America consumes more chicken than any other country, driving a massive demand for poultry production. There are around 25,000 family farms involved in poultry production, and as demand for poultry products continues to rise, so does the need for poultry farms. It is becoming increasingly common for large companies to offer multi-million dollar contracts to farmers to raise chickens. In this arrangement, the company will provide the animals and feed, and the farmer will house and care for the birds. This arrangement ends up demanding a sizeable upfront investment on the farmer’s end, as he must develop the infrastructure of his farm and build large barns for the chickens.
While the payoff of raising chickens can be great, many farmers who enter these contracts are forced to take out enormous loans from the bank, often valued at millions of dollars. This is a big gamble for families to take, especially since these contracts can be risky in some areas of the country. Some contracts are for one flock at a time, so there is no guarantee of a long-term income. And as with any livestock, there is the risk of losing a flock to disease or stunted growth.
When a bank or other lender issues debt, some sort of risk management is expected in return, whether that be a mortgage on the farmer’s land or liens on the infrastructure. The farmer must repay the loan, plus interest, in an agreed upon amount of time. If the poultry operation is successful, the farmer should have no trouble repaying this loan. But if a farmer has taken out a multi-million dollar loan to start his chicken operation and doesn’t see the returns from the contract that he was expecting, he risks defaulting on the loan and exposing his farm to foreclosure.
While taking out a loan is the traditional route farmers have taken to fund expansions, there are other options that offer different profit levels and risk management. Outside equity financing can provide farmers with another option for obtaining the capital needed to begin or expand their poultry operation. Equity financing allows investors to directly invest capital into a farm, in exchange for some level of ownership of the operation. Investors are able to decide how much capital they are willing to provide based on expected returns and the level of risk they are comfortable with. If the poultry operation is successful, the farmer will share the profits with the investor. However, if the operation is not prosperous or completely fails, the farmer and the investors may lose money while retaining the same proportion of ownership.
Choosing between debt and equity doesn’t have to be an all or nothing decision. A farmer may prefer a mix of the two, with some capital from outside investors and a smaller loan from a bank or lending agency. Using both will allow the farmer to retain a higher level of ownership in the operation, as well as require a lower level of mortgaged assets for a smaller loan.