· Poultry and swine production facilities could potentially be used for certain aquaculture activities such as prawn production.
· Any successful (and economically feasible) conversion would need to utilize the structures generally intact with minimal renovations.

· Farmers generally expressed an interest in alternative uses for structures specifically as well as ways to diversify their production and income in general.

· Farmers expressed a need for increased educational support from government and universities with respect to alternative agricultural enterprises.

· Farmers indicated a need for additional research and technical information (how to) as well as assistance with respect to developing business plans for alternative agricultural enterprises.

· Farmers expressed significant fear of losing their production contracts.

· Farmers expressed a significant level of anxiety and fear with respective to their relationships with integrators.

· Farmers felt contracts with integrators needed to better address the debt burden with the integrator bearing a portion of the debt burden if contracts are cancelled.

· Financial institutions have had bad experiences with conversions and would require proof of established markets and a business plan that would demonstrate adequate cash flow to service the debt load.

· The team concluded that rather than focusing on conversion of facilities (particularly after contracts are terminated), options for agricultural diversification need to be developed for farmers. This would allow farmers to diversify income (as well as increase income) sources and become less vulnerable to loss of contracts. Diversification would be much easier to achieve than conversion of facilities (particularly if contracts have been terminated and heavy debt loads exist).

· Most farmers had resources (i.e. land, tractors) that could be used for alternative agricultural operations (i.e. sod production, community sponsored agriculture operations, etc.) with little additional capital investment. Farmers expressed a need for educational assistance in developing these alternative businesses.

· No single alternative enterprise will work for all farmers. So many options should be provided. What will work for one farmer may not be viable for another.

Results Related to Specific Project Objectives:

1. Conduct meetings with potential team members to determine expertise required and determine breakdown of responsibilities.

The team met prior to the beginning of the activities to plan how the project was to be conducted and to discuss the team’s composition. The team decided that the current members were appropriate to conduct the planning proposal but that additional members might need to be added as the project progressed.
At the conclusion of the project it became clear that the team’s composition would need to be changed to address the specific issues that arose during the project. Specifically, the team needed to be broadened to include professionals from a more diverse group of specialties such as turf production, organic agriculture and aquaculture. The primary reason for this conclusion was that many potential alternative agricultural operations need to be presented to contract poultry and swine producers to allow for diversification rather than focusing solely on conversion of existing structures (as detailed in the following sections and conclusions). Diversification would provide alternative revenue streams for farmers and allow them to learn new areas of agriculture and develop markets before they face the situation of lost contracts.

2. Survey types of structures and equipment and condition of structures and equipment potentially available for conversions.

The team visited 14 specific locations in Arkansas, Mississippi and Oklahoma comprising 55 poultry and swine production structures. A brief description of each site is listed in Table 1 and a more detailed description follows. In some cases, only the first names of participants are provided to protect anonymity (as requested by participants).

Table 1. Producers consulted and sites evaluated
Contact or participant name(s) Location Type of operation Number and type of structures
Jim andGlenn Berryville, AR Contract poultry 6 drop-wall houses
Charlie Berryville, AR Contract poultry 9 tunnel houses
Bonnie andJim Eureka Springs, AR Contract poultry 4 positive pressure houses
Charlie Jay, Oklahoma Contract poultry 3 drop-wall houses2 tunnel houses
Unknown owner Jay, Oklahoma Contract poultry 3 drop wall wood framed
Jason Jay, Oklahoma Contract poultry 1 timber barn facility
Mark Crenshaw Prestage Pheba ComplexPheba, MS Swine production 4 farrow-to-wean facilities
Mike Shinn M&N NurseryMontpellier, MS Replacement gilt production 4 nursery units
Mark Crenshaw Hi Lo FarmsAberdeen, MS Swine finishing 3 concrete slated finishing floors
Jim Blissard Blissard Pork FarmsTrebloc, MS Swine finishing 8 finishing concrete-slated finishing houses
Mark Crenshaw Egypt, MS Swine finishing 3 swine houses
Mark Crenshaw Pontotoc, MS Swine breeding facility and small farm demonstration units 3 swine houses
Barry Lott Mississippi State University, Mississippi State, MS Poultry and egg production 1 poultry tunnel house and 2 drop-wall egg laying houses
Barry Lott Starkville, MS U.S.D.A. poultry research facility 1 wood frame poultry facility

Jim and Glen, Berryville AR

This business was a contract poultry production facility with 6 conventional drop-wall poultry houses. The structures were steel framed (heavily rusted), covered with galvanized steel, and had insulated drop ceilings. The structures were placed on concrete foundations and had clay floors. Sidewalls were 6 ft tall with 4 ft being a double curtain running the length of the structure. A fog and forced air-cooling system was used for cooling. Heat was provided using unit heaters with heat exchangers burning natural gas (estimated to have 1.2 million Btu capacity). The structures had 100 amps of electrical capacity. The owners did not know the volume or flow rate of water available, but based upon the use required for current operations, water supply would be adequate for any conceivable operation. The operation had significant pastureland surrounding the facility.

Charlie, Berryville AR

This business was a contract poultry production facility. These facilities were standard drop-wall structures similar to the structures described above (Jim and Glenn in Berryville). These structures were in the process of being converted to tunnel-ventilated structures. Three of the facilities were originally built as tunnel-ventilated facilities. Tunnel ventilated structures had cellulose cooling pads at one end of the structure and fans at th

Participation Summary
Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the U.S. Department of Agriculture or SARE.