1. Commercial Poultry Compensation
Stephen L. Ott, Ph.D.
Appraisal-Indemnity-Compensation Specialist
USDA:APHIS:VS:CEAH
July, 2011

2. Presentation Overview
Why Compensation
Compensation & Biosecurity
How Appraisals Are Done
Indemnity Payments
Valuation Methodology
Appraisal Calculators
Data Sources

3. What Compensation is Not
Not necessarily required by U.S. Constitution, taking clause 5th Amendment
Diseased animals can be considered a public nuisance and thus be ordered destroyed by government through its police powers
Based upon conversation with DOJ lawyer
Currently required by Animal Health Protection Act of 2002
What Congress gives, it can take away
USDA isn’t required to pay for plants it orders destroyed for disease control purposes

4. What Compensation is Not
Not to provide income subsidies to producers.
Not to put producers back into business
It is a secondary benefit
Business interruption insurance is a financial tool producers should consider if they are concerned about their ability to survive a depopulation

5. What Compensation Is
Compensation recognizes there is a disconnect (externality) between producers’ incentive not to report disease and industry and governmental desire for quick reporting to limit the spread of disease
Thus, the economic reason for paying indemnity for diseased animals is to encourage rapid reporting to animal health officials

6. 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 plus any other indemnity received must not exceed fair market value
Values not subject to judicial review
Title 9 Code of Federal Regulations
Part 53: Foreign Animal Diseases
Part 56: Avian Influenza

7. Compensation and Biosecurity

8. Does On-Farm Biosecurity Increase or Decrease Profits?
Function of costs and benefits
Costs
Capital, e.g. truck tire bath
Labor, e.g. time spent cleaning and disinfection between each load or pen of livestock
These costs are real and affect farm profitability

9. Biosecurity Benefits Benefits function of
Effectiveness of biosecurity measures to prevent disease
Greater effectiveness, more biosecurity
Amount of potential losses
Value per head
Greater value, more biosecurity
Number of head
Greater numbers, more biosecurity

10. Optimal Biosecurity
Optimal biosecurity occurs where costs and benefits are equal
If benefits > costs, then increase level of biosecurity
If costs > benefits, then reduce level of biosecurity
costs D o l a r s
benefits
low
high
Biosecurity

11. Government Compensation & Farm Biosecurity Expenditures
Q. What is the impact of government compensation on optimal on-farm biosecurity expenditures?
A. Compensation reduces losses realized
Which reduces benefit of biosecurity
Which reduces optimal on-farm biosecurity expenditures

12. Government Compensation & Farm Biosecurity Expenditures
Conclusion: government compensation reduces private incentive to practice good biosecurity
Which works against Veterinary Services’ Goal of Safeguarding Animal Health through Disease Prevention
Thus the tension between disease control and disease prevention in terms of compensation policy

13. Compensation Conflict Summarized
“One of the most difficult challenges in designing mechanisms that address the risks posed by contagious livestock disease is the potential conflict between encouraging producer herd health management and biosecurity measures while maintaining incentives for early disclosure of health problems.”
– Gramig, Barnett, Skees & Black, 2006

14. Poultry Appraisal

15. 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

16. Poultry Appraisal
Obtain bird count and age from owner or contract grower
Look up per bird value from APHIS’ price list
Maintained by the Appraisal-Indemnity-Compensation Specialist
Total flock appraisal value = count x value per bird

17. 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 may be 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

18. 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

19. 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
Approximate U.S. corporation average (US Bureau of Economic Analysis)
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 phase’s share of total cost

20. APHIS’ 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

21. 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

22. Grandparent Valuation
Grandparents and parent layers are generally produced by a few 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

23. 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
Meat: 2 sizes each for hens and toms
Breeders: hens and toms
Layers
3 laying periods

24. 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 %

25. 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

26. Breeder & Layer Valuation
Three valuation points
Initial (Day-old chick)
Maximum (Beginning of Lay)
Final (Salvage) = Spent hen price

27. 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

28. Breeder & Layer Valuation
Broiler & Layer Breeders all valuation is in the hen, therefore, don’t 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

29. 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

30. 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

31. Cost Data National productivity and cost data from 2009
Updating with 2010 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.
June ‘11 feed cost indexes (2009 = 100):
broilers, 148; turkeys, 150; layers, 156
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.
Base day-old chick cost: NASS’ Agricultural Prices

32. Broiler Price Data
Meat: USDA-ERS’ monthly composite wholesale price for broiler meat
Jun ‘11: current, $0.718/lb
12-month avg., $0.719/lb
Spent Hens: average of USDA-AMS’ Monthly Heavy Hens
Jun ‘11: $0.1369/lb

33. Turkey Price Data Meat:
Light Hens & Toms (up to 98 days old): USDA-AMS’ Monthly Frozen Whole Body, FOB Shipper’s Dock
Jun ‘11 current 12-month avg.
Hens $1.0314/lb $0.9790/lb
Toms $1.0506/lb $0.9802/lb
Heavy Hens & Toms: Monthly composite price based upon AMS’ National Young Turkey Parts and Bulk Meat & AMS’ percent carcass breakout
Hens $1.1588/lb $1.1424/lb
Toms $1.1707/lb $1.1488/lb

34. Layer Price Data Table Eggs
White & Brown Egg prices calculated from AMS’ Monthly Trailer Load Egg Sales
May ‘11 12 month avg.:
white, $0.6882/doz; brown, $0.9934/doz
USDA-NASS market egg price, $0.685/doz
Spent Hens: normally a cost to remove spent layers, assume minimum layer value of $0.01/bird

35. Data Needs Layers Broilers Turkeys
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