Division of Agricultural Sciences UNIVERSITY OF CALIFORNIA "*•>*€} FINANCING WESTERN BROILER PRODUCTION westernN regional^ -research ^ % publication CALIFORNIA AGRICULTURAL EXPERIMENT STATION BULLETIN 753 Western Poultry Marketing Research Technical Committee REGIONAL ADMINISTRATIVE ADVISER: Phil S. Eckert,* Arizona Agricultural Experiment Station, Tucson, Arizona WESTERN POULTRY MARKETING RESEARCH TECHNICAL COMMITTEE: California Kenneth D. Nadenf Utah Roice H. Anderson Oregon. . . .Charles M. Fischer, Chairman Washington E. L. Baumt COOPERATING GOVERNMENT MEMBERS: George A. Jackson, Jr., U. S. Department of Agriculture, Los Angeles§ Humbert S. Kahle, U. S. Department of Agriculture, Washington, D.C. * Resigned. f Resigned September 26, 1955. | Resigned November 1, 1954; replaced by Martin Waananen. § Resigned April 9, 1954; replaced by Haruo Najima. ACKNOWLEDGMENTS COOPERATION and assistance of many made this study possible: hatcheries, feed dealers, processors, banks, and other financing agencies, in Washington, Oregon, Utah, and California; producers and others in the industry who gave information and advice; and Haruo Najima (Los Angeles), who assisted in analysis of data. THE AUTHORS: During preparation of this bulletin — Kenneth D. Naden was Assistant Professor of Agricultural Economics, Assistant Agri- cultural Economist in the Experiment Station, and Assistant Agricultural Economist on the Giannini Foundation, Los Angeles. George A. Jackson, Jr. was Assistant Specialist in Agricultural Economics in the Ex- periment Station and Cooperative Agent, Bureau of Agricultural Economics, United States Department of Agriculture, Los Angeles. Submitted for publication August 15, 1955. CONTENTS PAGE SUMMARY 5 Financing universally recognized as important, but contributes to production instability . . . Plans available, conditions for financing . . . Outlook for stability not favorable. DEFINITION OF TERMS 6 SCOPE, OBJECTIVES, BACKGROUND 8 Central issue: vertical integration, its effects . . . Three aims of this study . . . Back- ground of phenomenal growth. I. HOW FINANCING GREW IN IMPORTANCE 9 Reasons short-term credit extensively used: variable costs, uneven income, batch system of production, feed dealer promotion, processor promotion. II. AGENCIES GRANTING OR PROCURING CREDIT 11 Feed dealers (most important), banks, cooperatives, FHA, producer cooperatives, hatch- eries, processors, and grower-contractors. III. PLANS FOR FINANCING PRODUCTION 14 Three principal plans— open account, share system, and flat fee. Each plan a "pack- age." IV. CONDITIONS FOR OBTAINING FINANCING 17 Agencies had almost identical requirements . . . chattel mortgage or conditional sales contract, field supervision, specific buyer, net worth, experience. V. LIMITS ON EXPANSION OF CREDIT OR PRODUCTION 19 Main reasons for limiting credit: Lack of qualified growers, plant at capacity, credit used up, quota set, market outlook bad. VI. RETAIL MARKET FOR SHORT-TERM CREDIT 20 Credit sellers limited . . . Quoted prices nominal . . . Effect of tie-in sales . . . producer's weakness. VII. PRICES CHARGED FOR CREDIT 21 Credit sold for secondary purpose . . . Three ways of charging for credit service. VIII. COMPARISON OF FINANCING ACTIVITIES 25 Methods, results related to organization differences. IX. FINANCING AND VERTICAL INTEGRATION 27 Degree of integration related to finance plan offered . . . Trend toward integration, sus- tained production . . . Three great risks. X. EVALUATION OF FINANCING PLANS 30 Effect of plans on income, prices, the industry. LITERATURE CITED 32 [3] WESTERN REGIONAL -RESEARCH- fe PUBLICATION FINANCING • • • SHORT-TERM FINANCING made possible the great growth of the broiler industry, but it also brought problems that must be solved if production stability is to be achieved. THIS BULLETIN . . . examines the sources of financing used by producers in Washington, Oregon, Utah, and California; analyzes credit plans; and shows the effects of the plans on industry development. Data were collected from 44 major financing agencies in the above four Western Region States. The data con- cerned (1) the relation of the agency to the broiler industry, (2) the cost of credit, (3) the conditions and practices for financing production, and (4) the quantity of credit used. THE STUDY . . . is a contribution to the Western Poultry Marketing Research Project and was conducted by Experiment Stations of the Western Region, cooperating with the Agricultural Marketing Service of the United States Department of Agriculture. Research for and publication of the report were supported in part by funds provided by the Research and Marketing Act of 1946. Under the procedure of cooperative publications, this report becomes in effect an identical publication of each of the cooperating agencies and is mailed under the frank and indicia of each. MAY, 1956 [4] WESTERN BROILER PRODUCTION KENNETH D. NADEN GEORGE A. JACKSON, JR. SUMMARY The Pro's and Con's The important part short-term financ- ing played in the 20-year expansion of the broiler industry is generally recog- nized. Producers, processors, hatchery- men, and suppliers generally agree that ample credit has permitted new pro- ducers to enter the industry and estab- lished ones to expand output to meet consumer demand. They also agree that short-term financing of production from trade sources will continue to be neces- sary and that adequate financing will be essential if further expansion accom- panies increases in national population. Disagreement and concern over the use of financing, however, arise over the problem of short-run fluctuations in pro- duction and price. Many fear that cer- tain financing practices are undermining or blunting the mechanisms that nor- mally control changes in output. 1 This publication reports on the second phase of a 1951-52 study of broiler price and pro- duction fluctuations in four States of the West- ern Region— Washington, Oregon, Utah, and California. The first phase is reported in the following publications: Fischer, Charles M., and Western Regional Poultry Technical Committee. Influence of hatcheries on changes in broiler production in Western states. Oregon Agricultural Experi- ment Station Bui. (in press). Naden, Kenneth D., and George A. Jackson, Jr. Price and production policies of California broiler chick hatcheries. California Agricultural Experiment Station. Giannini Foundation Mimeo. Rep't 171: 1-71. 1954. Variety of Plans Short-term financing was available to producers in this study through a variety of plans. Not all plans were available in each producing area. Financing agencies offered the plan that best served their purposes. Rarely did they offer two dif- ferent plans. Feed dealers, banks, and hatcheries preferred the open account; processors, the flat fee or open account; and grower-contractors, the share or flat fee. Each plan represented a "package" — a group of goods and services that were sold collectively and could not be sepa- rated. One result of such financing was to reduce emphasis on price competition in markets for individual broiler sup- plies and to create differentiated pack- ages. Conditions for Credit Financing agencies in this study made five principal conditions for accepting an application for financing: (1) a chat- tel mortgage or a conditional sales con- tract to protect the loan or to maintain ownership over the flock; (2) producer or grower acceptance of field supervision of management practices for the flock; (3) a specific buyer named or available for the flock when mature (This included full acceptance of responsibility by grower-contractors for marketing the flock.) ; (4) experience of the operator; and (5) his net worth. These conditions were interchangeable in some degree. [51 New Producing Unit Among the most important effects of financing were the emergence of financ- ing agencies into broiler producing firms and the growth in size of broiler-produc- ing firms. Under the flat-fee and share systems of financing the broiler-producing firm is not a single-plant enterprise run by one operator but a multiple-plant organi- zation contracting with many growers for services. Financing and vertical in- tegration have thus created a new kind of producing unit using profit prospects as its guide to production, but from the long-run rather than the short-run view- point. The objective of this new large firm is to meet a certain market demand and thereby protect its capital invest- ments and good will. By shifting to long- run objectives it tends to respond to many incentives in addition to short- time price changes and thereby to stabi- lize production. To achieve comparable production stability, the other producing firms — the small independents — would also have to change their viewpoint from short- run to long. Control over production de- cisions or restrictions on producers' freedom to enter the industry would be required. Such a solution is not feasible under present industry organization. Some control, however, could be exer- cised by financing agencies through focusing attention on long-run rather than short-run factors and by controlling the granting of credit to achieve a cer- tain level of output and quality rather than higher profits from sale of supplies. Such a course would make it essential that financing agencies enter directly into production and help carry the risks involved. DEFINITION OF TERMS In this study of financing agencies' role in broiler production, agency refers to a firm that grants or procures short-term credit for its own or others' use, regardless of its primary function or its integration of more than one function. Short-term financing means granting of a loan or line of credit for the entire production period of a flock of broilers. The mature flock constitutes the means of paying off the loan. Financing also includes the broiler produc- tion system in which the output decision is under control of a business firm rather than a farmer and in which technically no loan and no debt exist. In this study the ordinary 10- or 30-day credit is not included in the concept of short-term financing. The distinction between producer and grower should be noted: a pro- ducer is a firm retaining the basic power of decision over output — when and how many broilers to produce. A grower does not have this power — hence is a plant constituting part of a firm. Both producers and growers are respon- sible for the physical care of a flock of birds. A grower-contractor is a large-scale producer with many growers (plants) and has in effect a continuous system of production even though each grower operates under the batch system. Hence he obtains advantages of both the continuous and the batch systems. Vertical integration as used in this report means effective control by one firm over activities and decisions of another, as well as ownership of the facilities of the other firm. [6] Causes of Instability Any instability in production in the broiler industry can be attributed to the short production period, the ease of entry, the nature of costs, the inadequacy of planning bases, and the ready avail- ability of credit. When prices are high or rising, pros- pects for profit bring new producers to suppliers asking for credit. Competition for feed and chick business has been so acute that an individual dealer could not afford to consider the interest of the ap- plicant or of the whole industry. Even though dealers all agree that a certain level of expansion is unwise because of the depression and hardship that will follow, their action is explainable on the basis of their willingness to accept the risks of default in hopes of making a profit. Furthermore, the supplier grant- ing credit under these conditions does not take an extraordinary risk since he can charge enough for his supplies to offset losses from defaults on loans granted. Banks Not the Answer Many in the broiler industry argue that adequate control of production deci- sions would be made if all short-term credit were granted by banks rather than suppliers. Since bank requirements are more severe in terms of net worth, the argument runs, only financially strong producers would get into the industry. These producers would have more assets at stake and would take a more conserva- tive view of the future. They would be guided by long-run rather than short- run prospects. It is unrealistic, however, to expect banks to supply more broiler production credit, because the number of eligible producers will not increase in the imme- diate future. The main reason supplier credit rose to its present importance was that few producers qualified for bank credit. Profit prospects were not bright enough in the broiler industry to attract people with net worth from other lines of agriculture. This situation will prob- ably continue as long as price risks from irregular fluctuations in production pre- dominate in the industry. Fluctuation Promotes Turnover These erratic price and production fluctuations determine the kind of pro- ducer who will enter and stay in the in- dustry. Of growing importance is the vertically integrated feed dealer who has become a producer. Fewer and fewer in- dependent producers will be willing to risk their assets in an industry of such doubtful stability. As they drop out, processors and others must take steps to insure a steady supply of broilers. The multiple-plant producer is one answer. The remaining producers, working under the open account system, will be a few highly-skilled and efficient producers who can stay in the industry and make a living, or who have no better alternative. Many others will be forced out by the next cycle of low prices. Hence, expan- sion of production on the basis of short- run price outlook only promotes high turnover of producers and reduces the number of independent single-plant pro- ducers. Industry Must Decide The outlook for greater stability in production and prices in the industry is not favorable. By greater use of price analyses and outlook information, fore- casts can be made of the probable effects of expansion and contraction of produc- tion to certain levels. But even with the best information, producers and agencies seeing an oppor- tunity to profit by responding to short- run stimuli will continue to do so. The industry, collectively speaking, must de- cide whether to continue with the present unsatisfactory situation or to adjust out- put to long-run market demand. [7] SCOPE, OBJECTIVES, BACKGROUND The Critical Issue Opinions on short-term financing in the broiler industry vary widely — some call it an unqualified benefit while others say it has changed growers from inde- pendent agents into sharecroppers. But all agree that it is important, and the de- gree of interest in financing is shown by recent research publications 2 and by the many articles and speeches carried in trade magazines. 3 All serious discussions and analyses agree that the central critical issue is the economic effects of financing and the vertical integration that accompanies it. Closely related are the effects of shifting responsibility for production decisions from producers to other agencies. Scope and Objectives This bulletin attempts to present the picture of financing practices and the flow of short-term credit as shown by data obtained from the major dispensers or distributors of credit. A broader view of the effects of financing systems was obtained at this level than would have 2 Some of the recent publications are as fol- lows: Southern Poultry Marketing Research Tech- nical Committee. Financing production and marketing of broilers in the South, Part 1: Dealer phase. Southern Cooperative Series Bui. 38: 1-71. 1954. Miles, James F. and J. Verlon Minchew. Broiler production in South Carolina with em- phasis on methods of financing. South Carolina Agricultural Exp. Sta. Bui. 415: 1-39. 1954. Christian, W. E., Jr., and Paul T. Blair. Broiler production, financing and marketing in Mississippi. Mississippi Agr. Exp. Sta. Bui. 514: 1-39. 1954. Buck, John T. An evaluation of broiler finan- cing methods in Virginia. Virginia Polytechnic Institute Bui. 470: 1-39. 1954. 3 Issues of BROILER WORLD, BROILER GROWING, and other trade magazines during 1954 and 1955 gave a high proportion of space to articles and speeches on short-term financing, its benefits, effects, and evils. been available from producers alone. No attempt was made to contact all financ- ing agencies except in States where the number of such agencies was small. The study reported in this bulletin had three objectives: (1) To determine the sources of short- term financing used by broiler producers and growers in California, Oregon, Washington, and Utah, and the kind of market existing for credit. (2) To analyze plans for distributing and controlling credit available in the four States. (3) To determine the effect of financ- ing practices on price and production fluctuation and thereby on industry de- velopment. Background In the last 20 years, rapid expansion of the broiler industry has been accom- panied by vacillations in short-run out- put, causing economic instability in many parts of the industry (Naden and Jackson, 1954. Fig. 3, p. 9), and greatly influencing prices and net returns to pro- ducers. Changes in production in any of the 12 or more separate commercial broiler areas of the United States have been sufficient to affect prices and sub- sequent production in nearly all areas. Commercial broiler production is relatively new and increasingly impor- tant in the total national meat supply. Total output increased at an average rate of 21 per cent per year from 1934 to 1953. This phenomenal growth was stimulated by a number of factors, among them (1) the shortage of red meats during World War II, (2) the short production period required, (3) the rapid flow of new techniques which reduced costs of production, (4) cor- responding developments in merchan- dising and marketing chicken meat which increased its shelf life and im- [8] proved its appearance, (5) the avail- ability of short-term credit from trade and supplier sources, and (6) the avail- ability of underemployed resources, pri- marily labor, in certain areas (Karpoff, 1954). Centers of production developed when processors built plants in broiler areas and feed dealers and hatcheries expanded operations in the same areas to support production. (Rice, 1951.) Such areas have developed both in regions of high per-capita farm income (California and Washington) and low per-capita income (Mississippi and South Carolina). The most rapid growth has been where pro- ducers were offered an attractive alterna- tive to their previous sources of income (Georgia, Virginia, Mississippi, and Texas) (Gwin, 1950). I. HOW FINANCING GREW IN IMPORTANCE The broiler industry would have de- veloped slowly, if at all, had producers been required to furnish all their own operating and fixed capital and to carry all risks of commercial broiler produc- tion. At least five important factors have led directly to the extensive use of short- term credit for broiler production: (1) the high proportion of variable costs to total production costs, (2) the uneven flow of income, (3) the batch system of production, (4) the desire of feed deal- ers to maintain and increase volume of sales and achieve low cost of operation, and (5) the desire of processors to ob- tain a regular flow and a high output for economical operation of their plants. Variable Costs Several studies have shown that feed costs make up about 62 per cent of the total cost of producing broilers, chick cost accounts for 19 per cent, and medi- cine and fuel take 4 per cent (Claybaugh, 1952. Morrison, Gunn, 1953). These costs are all variable. They rise and fall in direct proportion to the number of broilers raised. A producer paying cash would require about $7,000 to buy all supplies for a flock of 10,000 birds. Most agencies in this study stated that produc- ers were unable to finance their own op- erations. This situation has also been re- ported from other commercial broiler areas (Buck, 1954). Uneven Flow of Income The usual production period for broil- ers is nine to ten weeks. A producer therefore receives income about four times a year at most. He needs credit to meet production expenses. This contrasts with dairy farmers and egg producers who usually are paid weekly or monthly for their products. Even though cash costs of milk and egg production may be high, production credit is not widely used. On the other hand, enterprises with an annual period of production also may not use production credit if cash costs are low. Production Techniques The batch or "all-in, all-out" system of broiler production, used by nearly all producers and growers in commercial areas, is the principal cause of the quarterly flow of income to producers. Hence the system creates a demand for short-term credit. An alternative to this is the continu- ous system of production. It is designed to produce mature birds at a relatively [9] constant rate throughout the year. It uses different labor, capital, and market- ing requirements (Abbott, 1953). Under this system, the producer gets a few hundred (depending upon size of enter- prise) chicks every week or two weeks throughout the year and grows each small lot to maturity, selling them in the same size lots as obtained. This system averages out production risks and mar- ket uncertainties. Commercialization of the industry has been speeded through use of the batch system of production, which offers im- portant economies in production and marketing. It permits lower cost of chicks, lower cost of processing, and im- portant disease control advantages. Proc- essors, hatcheries, and feed dealers therefore encourage producers to use the batch system. The batch system of production has helped make short-term credit a neces- sity and has also increased the price risk to individual producers in marketing large flocks. This leads to measures for shifting the risk through the booking process or eliminating it through ver- tical integration. Feed Dealer Promotion Promotional activities of feed dealers led to extensive use of short-term credit by broiler producers. The opportunity to increase feed sales by making feed avail- able on credit has been thoroughly ex- ploited. After some dealers began to furnish credit, it became customary and necessary to grant credit in order to re- tain and expand business. Credit became and is an important ingredient of compe- tition in the mixed feed business. A Virginia study (Buck, 1954) showed that 51 per cent of the sample of dealers in that state made credit avail- able in order to maintain volume of business, or to remain in business. An- other 29 per cent stated that they granted credit because of custom or because they grew into it. The leading feed manufac- turers of the United States have been quoted as stating that "more than 90 per cent of the financing of the broiler industry has been done by the feed manu- facturers and their dealers as a means of selling feed" (Congress, 1954) . In the race for feed sales, some companies have been so liberal with credit and so active in promoting the sale of feed and credit Table 1. TYPES OF FINANCING AGENCIES Agency (type) Total Utah Washington Oregon California Terminal mill 15 9 6 2 2 3 4 3 44 1 1 1 3 2 1 5 2 10 6 3 1 1 1 12 7 5 1 1 2 1 2 19 General feed company Hatchery Processor Bank Grower-contractor Farmer cooperative Federal Government Total THE 44 AGENCIES listed aboved were the principal source of data for this bulletin and the major sources of broiler production financing in the period July, 1951, to June, 1952, for the states listed. Agencies with more than one function were classified by their predominant activity. [10] that they have encouraged producers to get into the business even though they were ill-equipped for it by training or experience. 4 Processor Promotion The requirements of processors for a large and continuous volume of birds flowing through their plants have led to their promotion of commercial produc- tion. In some areas, processors have taken over feed mills or hatcheries or have directly entered the production field by contracting with growers in order to get the volume they required. This ac- tivity involved much more than obtain- ing credit for producers — it involved the transfer of most responsibilities for pro- duction and marketing from producers to processors. II. AGENCIES GRANTING OR PROCURING CREDIT Several different types of agencies in the Western Region made credit avail- able to commercial broiler producers or sponsored production through short- term financing arrangements. (See table 1.) The principal agencies were feed manufacturers and distributors, proces- sors, and chick hatcheries. In addition, agencies outside the industry, such as banks, furnished credit. Many of the firms in financing activities combined two or more functions and furnished two or more items required in production. Feed Dealers The most important source of direct credit to broiler producers was feed dealers. For the purpose of this study dealers were classified as terminal mills (major mills) if they operated through a system of local dealers, or as general feed companies if they operated directly with producers. Terminal mills were also characterized by operations throughout the Region as manufacturers and whole- salers of mixed feeds, whereas general feed companies operated in more limited 4 Statement made by W. D. Termohlen, Di- rector, Poultry Division, Agricultural Market- ing Service, U. S. Department of Agriculture, before First National Broiler Convention, Cin- cinnati, Ohio, March 25, 1954. geographic areas as manufacturers and retailers of mixed feeds. Nearly all feed companies offered feed on credit or made arrangements to ob- tain credit for producers. Dealers who did not offer credit or offered it on a limited basis had few sales to broiler producers. 3 General feed companies dispensed credit from several sources (See figure 1 ) . The credit to producers was obtained by discounting the producer's note or chattel mortgage at the local bank, or through trade credit from primary sup- pliers on a 90-day agreement, or through unsecured bank loans on their net worth. The smaller local feed distributor or dealer used the trade credit extensively. The terminal mills also had several sources for the credit they distributed. Some used their own operating capital, some obtained funds from company re- serves, and others obtained direct loans from local banks based on the net worth of the mill and its inventories. Many used a combination of sources. In addition, some dealers arranged credit at local banks for their producers' accounts. 5 The most conspicuous examples of this were the cooperative feed mills. Several large cooper- ative mills were contacted as sources of data for this study but were not included because of low volume of sales to broiler producers. [ii] Banks Commercial banks furnished both di- rect and indirect credit for commercial broiler production. Producers with suffi- cient net worth could obtain unsecured production loans from banks to pay pro- duction expenses. They paid off the loan from proceeds of the sale. But few pro- ducers were able to use this procedure because of their low net worth. The usual method of obtaining bank loans was through the initiative of and under the auspices of a feed dealer, usually a term- inal mill. Commercial banks played a more im- portant role in financing broiler produc- tion by furnishing credit to other financ- ing agencies such as feed dealers, hatch- eries, and processors. Nearly all these agencies had sufficient net worth to ob- tain 90- or 180-day operating loans from their banks. Credit Cooperatives Credit for all types of agricultural pro- duction including growing of broilers was available through Production Credit Associations, which are a part of the co- operative farm credit system under the general supervision of the Farm Credit Administration. At the time of this study little credit was being supplied by Pro- duction Credit Associations to broiler producers in this region because the terms of PCA loans were similar to those of commercial banks. Producers were required to show a greater degree of financial strength than most of them possessed. In addition, the terms of the credit required the applicant to pay all expenses except feed. Producers unable to meet these requirements turned to other sources. The PCA in effect was not offering a "product," all things con- sidered, which producers could use. FLOW CHART OF PRODUCTION CREDIT COMMERCIAL CREDIT INSTITUTIONS PROCESSORS Home Office FEED MILLS Major Mills Special J Regular Account Account Credit | Control I General Feed Companies Jointly Local Feed Dealers \J HATCHERIES GROWER-CONTRACTORS OPEN ACCOUNT PRODUCERS SHARE and/or FLAT FEE GROWERS [12] Federal Government The Farmers Home Administration did not make any loans to producers for the explicit purpose of financing broiler production. It made loans for building and equipping broiler houses. The FHA representatives stated that undoubtedly some of these funds granted for perman- ent improvements were used for produc- tion purposes. However, the amount di- verted to production uses was believed to be insignificant in the total picture. Producer Cooperatives Four agencies financing broiler pro- duction in 1951-52 were producer coop- eratives engaged in some marketing or processing function but primarily inter- ested in the welfare of the members. Financing was therefore offered to mem- bsrs as a service at cost rather than an adjunct for promotion of feed or chick sales. Hatcheries Since nearly 20 per cent of the total production costs of broilers are attribut- able to chick costs, many hatcheries entered the credit field either directly or indirectly. Hatcheries usually offered chicks on credit as part of a joint-credit venture with a feed dealer. The initiative for such arrangements came from either feed dealers or hatcheries. If the applica- tion for credit was approved by either agency, the producer usually got credit from the other. In typical joint-credit arrangements the hatchery obtained a second mortgage on the mature birds, or was made a joint payee to the note or chattel mortgage. Other hatcheries entered the credit field by taking responsibility for all cash costs of production and promoting broiler production on a share system. The hatcheries placed their own chicks, paid the feed bills from any feed com- pany the producer chose, and then mar- keted the birds for the producer. In general, however, hatcheries pre- ferred the joint-mortgage arrangement with a feed dealer rather than this com- plete financing, . which involved addi- tional costs and risks not normally part of hatchery operations. Relatively few chicks were furnished directly to producers on credit without the participation of another agency. Practically all producers needing credit for chicks also needed credit for feed and other items. Hatcheries also granted credit to other agencies which in turn directly financed producers. In all of the Western Region, processors, feed dealers, and grower- contractors bought chicks directly from hatcheries and furnished them to grow- ers on credit. This wholesale trade per- mitted hatcheries to operate on a more reliable schedule, to utilize labor and equipment better, and to reduce costs. Sales usually were for cash or on a 30- to 90-day trade credit basis. Processors Processors furnished operating capital or short-term credit to broiler producers in States and areas where they found it necessary or desirable to do so to obtain an adequate and steady supply of birds. In Utah and Washington processors fur- nished feed and chicks on credit to ap- proved producers or paid growers a fee to raise broilers. In general they did not procure or distribute credit directly to producers. In California some processors arranged financing in their role as grower-contractors. Grower-contractors These agencies also arranged systems of financing broiler production. Most were either processors or feed dealers. To attain continuous, high-volume pro- duction and because of the high propor- tion of total costs financed, grower-con- tractors assumed most of the responsi- bility for production and marketing de- cisions. They obtained operating capital from their local banks. [13] III. PLANS FOR FINANCING PRODUCTION Western Region broilers were pro- duced under two groups of financing ar- rangements at the time of this study : One group involved credit as a loan. The other involved credit from commercial sources, used by nonfarm firms. The extent of financing by the 44 agencies in this study is shown in table 2. Financing was available at the pro- ducer level in a variety of forms. These forms were called financing plans or "deals" and were in effect different sys- tems for distributing or using short-term credit. The principal systems or plans were (1) the open account, with varia- tions, (2) the flat fee, and (3) the share. Each agency had a preferred plan that served its purposes best and was adapted to local conditions. Rarely did an agency offer two different plans, al- though minor variations arose to meet local situations and competition. The parallelism between kinds of agen- cies and plans offered is shown here: Type of agency Preferred plan processor hatchery grower-contractor flat fee or open account open account share or flat fee feed dealer bank open account open account Each of these plans represents a "pack- age" sale. The selection of one item in the package automatically determined the source, price, and method of using several items needed for broiler pro- duction. By selecting a feed dealer, a hatchery, a system of credit, or even through de- ciding to go into production, a producer obtained a package consisting of varying combinations of the following: feed — brand, composition, and price chicks — hatchery, breed, and price credit system — source, price, and method of allocating returns and bearing risks other supplies — medicine, litter, fuel (prices specified) management services designed to control production practices marketing services The need for credit and the element of risk were the strings that tied all these Table 2. PER CENT OF SUPPLIES FINANCED State Number of agencies Per cent of broiler supplies financed 11-25 26-50 51-99 100 Utah Washington 3 10 12 19 44 1 1 2 4 8 12 3 5 2 10 3 2 7 8 20 Oregon California Total FIGURES IN the two right-hand columns indicate the large proportion of agencies financing from 50 to 100 per cent of supplies: 30 agencies, compared to 14 financing from 11 to 50 per cent, in columns at left. Forty-five per cent of the reporting agencies had no cash transactions with pro- ducers. The per cent of supplies financed was derived from numbers of broilers in cash and non- cash categories, and included bank credit. [14] goods and services into a package. Credi- tors developed the package to assure a market for supplies and to protect the loan against default. Producers who operated on a cash basis or whose net worth permitted them to get bank loans independently of the suppliers had greater freedom in selecting parts of packages they desired (Kohls, Wiley, 1955). The economic significance of the pack- age method of offering these items be- comes clearer when it is considered as a tie-in sale. Producers using credit were not free to select only the components advantageous to them. Each package rep- resented a complete system for producing broilers and distributing credit. The package system created situations which bound producers to certain sell- ers regardless of available alternatives, thereby reducing the bargaining power of producers. Even if two or more com- plete packages were available to a pro- ducer, he could not freely shift from one to another because of potential penalties involved, such as the loss of his source of credit. Open Account Plan This plan was more widespread than any other for financing broiler produc- tion in the Western Region. It was sim- pler to administer, transferred the least risk to the creditor, permitted the pro- ducer the greatest freedom of action (to make profits when available and to as- sume losses when they occurred) , gave producers title to birds, and forced little responsibility on the creditor. Essence of the open account plan was that the creditor furnished the money (bank credit) or materials, supplies, and services the producers needed to bring a flock of chicks from hatching to ma- turity. Account was kept of the cost of all the items furnished, a charge made for interest for the use of the funds, and when the mature birds were sold, the loan was paid off. In a variation of this system, banks furnished direct credit to producers. With the money or credit the producer went to an approved dealer and obtained supplies just as if the dealer were fur- nishing the credit. At the time of granting credit, a chat- tel mortgage 6 was signed by the pro- ducer and an agreement drawn up between creditor and producer. Under this system, producers agreed to follow management practices specified by the creditor, to purchase specified supplies at current prices from the creditor or a dealer named by him, and to pay a cer- tain interest charge. The agreement gave the creditor control over disposal of the flock if the producer failed to follow the terms of the agreement. Most of the open account agreements specified that the flock was to be marketed at a specific time and to a dealer chosen by the pro- ducer with the advice of the creditor. Only rarely did the creditor assume direct responsibility for finding a buyer for the flock, except where the creditor was a processor furnishing credit to pro- ducers to fill his own requirements for birds. Most open account agreements held the producer responsible for paying the difference between returns from the flock and the amount of the loan. Creditors usually collected the unpaid balance from future returns if the producer remained in business and took out another flock and agreement with the same dealer. In this way creditors held their losses over a long run to a low figure. The open account system was the only plan in which the producer was fully responsible for all losses and pocketed all net returns. The open account system used feed conversion indirectly in its operation. The feed conversion achieved by a pro- ducer for recent flocks was a criterion 6 Hatcheries usually sold chicks under this system on a conditional sales contract. [15] of his general management ability and hence influenced his ability to obtain credit. Producers with a reputation for high (that is, poor) feed conversion had difficulty in obtaining credit, despite the fact that they presumably were fully re- sponsible for losses. Creditors kept only producers with good reputations for feeding ability because they represented less risk to them. This promoted more efficient production and hastened elimi- nation of inefficient producers. Feed conversion entered into open ac- count contracts in another indirect fash- ion. Most creditors using this system placed a maximum or a limit on the amount to be loaned for certain or for all supplies per 1,000 birds. This limit was based on standards established for feed efficiency. Producers who in the past could not finish a flock within the limits set by the creditor had difficulty in get- ting future loans. Share System The next most prevalent system for financing the production of broilers was the share system. Characteristics of this system, in the Western Region, were quite different from those of the open ac- count. Under the share system the grower had markedly less responsibility and freedom of action. Under the open account system, the chattel mortage was the key to the shar- ing of responsibilities between creditor and producer. Producers assumed re- sponsibility for all losses, and creditors needed a chattel mortage as a legal basis for collecting a debt if and when collec- tion became necessary. On the other hand, the sponsor of the share or the flat fee system used the con- ditional sales contract because he wished to retain ownership of the flock. Hence, no mortage was needed for pro- tection. From the producer's viewpoint, the use of the mortgage or the sales con- tract was immaterial. He considered them part of the package and not critical items in his decision whether to accept one package or another when going into production. Besides retaining title to the birds, the grower-contractor furnished all feed, chicks, medicines, litter, etc., and as- sumed all responsibility for production and marketing decisions. He assumed all risks of price changes and all losses in the event that returns from birds were less than the cash costs charged against the grower. The grower furnished the fixed capital required for buildings, brooders, and other equipment. Splitting Returns. Under the share system growers shared in net receipts from sale of birds, whether sold live or processed, after the cost of materials and services was deducted. The usual method of splitting net returns between growers and contractors was on a 70-30 basis in 1952 and had been modified to an 80-20 basis in 1954, reflecting the long period of low returns in 1954. The share in these contracts can rise to 90-10 if an incen- tive plan is added. Farmers operating under the share system were in many ways employees of the grower-contractor, yet were hired by individual contracts. This freed the grower-contractor from many adminis- trative burdens and legal liabilities of an employer. The effect on production and marketing decisions was the same as if the contracting growers were actually employees, since all responsibility rested with the contractor. The effect of the share system on pro- duction efficiency depended somewhat on the attitude and practices of the contrac- tor. All grower-contractors in the Region used feed efficiency as an important criterion in selecting and retaining grow- ers. In some contracts the share of re- turns over cash costs that went to growers was in direct ratio to the feed efficiency obtained. A grower with a 3.0 feed con- version might obtain 80 per cent of the net returns and one with a 2.7 feed con- [16] version 85 per cent. One contractor paid a direct cash bonus each month to the grower with the best feed conversion record. The portion of net returns retained by the contractor represented a combina- tion of reserve for losses, management income, and profits. This income was in addition to profits or losses arising from processing, feed or chick sales, or other activities of the creditor. This type of contract has been called a "guarantee against loss" contract. This refers only to money or cash loss since growers had no cash investment in the flock. Growers were guaranteed against out-of-pocket losses but were not guar- anteed a minimum income. Growers could not stay in business unless they received some returns for their capital or their labor. Flat Fee Until 1954, the flat fee system for fi- nancing broiler production (or more ac- curately, for contracting for production of broilers) was unusual in the Western Region. During 1954, however, the sys- tem became more widespread as grower- contractors and feed dealers in most states adopted it. The primary reason for its spread was that the other systems in effect — i.e., share and open account — did not offer producers enough incentive to remain in business during the long pe- riod of depressed income and prices in 1954. The flat fee system was similar to the share system in the responsibilities of contractor and growers. The contractor furnished supplies, materials, and tech- nical information; the grower furnished buildings, equipment, labor, and man- agement. The usual terms of the flat fee system were a payment to the growers of 6 cents per bird raised to maturity. The contrac- tor assumed all losses and decided when and to whom the birds would be sold. The flat fee system can be called a salary or a guaranteed income system. Under some arrangements, the flat fee was modified by the share or by the feed conversion systems. When combined with the share system, the grower received the flat fee at low broiler prices, but as a substitute, at high prices received 80 per cent of the net returns after paying cash costs, if this amount exceeded 6 cents per bird. This arrangement reveals clearly that the flat fee is designed to maintain production at a high level by maintaining a basic income for growers at all times. IV. CONDITIONS FOR OBTAINING FINANCING The 44 agencies furnishing data for this study had almost identical minimum requirements for producers seeking credit. In addition to those shown in table 3, the main requirements were net worth and experience. Almost without exception the first con- dition was either a conditional sales contract or a chattel mortgage. These legal instruments protected the creditor's property rights or his invest- ment in the flock. One gave the creditor ownership of the birds being grown; the other gave the creditor first claim to the value of the flock when sold. All but three of the agencies required producers to accept field supervision by the agency. This supervision was de- signed to keep the creditor in touch with the progress of each flock, to insure proper management procedures and to enhance the safety of the loan. The man- [17] Table 3. CONDITIONS FOR OBTAINING FINANCING Condition for financing Number of agencies Total Utah Washington Oregon California Title to broilers 44 35 8 1 41 40 3 1 2 3 3 10 4 6 9 10 12 11 1 11 12 19 Chattel mortgage 18 Conditional sales 1 None Supervision by creditor Specific buyer 18 15 ALMOST UNIVERSAL among the agencies reporting were three requirements for obtaining finan- cing. (See figures in "Total" column): title to broilers, supervision by creditor, and a specific buyer. agement assistance furnished by field- men was an essential and costly service. The requirement of a specific buyer by 40 of the 44 agencies meant either that the producer had to have his flock booked with some processor or that the financing agency would determine to whom and when the birds would be sold. The requirement represented an attempt to forestall or reduce difficulties in mar- keting the broilers at the proper age and weight. The principal significance of this re- quirement was that it took the marketing function away from producers or, if they retained that function, it left them few alternatives. Under the auspices of credi- tors, with their greater bargaining power than producers, the marketing was prob- ably done better and competition among live poultry buyers was probably pro- moted. On the other hand, booking by producers had the effect of reducing the alternative market outlets available to producers and reducing the competition among poultry buyers. The producers had to accept the price offered by the booking buyer rather than shop around for the best offer. A requirement of most creditors, not shown on table 3, concerned the net worth or net financial assets of the pro- ducer. Net worth was a consideration in the granting of credit by all agencies, but the exact form and amount of finan- cial assets required differed widely. For some creditors, the net worth re- quirement meant that the producer had to own his own broiler house and land and internal equipment such as stoves and feeders. This fixed capital might also be available under lease, but the ability to meet rental payments had to be shown. Frequently the net worth re- quirement was interpreted to mean that the producer had to have the capital to buy his own chicks and medicine and other supplies except feed. Producers also had to have available sufficient liquid assets to meet their daily family living expenses during the 10- week pro- duction period. Another prerequisite for obtaining credit — experience — was listed by all agencies studied, but the exact manner of meeting the requirement defied classi- fication. Although all agencies said they required producers to have experience, they all had made provisions to accept a newcomer with no experience, provided the other requirements were met. By the same token, rigidity of the net worth re- quirement was relaxed if a man with much experience applied. In other words, some of the conditions for obtaining financing were substitutable one for an- other, but in an indeterminate ratio. [18] V. LIMITS ON EXPANSION OF CREDIT OR PRODUCTION Major elements that limited credit to producers and that limited integrated production are shown in table 4. Many agencies gave more than one reason for a limitation. Only the most important are shown. The reason given most frequently for not expanding broiler financing further was the lack of qualified growers — that is, growers meeting the minimum requirements set for in the preceding section. Ten agencies reported they could not serve additional producers because of present full utilization of their plant, such as the feed mill or the hatchery, or because their line of credit was ex- hausted. Either the agency was unable to obtain more credit from its primary source or its own operating capital was fully utilized. Another reason often given was closely related to the first in that the upper limit of credit expansion was governed by number of birds rather than number of dollars. These two factors are convertible into one another through the practice of setting a standard per bird as a limit on credit. Agencies reporting "quota set" as the basis for limiting credit usually indicated that the home office set a num- ber of broilers as the quota for credit ex- pansion. It is likely that the home office had in mind a dollar figure that could be allocated to credit for broilers when setting financial policy for the entire organization. This was then translated into number of broilers for ease in han- dling. The last important reason given by the 44 reporting agencies for limiting the number of broilers on credit was the market outlook. This is explainable mainly in terms of the motivation or the principal business interest of the finan- cing agency, the discussion and analysis of which appears in Section 9 — Finan- cing and Vertical Integration. Table 4. REASONS FOR LIMITING FINANCING Limiting condition Number of agencies Total Utah Washington Oregon California Quota set 7 10 7 19 1 44 1 2 3 1 3 6 10 6 5 1 12 6 3 2 8 19 Full utilization Market outlook Lack of qualified growers .... Other Total LACK OF qualified growers was the reason agencies gave most frequently for limiting broiler financing, followed by "full utilization of credit or facility." Agencies were listed according to the predominant reason given. [19] A description of the market in which credit was offered and sold to producers shows more clearly its role in production decisions. The market for credit is a retail market in which the sellers are not sellers of credit but of other commodities such as feed, chicks, medicine, and fuel. Some of the important characteristics of this market were as follows: Choices Limited (1) Although there appeared to be many sellers of credit, the number from which to choose varied with the financial strength of the producers. Producers with sufficient net worth could go directly to commercial banks and other sources and easily obtain credit. Producers with somewhat smaller resources could also get bank financing but only through the program outlined by one of the terminal mills. Those with slimmer resources could get feed and chick financing if a feed mill in their area offered it. Those with little or no financial strength were limited to some form of contract growing. Geographical Limits (2) The number and type of financing agencies in the industry were limited by geography. The broiler industry has grown in different areas under the spon- sorship of several kinds of dealers and agencies. In Washington, cooperative organizations have been prominent; in Utah, processors have taken the lead in broiler production activities; in Cali- fornia and Oregon terminal mills have been the leaders, and in southern Cali- fornia local feed mills and hatcheries de- veloped contract production systems. Only one or a few alternative systems were available in each area. Therefore, although there were many sellers of VI. THE RETAIL MARKET FOR SHORT-TERM CREDIT credit in the Region, the financing sys- tem offered in one area and the relative financial strength of the individual pro- ducers greatly limited the opportunity to compare prices and products of the dif- ferent sellers. Quoted Prices Nominal (3) Quoted prices were only nominal prices. The price usually quoted made only a partial contribution to the cost of the service. The total cost of credit ad- vanced was contained in the package of goods and services producers took in order to get financed. Producers found it nearly impossible to compare prices of packages even when alternatives were available. For example, six agencies — a grower- contractor and some of the cooperatives — did not quote a price. They reduced administrative and bookkeeping costs by lumping charges for credit with other services and collecting it through the prices for feed or services offered. The agencies using the greatest extent of ver- tical integration gave the least informa- tion to producers about the price they were charging for financing. Tie-in Sales (4) Financing was usually offered to producers only as a tie-in sale with other items and services offered by creditors. Tie-in sales and package arrangements made for competition of product rather than price among sellers. After a pro- ducer had selected his source of finan- cing, his brand of feed, his strain of chicks, or any of a number of other items, he had simultaneously bought all or most of these items. The package system of selling made comparison of best buys between sellers more difficult, reduced the alternative markets available to pro- [20] ducers, and reduced the price compe- tition among sellers of supplies and services. Bargaining Weakness (5) There was usually a great dis- parity in bargaining power between broiler producers and the sellers of credit. The weak financial position of most producers forced them to accept whatever conditions were imposed by the sellers of credit. The absence of producer cooperatives in most of the Region was a symptom of this weakness. If credit were available as an isolated product and the foregoing characteristics of its market existed, we would conclude that the market had serious imperfec- tions. It would be a market in which most growers had few or no alternative choices among financing plans, in which prices charged were nominal, and in which pro- ducers had little bargaining power and little information. It can be argued, however, that no market for credit exists in the conven- tional sense of the word. The package system has submerged credit as an item within a larger body of goods and serv- ices. To be fruitful, an analysis of the market for credit should include feed, credit, supplies, and various services. The sale of these items resembles the "package" of food, service, atmosphere, and other items sold by a retail food store. The attention of buyers and sellers and the level of competition has shifted from any single item to an aggregate of items. VII. PRICES CHARGED FOR CREDIT Credit is a service required by broiler producers and furnished by industry suppliers for a price. It is obtained at wholesale (from banks or insurance companies) or "produced" from the sup- plier's own facilities (reserves or operat- ing capital) , given time and place utility, and then retailed. A distinctive fact about the retailing of credit in the broiler in- dustry is that, except for banks, credit is not sold primarily to earn a profit. It is carried and sold primarily for some other purpose related to the major ob- jective of the financing agency. Credit is a minor item in cost compared to the total cost of other supplies sold with it. This ancillary status of credit creates dif- ficulties in analyzing the prices charged and the market for this service. Credit can be considered both as a price and as a cost. For credit agencies the interest and carrying charges consti- tute the price of service. For the producer interest charges are a cost which must be recovered in his income. In this study, prices charged by credi- tors were examined to discover the total credit charges and to compare the prices charged with the cost of furnishing the service. This discussion of interest rates and charges for financing is confined to the various producer-financing-agency rela- tionships because no specific interest or carrying charges were made under the contract growing arrangements. All charges for interest were lumped into charges for other supplies such as feed and chicks, or were recovered in the share of the net returns retained by the grower-contractor. Three Forms of Prices The prices charged for credit by the agencies in this study appeared in several forms — some creditors using all forms. They were : (1) a quoted interest rate or service charge specifically for credit; [21] (2) a quoted additional charge for chicks furnished on credit; and (3) a discount for cash payment for feed. The interest rates and other charges for credit quoted by agencies of this study are shown in table 5. Most of the agencies charged 6 per cent interest. There is considerable difference in the cash cost of a 6 per cent interest rate depending upon whether the rate is ap- plied to the number of dollars required for the entire financing operation (the "line of credit" procedure) or only upon the amount needed to buy feed on a month-to-month basis (the "dispensed" procedure). The cash costs in dollars to growers at the rates quoted are shown in table 6. Assuming a need for $655 to buy feed for 1,000 broilers to 12 weeks of age, a 6 per cent per annum loan on this amount would cost $9.07. However, the grower does not actually need all the $655 the entire 12 weeks, and a saving in interest is available to him to have the money advanced as he needs it. If made in monthly advances, the average amount of a loan outstanding would be $346 and would cost $4.79. A creditor who ob- tained funds from his bank on a straight 6 per cent loan and then charged pro- ducers on a dispensed basis would not recover the out-of-pocket costs of the interest unless he was able to stagger his production program in such a way to keep the funds continuously employed. Even then, he may not be covering ad- ministrative costs of keeping books for control of the credit. It is apparent that credit agencies obtained interest revenue from sources other than the quoted in- terest rate. It is shown in table 5 that some creditors did charge higher interest rates and some charged the interest plus $1 per ton feed service charge. Most creditors used 6 per cent as the quoted interest charge, probably because that was the customary rate. It was de- sirable to appear to charge competitive rates for credit. It is apparent from table 6 that the 6 per cent rate on one base might not cover the cost of credit but on another base might be a source of considerable profit. Table 5. INTEREST AND OTHER CHARGES MADE FOR CREDIT Nominal interest rate or charge 5 per cent 6 per cent 7 per cent 8-10 per cent $l/ton plus 5-10 per cent $l/ton Yl cent/chick 1 cent/chick None Total Total 2 22 2 2 4 3 2 1 6 44 Number of agencies Utah Washington Oregon California 1 1 2 4 1 8 2 8 1 4 t . 1 2 1 1 1 1 3 2 3 10 12 19 MOST AGENCIES charged 6 per cent interest. Interest rates stated in this fashion, however, may be misleading because neither the time period nor the amount of the loan is known. The current practice in the Region is for rates to apply on an annual basis for the amount of the loan or number of dollars outstanding. [22] Table 6. CHARGES FOR CREDIT TO RAISE 1,000 BROILERS Credit charged on different bases Total charge (dollars) 6% interest on per annum basis: When line of credit established 9.07 4.79 3.53 5.70 5.00 10.00 For monthly advances For weekly advances Charge of $1 per ton feed Charge of 3^c per chick Charge of lc per chick THE CHARGES in the right-hand column were figured on credit needed to raise 1,000 broilers to 12 weeks, with a feed cost of $1 15 a ton, or a total of $655. The second method of charging for credit was to add $1 per ton to the price for feed delivered. Assuming a price for feed of $115 per ton, the cost to the producer for the 5.7 tons needed to raise 1,000 broilers to 12 weeks of age would be $5.70, or slightly more than the 4.79 cost when 6 per cent was charged on a dispensed basis. Of the 44 agencies in the study, three charged only the $1 per ton, and four charged $1 per ton plus 6 per cent interest. Many producers obtained credit for chicks in addition to credit for feed. Table 5 shows only three agencies made a direct charge for credit for chicks — the usual charge being V2 cent per chick. When this rate was charged, it was equiv- alent to $5 per 1,000 chicks for the period of the loan, or at a rate of 13 per cent per annum on the $170 required to buy 1,000 chicks (assuming $17 per hundred as the price of chicks). This is not an accurate picture of the extent of chick financing. About half of all broiler chicks hatched in California in 1952 were either sold to or financed through feed dealers (Naden and Jack- son, 1954, p. 45) . The reason these credit sales are not shown in table 5 is that they were financed under joint accounts in which the feed dealer was considered the initiating agency. The third form of charges for credit was the discount for cash payment. The discount for cash was one per cent if paid within 10 days. This amounted to $6.55 per 1,000 broilers (assuming $115 per ton and 5.7 tons required to feed 1,000 broilers to 12 weeks). The $6.55 can be called a charge for credit in addition to the other listed charges because this cost was not incurred by producers able to pay cash for feed. Credit Price Obscured Just as the package system of selling supplies obscured the market for credit, it has also obscured the price paid for credit. The major item in the package sold broiler producers is mixed feed. The evaluation of the market for credit must await an evaluation of the competitive situation among sellers of mixed feeds. The structure of the mixed feed market and its pricing system are so complex that an analysis is beyond the scope of this study. One clue to the competitive situation in the mixed feed business is that many cooperative feed mills have not offered feed and credit as a joint product. Mills that offered credit thereby created a differentiated product and be- came partially insulated from the price competition of cooperative mills. [23] Patronage Dividends Another clue to the competitive situa- tion in the mixed feed business is the size of patronage dividends paid by the large cooperative mills. The average dividend paid by the Poultry Producers of Central California over the eight years 1947-1954 was 10.5 per cent or $10.50 per ton on feed priced at $100 per ton. 7 It has been the policy of P.P.C.C. to charge members for feed at a price com- petitive with that of the major non-coop- erative mills. Therefore the net difference in price paid for feed can be determined roughly by the size of the patronage dividend. Other cooperative mills in the Region reported patronage dividends of about the same size. The feed sold by cooperatives and by proprietary dealers may differ in com- position, in cost of ingredients, and in price, which must cover advertising, service, or riskbearing charges. Price comparisons were difficult because al- though terminal mills quoted a recom- mended retail price dealers had authority to sell at any figure necessary to meet competition. Unofficial reports indicate that they sold much feed at less than the recommended price. 7 Poultry Producers of Central California, 1953 annual report, in Nidaid News 32:1, p. 1. Feed Mixes Differ The complexity of feed composition makes accurate price comparisons nearly impossible. Only careful laboratory anal- yses can detect differences in composi- tion and quality, both of which can change with each batch produced. The protein content of the standard broiler mashes sold by terminal mills and by cooperative mills was usually the same, but there were often differences in vita- min content, moisture content, and con- dition of ingredients. Losses Covered The major mills and general feed com- panies granting credit to producers charged a price for feed high enough to establish a reserve to cover credit losses. This was a return for assuming part of the risk of broiler price changes. Even though most feed dealers financing under the open account system held producers responsible for losses incurred, the deal- ers had to stand losses of bad debts if producers went out of business after flocks failed to return cash costs. During periods of prolonged low prices, credit losses have been high. In the long run creditors must make a charge to cover these losses. Table 7. BROILER PRODUCTION IN THE WESTERN STATES 1952 1953 1952 1953 Utah (1000 birds) 1,634 7,513 5,093 48,079 (1000 birds) 1,928 8,339 4,889 48,560 (per cent) 2.6 12.1 8.2 77.1 (per cent) 3.0 Washington Oregon 13.1 7.7 California 76.2 Total 62,319 63,716 100.0 100.0 SIZE OF the industry in the four Western states can be seen in these figures on production for the years 1952 and 1953, supplied by the U. S. Department of Agriculture and California Depart- ment of Agriculture. [24] To sum up, we have seen that: (1) Quoted prices for credit may or may not cover the cost of credit to the agency. (2) Quoted prices for credit usually do not represent the entire price paid by producers for credit. (3) The inelastic demand for credit permits wide differences in price of credit. (4) The price of credit depends on the price of the package — primarily the price of the feed. (5) The need for credit and the spe- cialized services that go with it have created significant differences in sales appeal among commercial mixed feeds. One effect of this differentiation is a strengthening of product competition and a lessening of price competition among feed dealers. VIII. COMPARISON OF FINANCING ACTIVITIES Differences in methods and results of financing broiler producers among the four Western States were closely related to differences in organization of the in- dustry. The relative size of the broiler industry in each state is shown in table 7. Washington's principal agencies fi- nancing production were processors, feed dealers, and hatcheries. Processors loaned the largest amount per bird. The second largest creditor was feed dealers. Hatchery men seldom granted more credit than the cost of chicks. Among processors both cooperative and non- cooperative organizations were active. The cooperatives assumed the initiative in introducing methods for stabilizing output and price of broilers. Both feed dealers and processors exer- cised some form of control over produc- tion practices through field supervisors. Cooperatives carried control further than others because they assumed or had thrust upon them the responsibility for production decisions. The large output of major cooperatives in relation to total market demand and the partial isolation of Washington from surplus producing areas made it possible to schedule pro- duction according to demand. This was done through the booking requirement of financing agencies. Credit was ex- tended only to producers who had a com- mitment from a processor. In Utah, three agencies financed — under both the open account and the flat fee systems — about 80 per cent of all commercial broilers grown in 1952. All three were integrated firms (their activi- ties included feed and equipment sales as well as broiler processing) . The finan- cing was done to assure a supply of birds for processing plants whose schedule was regulated according to estimated demand in the local market and that of contiguous states. California had a wider range of types of agencies directly in the business of financing broiler production. The chief agencies were feed dealers (both termi- nal mills and general feed companies), hatcheries, banks, and grower-contrac- tors. Most of the producers and most of the broilers in California were financed by feed dealers. Next in importance were grower-contractors. Major operators in this category were primarily feed dealers or processors or both. The usual arrange- ment made for this production included a guarantee-against-loss and a profit- sharing contract modified for feeding ef- ficiency of the grower. Bank financing was used more widely as a source of broiler production credit in California than in the other States of the Region. Bank credit was made avail- able to producers through a so-called [25] Table 8. SOUTHERN AND WESTERN FINANCING PLANS Type of financing plan Percentage of dealers using plan in Western Region* Georgia Mississippi South Carolina Virginia Open account 93 2 5 68 50 9 36 88 27 4 10 4 74 22 7 7 80 2 73 4 Flat fee Share Feed conversion Salary * Western data by W.P.M.R. Technical Committee, obtained from terminal mills, independent local millers, and other sources of credit. Southern data from Southern Poultry Marketing Research Technical Committee: Financing production and marketing of broilers in the South, Part 1: Dealer phase. Southern Cooperative Series Bui. 38:1-71. 1954. P. 33. Obtained from local feed dealers and other sources of credit. OPEN ACCOUNT financing was most popular in the four Western Region States (California, Oregon, Washington, Utah) and in the Southeastern Region. Columns do not sum to 100 because many dealers used more than one plan. producer-banker-feed dealer arrange- ment. 8 In Oregon, feed dealers, both termi- nal mills and general feed companies, were the principal source of short-term financing for broiler producers. Little or no financing was used under grower- contractor arrangements. The chattel mortgage was used widely as security for the loans, but some were made using only net worth and experience of the operator as security. No profit-sharing arrange- ments were reported in 1952. The data collected for this study do not permit an accurate estimate of the proportion of commercial broilers grown in the Region through financing plans. Informed persons in the industry esti- mated that as many as 90 per cent of the producers and growers used some form of financing. The requirements for 8 For a favorable statement of this plan and of its relation to other broiler financing plans, see speech made by J. D. Sykes, Vice-President of the Ralston-Purina Corporation, at the First Annual Convention of the National Broiler As- sociation, Cincinnati, 1954. credit in this Region are about the same as in other regions where accurate esti- mates have been made. A study of finan- cing in the Southeastern states showed that from 94 to 98 per cent of the broiler producers were financed (S.P.M.R.T.C., 1954). Regional Differences The major differences in financing be- tween the Western and Southeastern Regions were in the types of financing plans most used (table 8). The open account system, with some variations, was the most popular in both Regions. In the West few agencies offered the flat fee, the salary, or the share ar- rangements. One reason is that dealers have not wished to assume the additional risk and burden or responsibility entailed by the flat fee and salary and share prop- ositions. In the past they have found enough producers willing to use the open account system. Although few agencies used the flat fee or share plan in the West up to 1954, each such agency was relatively large. [26] Among the 44 agencies in this study, 22 feed mills and six hatcheries per- formed only one function or manufac- tured only one line of products. The remaining agencies (less the five fur- nishing credit only) were integrated in some degree and operated more than one facility (table 9). Ten feed mills had other operations such as a hatchery or a processing plant. Credit agencies made various combi- nations of supplies available (table 10). In addition to those from their own firm, many agencies provided other supplies on credit. The most popular grouping was feed, chicks, and other supplies — i.e., complete financing of cash costs. Stability of Production There was a direct relationship be- tween the degree of vertical integration IX. SHORT-TERM FINANCING AND VERTICAL INTEGRATION of the agency and the type of financing offered. Financing plans were instru- ments for making a profit. The plans re- flected the various ways that credit could be used or that financing could be ar- ranged to achieve differing goals of the agencies. As plans varied in sharing of management and marketing responsi- bility, varying degrees of vertical inte- gration resulted. The location of respon- sibility, and authority in production and marketing decisions was related to sta- bility and risks of production. Trend Apparent There appeared to be a trend toward vertical integration in the industry. A greater proportion of birds were pro- duced under flat fee and share plans in 1954-55 than in 1951-52. The propor- tion of the total output being financed Table 9. FACILITIES OPERATED BY FINANCING FIRMS Facilities operated Number of agencies Total Utah Washington Oregon California Feed mill 22 6 2 3 1 3 1 1 5 44 1 1 1 3 1 6 2 1 10 9 1 2 12 12 2 1 1 3 19 Hatchery Feed mill, hatchery Feed mill, processing plant Feed mill, retail outlet Feed mill, hatchery, process- ing plant Feed mill, processing plant, retail outlet Hatchery, processing plant, retail outlet None Total - INTEGRATION of financing firms with other facilities can be seen in column at left. Eleven of the 44 agencies studied were integrated in some degree and operated more than one facility. The "none" at bottom of the column refers to agencies furnishing credit only. [27] Table 10. SUPPLIES AVAILABLE UNDER FINANCING CONTRACTS Supplies financed Number of agencies Total Utah Washington Oregon California Feed 12 2 3 8 10 4 5 44 2 1 3 1 1 1 2 5 10 5 1 3 1 2 12 6* 1 2 2 8 19 Chicks Credit Feed and chicks Feed, chicks, and other supplies Feed and other supplies, except chicks Chicks and medicine and /or equipment Total * Includes institutional credit for feed purchases only. TWENTY-SEVEN financing agencies in the four States provided combinations of supplies. Ten supplied feed, chicks, and other items— in words, complete financing of cash costs. did not seem to increase, but creditors were financing more supplies and mak- ing more production decisions. The primary reason for the trend was that risks of production were greater than producers acting independently were willing or able to sustain. Nonfarm agencies have assumed responsibility for production in order to maintain feed and chick sales or the good will of processors who depend on them for a flow of broil- ers. Maintenance of stable production serves to protect capital investments in breeding flocks, in hatchery equipment, in research facilities, in feed mills, and other equipment. Effects of Integration It can be argued that vertical integra- tion enables these nonfarm financing agencies to stabilize long-run production and prices, thereby maintaining facilities needed in the long run by absorbing short-run losses. Price fluctuations and losses by the industry would be greater if production responded only to current market prices (Karpoff, 1954) . One effect of vertical integration is to maintain production at times when eco- nomic conditions would not justify pro- duction by individual producers. This is possible because the grower-contractor has lower variable costs of production than the individual producer and a smaller ratio of reserves to investment required due to multiple sources of in- come. Price and cost outlook, motivation, and financial strength of independent producers differ greatly from those of nonfarm firms such as grower-contrac- tors. Implicit in the decision of nonfarm firms to maintain production during pe- riods of low prices is an assumption that the industry will continue to be charac- terized by unpredictable changes in out- put which the industry as a whole has been unable or unwilling to control. The willingness of grower-contractors to sub- sidize production and to assume financial losses for short periods means they must be able to recoup those losses in the long run. Successive price cycles drive inde- pendent producers out of business or [28] force them into contracting status be- cause they cannot overcome the risks and recoup their losses. Sustained Production Sought The primary objective of the inte- grated financing agency — the grower- contractor — is long-run rather than im- mediate profit through the production of a certain supply of broilers of a certain quality. Although it is true that the grower-contractor's profit goes up and down with broiler prices, his production response is not to short-run but to long- run prices and market demand. Other credit agencies, such as feed dealers and hatcheries, have as their pri- mary objective profits from the sale of feed and chicks. They do not have direct control over production decisions of in- dividual producers. When prices are ris- ing and producers are stimulated by prospects for profit, the competition to sell feed leads to promotion of more pro- duction. To the extent production is pro- moted, through credit, in response to short-run prices, credit helps make broiler production more unstable. Credit from feed dealers probably stimulates production more when prices are high than credit from banks. To in- crease feed sales, dealers encourage pro- ducers to come in even though they are unable to withstand adversity. Dealers can be indifferent to this situation as long as they can charge a price high enough to cover losses when low prices appear and as long as new producers are willing to enter the market when prices are rising. Vertical Integration and Risk All agencies making up the broiler in- dustry face certain risks. Attempts by these agencies to absorb, meet, or share the burden of risks result in changes in industry structure and costs. Broiler output is highly responsive to price changes when production is con- trolled by independent producers. Vio- lent changes in output seem to create the most serious problems and the most risks in production and marketing. The exten- sive use of trade financing has had an important impact on the incidence and size of the risk burden. Three Great Risks Independent producers face three great risks: price decline below produc- tion cost, disease and mortality in the flock, and finding a buyer for the mature flock at going prices — i.e., finding a "home for the birds." The price decline risk arises pri- marily from the wide and rapid fluctua- tions in production characteristic of the industry. Production and price changes are hard to predict, but even when they are predictable commercial producers hesitate to drop out of production to avoid price risk, because of the difficulty of restoring their source of chicks or their market outlet. Despite this reluc- tance, however, continued below-cost prices force producers out of business. When enough of them act in unison to enter or leave production, substantial damage may occur to the agencies sup- plying production items or marketing services. Nonetheless, the independent producer is not in a position to subsidize these agencies by staying in business. The second risk — disease and mor- tality in the individual flock — is also highly unpredictable. Its effect on pro- ducers' income and ability to remain in production is to raise production costs through greater medicine costs, slower growth rate, lower quality of broilers, and a higher feed conversion ratio. The third risk — finding a suitable market — is especially significant when broiler markets are glutted and prices are low or declining. This risk arises pri- marily because of an imperfection in the broiler markets due to contracts or agree- ments between producers and processors. When markets are glutted, processors hesitate to accept all birds offered and [29] frequently take only those for which they have contracted. All others are consid- ered "distress" chickens and are accepted only at steep discounts below the con- tract or "going" price. The risk of a "home for the birds" is really a specific form of price risk. The table below compares the inci- dence of risks under the various finan- cing systems described earlier with a theoretical cash system. This tabulation shows a correlation be- tween the proportion of costs financed and the incidence of some risks of pro- duction and marketing. To assume risks means assuming some responsibility for the basic production decision. As these decisions pass from producer to creditor, so do the risks. It is not clear whether shifting the burden of risks from producers to others under the various plans reduces over-all risks of each kind that must be borne by the industry as a whole. It might be argued, for instance, that the risks of finding a market for all broilers at the going price have been reduced as credi- tors take over this responsibility. This would result from the greater bargaining power of financing agencies as compared to individual producers. It might also be argued that the burden of disease and price risks is borne by creditors at lower cost than by individ- ual producers, because their greater size permits better outlook advice, better re- search facilities, closer inspection of flocks to detect disease, and better treat- ment of disease. Some believe the greater size of creditors and the allocation of price and disease risks over a large vol- ume of production permit them to bear these risks under actuarial principles at lower average cost. RISKBEARERS UNDER VARIOUS FINANCING PLANS Type of Cash payment Open account Share Flat fee risk plan plan pfan plan Price change Producer Producer (Creditor shares if bad debt results) Contractor and Grower (shared) Contractor Disease or mortality Producer Producer (Creditor shares if bad debt results) Contractor and Grower (shared) Contractor Market at going price Producer (shifts to processor by booking flock) Producer (Creditor shares if bad debt results) Contractor and Grower (shared) Contractor X. EVALUATION OF FINANCING PLANS Agricultural credit can be a powerful force for economic progress in the hands of those who know how to use it. It helps some firms and harms others. To judge the various broiler financing plans used in the Western Region we should find out whether a given plan ac- complished the purposes of the agency using it and whether its harmful and beneficial effects balance out. An evaluation of financing plans will show the advantages and disadvantages of each to producers or growers. It will also show whether the financing agency is primarily interested in selling feed and supplies or in producing and marketing [30] birds. As each plan entails assuming varying degrees of responsibility in pro- duction and marketing decisions, its evaluation depends heavily upon the dif- fering effects of vertical integration on organizational and structural changes in markets. Effect on Income The effect of open-account, share, and flat-fee financing on net income to pro- ducers and growers depended partly on producer efficiency but more on broiler prices. Efficiency, in terms of feed con- version, affected net income only when the financing plan paid higher rewards to the man with better feed efficiency. Generally he fared better under the open account system for this reason. General price level affected net income under the various plans in strikingly dif- ferent ways (Buck, 1954, pp. 31-33). Under the open account, net income to producers rose rapidly as prices rose; it rose less rapidly under the share sys- tem because net returns had to be shared ; under the flat fee system income re- mained the same regardless of price un- less an additional profit-sharing feature was in the plan. Exactly the reverse occurred when prices were low or declining. In general, we can say that producers' incomes rose and fell with price changes in proportion to the amount of risk they bore. Influence on Prices The influence of financing plans on prices received by producers and growers depended on the producer's size and bar- gaining power. Under the open account system each producer marketing his own flock obtained a booking date with a processor in order to get financed. The booking process reduced the producer's bargaining power because he could not shop around at time of flock maturity and take the best price offered. Some open account producers turned their marketing over to a financing agency, whose superior bargaining power assured better prices. Under the share and flat fee systems the contractor assumed the marketing task. Since the flat fee creditor or grower- contractor is primarily interested in broilers as a supply for the market, and since his rewards come from efficient marketing, he probably gives marketing more attention than other creditors. Effect on Industry An evaluation of short-term credit in- stitutions as they have developed in the broiler industry must remain incomplete because available data are insufficient to make final judgments about certain trends, and data on some aspects are entirely unavailable. The great dependence of the industry on short-term production credit shows that financing has speeded the over- all growth of the industry, enabling it to add significantly to the nation's food supply. Most recognition for this de- velopment belongs with the mixed feed industry. A principal vexation of the industry, as we have seen, has been sudden and frequent changes in production and price. Part of this trouble has arisen from a poor marketing system; part from in- adequate information; part from the simultaneous response of many produc- ers to a short-run change in price. Inso- far as financing institutions with varying degrees of integration have assumed the basic production decision, they have promoted greater stability of out- put — at least on the downward side. The integrated unit expands and contracts production in accordance with long-run market demand and price; the small in- dependent producer changes output ac- cording to immediate price and market outlook. Financing activities, through vertical integration, have promoted larger pro- ducing units. This does not mean larger [31] flocks, although that may be a concomi- tant trend, but larger blocks of broilers being produced by one firm through grower-contracting activities. As vertical integration expanded, financing agencies that became producers took on more growers until they reached a size related to their market demand. The larger pro- ducing units, by pooling risks, could withstand greater economic adversity than the independents. The young commercial broiler indus- try has seen a steady flow of techno- logical advances that reduced labor requirements, costs of production, and wastes in assembly, processing, and marketing, and that improved feed effi- ciency of birds. Many of these advances would have been impossible without the concurrent trend toward larger flocks. Insofar as financing promoted that trend, it also favored technological advance. The transfer of managerial decisions, of marketing functions, and of some risks to financing agencies is a cost to producers. Most producers are willing to pay higher feed prices to obtain these services. On the other hand, the large-scale operations of grower-contrac- tors may reduce cost of production through pooling of risks. Growers who have given up some freedom for more financial security will benefit from lower cost only if there is competition in the sale of goods and services they buy. Financing has permitted thousands of broiler producers and growers to raise their net income. Although no figures of the net addition to income created by this industry are available, thousands of producers have transferred from other enterprises to broiler production. This process of introducing new industries and opening new opportunities to people to raise their incomes is essential for progress in a free enterprise system. LITERATURE CITED Abbott, John C. 1953. Fryer marketing in the East San Francisco Bay area, California. California Agr. Exp. Sta., Giannini Foundation Mimeo. Rep't 146: 1-86. Buck, John T. 1954. An evaluation of broiler financing methods in Virginia. Virginia Poly. Inst. Bui. 470 : 1-39. Claybaugh, J. H. 1952. Analysis of broiler production costs. Nebraska Agr. Ext. Service Circ. 1410. Congress, U.S. 1954. Price spreads on poultry and eggs. Hearings before the Committee on Agriculture and Forestry, 83d Congress, 2d session, December, 1954. P. 39. Gwin, James M. 1950. The Delmarva broiler industry. Maryland Agr. Exp. Sta. Bui. A-57 : 1-35. Rev. December, 1950. Karpoff, Edward M. 1954. The broiler industry in the United States. (Paper presented at Tenth World's Poultry Congress, Edinburgh, Scotland, August, 1954. Processed.) Kohls, R. L., and J. W. Wiley 1955. Aspects of multiple-owner integration in the broiler industry. Journal of Farm Economics. 37:1:81-89. Morrison, Earnest M. and Thomas I. Gunn 1953. Broiler production in Utah. Utah Agr. Exp. Sta. Bui. 359: 1-32. Naden, Kenneth D., and George A. Jackson, Jr. 1954. Price and production policies of California broiler chick hatcheries. California Agr. Exp. Sta. Giannini Foundation Mimeo. Rep't 171: 1-71. Rice, Sherman T. 1951. Interregional competition in the commercial broiler industry. Delaware Agr. Exp. Sta. Bui. 290: 1-36. Southern Poultry Marketing Research Technical Committee 1954. Financing production and marketing of broilers in the South. Part I, Dealer phase. South- ern Cooperative Series Bui. 38: 1-71. 12, 500-5, '56(B6595)RMB 141