
Farmers Take Out Millions In Loans To Raise Chickens For Big-Box Retailers - happy-go-lucky
http://www.npr.org/sections/thesalt/2017/06/22/533944458/farmers-take-out-millions-in-loans-to-raise-chickens-for-big-box-retailers
======
patio11
The most natural reading of this is "Sophisticated entrepreneurs attempt to
increase revenue by diversifying into a new line of business requiring capital
improvements financed by readily available debt.", unless one has the
misapprehension that farmers are, as a class, stupid.

~~~
yequalsx
It's not binary. There's a whole range types of people, situations and forces
at play. Not all are sophisticated, not all are dumb and probably are reacting
to emotional forces that we aren't aware of. I frequently read stories on this
site about how it's dumb to have your whole business dependent upon Facebook.
Maybe depending entirely on Costco is equally a bad idea. Perhaps more so
since there are massive loans involved.

EDIT: From the article:

"Bringing the boys back to the farm is huge for me," Mueller says. "I'm not a
big enough farmer to where another family could farm and do corn and soybeans
and survive. This way they can."

At least in this one case there are non-sophisticated financial forces at
play. Patio11's comment is not apt.

~~~
austenallred
> At least in this one case there are non-sophisticated financial forces at
> play.

I'm not convinced that's a fair assumption. Everyone has reasons they'd like
to make more money and some vague idea of what they'd do if they were more
wealthy. Acknowledging that you want your business to be successful because x
doesn't necessarily indicate that a decision making process is irrational or
unsophisticated.

~~~
yequalsx
I'd say that a major part in his deciding to take $6 million in loans and
signing an exclusive contract with Costco has to do with emotion and not
purely financial reasons. It may be a good decision but at least part of the
decision making was not for sophisticated financial reasons.

~~~
austenallred
I think it's silly to assume that's the case. You could very well be right,
but there's no way to make that anything more than an assumption based on the
article.

~~~
yequalsx
Well the man in the article talked about how important it was for him to bring
his boys home. That is provide an environment where he sees them at home with
a future in farming. It's what he said.

Emotion is a huge part of business decisions for most people. It's rare for
someone to disassociate their emotions from the transaction. This is well
known.

------
austenallred
Million dollar loans aren't really that strange for farmers. It is definitely
a lot of money, but usually it's secured by assets that are objectively
valuable themselves (land).

My father in law started out as a humble hay farmer in the middle of nowhere
in Utah, but he could easily retire on the appreciation and equity he built in
the land he owns alone (though he's the type that would never sell it, and
he's already rich).

~~~
mfoy_
In this case the loan is to build barns, not buy more land. And the barns are
specifically for raising chickens. If the contracts or the poultry processing
in that area fall through then I don't think the underlying assets would be
worth their cost-- leaving the farmers high and dry.

~~~
bluGill
True, but the bank won't be giving those loans if they think the contracts
will fall through. Even if the contracts fall through, chicken demand is a
known quantity. The farmer has opportunity to find someone else to buy his
chickens.

~~~
kgwgk
Yes, because banks never give loans to people who is later unable to pay back.
And chicken prices can only go up, like house prices.

~~~
austenallred
Well in this case the assets will be chickens and barns. Certainly there's
risk, but the likelihood that either chickens or barns rapidly become
worthless is quite small.

Unlike the housing crisis, they don't need the prices to continually go up.
They just need them to not fall through some floor.

------
vwcx
Christopher Leonard's book 'The Meat Racket' is a good primer for anyone
interested in the subject. He does an excellent job walking through the
simultaneous rise of "big chicken" and the legislative steps corporations like
Tyson and Cargill took to ensure their long-term domination of farmers, the
law and the consumer.

[https://www.amazon.com/Meat-Racket-Takeover-Americas-
Busines...](https://www.amazon.com/Meat-Racket-Takeover-Americas-
Business/dp/1451645813)

~~~
rayiner
Here's the NYT book review:
[https://www.nytimes.com/2014/03/02/books/review/the-meat-
rac...](https://www.nytimes.com/2014/03/02/books/review/the-meat-racket-and-
in-meat-we-trust.html).

I think the bigger picture issue is that there is nothing special here about
meat, nearly every industry is like that. Big corps are inherently more
efficient at this sort of thing, and technology has helped them overcome any
inefficiencies of scale they might have suffered in the past. You used to be
able to walk into a Comp USA (or even local computer stores) and see aisles of
CDs from all these different software companies. Today, Google/Microsoft/Apple
control everything through their app stores and bundle most of the software
you might want to buy with their devices.

Heck, we're watching this happen right now in several industries, and cheering
it along. Amazon is putting all the smaller retailers out of business (because
there is pretty much no way to compete with Amazon's economics of scale). Uber
is an international mega-corp that's systematically wiping out the dozens of
taxi companies (almost all small businesses) that used to exist in each city.

~~~
patio11
_You used to be able to walk into a Comp USA (or even local computer stores)
and see aisles of CDs from all these different software companies._

This is true. Those were terrible, terrible times to be in the software
business.

If you want me to elaborate, I can elaborate at some length.

~~~
rayiner
I'd certainly be curious to know what you mean.

~~~
patio11
So I came up in the post-retail days of software, but I sold CDs (once upon a
time) and have had a coffee or hundred with folks who came up a few years
before I did, including ones who operated spiritually similar businesses with
retail components. (My CD sales were over the Internet.)

Retail math is absolutely brutal. Consider software sold at a MSRP of $30,
which might be squarely in the Scrappy Small Software Company Making A Go Of
It range.

The retail store itself practices "keystoning" \-- it won't pay more than $15
for that SKU. It also generally won't (and certainly not if it is a Best Buy /
CompUSA) pay when one expects it to pay, before receiving the product. Nope,
it pays after (depending on the contract) sell-thru or sell-thru plus return
window expiry.

So who got the $15? Was it the software company? No, because CompUSA has
better things to do than to talk to software companies, unless your company
rhymes with Microsoft or Intuit. Instead, CompUSA purchased the software from
a distributor. The distributor purchased it from a publisher; the publisher
from the software house.

Suppose your software company self-published, to capture the margins. Bully on
you. You make about $10 per unit.

Now let's return to that CD bit. Permit me to handwave, because it has been
many years, but in quantity, shipped to your distributor, assume CD plus
printed insert plus jewel case costs you $4.

So, when everything works out correctly, you make $6 on a $30 sale. You eat $4
per return (returned software is unsaleable; my standing instruction to our
fulfillment provider was to destroy it if mail bounced back because even an
unopened envelope is useless); assume that's negligible.

Ahh, but you get the massive, massive volume of the retail channel, right?
Wonderful performance for midlist in retail is, drumroll, 10k units per year.
You're doing better than almost all B2C software which isn't games.

It is the best time in the history of the world to be independent in software.
Selling CDs over the Internet bad, not terrible. Selling downloads over the
Internet was pretty spiffy. Selling SaaS over the Internet is the best model
independent software makers have ever seen.

(The mobile folks are in a parallel universe which is very, very hit driven
and which I wouldn't recommend to most people. Apple/Google are actually are
capable of delivering volume -- more than BestBuy could even dream of -- and
charge less as a percent for it, but it is in their interests to churn-and-
burn who gets that volume, so it is a rough place to be.)

see also [https://successfulsoftware.net/2008/04/21/selling-your-
softw...](https://successfulsoftware.net/2008/04/21/selling-your-software-in-
retail-stores-all-that-glitters-is-not-gold/) which recounts a conversation
which is substantially in line with unpublished conversations I had over the
years. (Andy Brice, who runs that site, runs a business spiritually similar to
my sold software business, but rather larger.)

I note that you might be suffering from a peculiar sort of availability bias.
You're, IIRC, a gainfully employed professional who doesn't sell software for
a living. As a gainfully employed professional, walking into a CompUSA and
walking past a row full of shelves exposes you to evidence that there exists a
software industry, even if you have no connection to the industry. If that row
of shelves goes away, you might reasonably believe "Wow, the software industry
went away.", but that is not in fact what happened. The software industry
makes more money than ever, by a lot, but it does so in places which are
inconvenient to you to stumble upon accidentally.

------
bjpbakker
> "There's some things that aren't perfect, but you're never going to get a
> perfect contract," Mueller says. "And there again you got to have some faith
> and you've got to have some trust."

That's a bit of a straw man. You sign contracts to have a set of rules that
you can fall back on if you /no longer/ can trust the other party.

------
mfoy_
Interesting that they say "raise corn" and "grow chickens".

~~~
saalweachter
There may be two distinctions in the language.

First, chicken "production" is generally separated into "layers" and
"growers". Layers are chickens you raise to lay eggs, growers are chickens you
raise just to grow big enough to eat. So "grow" in the "raise vs grow" context
may influenced by the "layer vs grower" context.

The second is that there is a split between people who raise livestock through
their full life cycle, breeding them and raising them to a finished weight,
versus people who just breed or just finish livestock; the "factory chickens"
will typically be just a finishing operation, so "grow" may also be influenced
by that.

The third possibility is that it's an in-joke by the farmers, on how the
chickens have become more of a crop than the corn.

The fourth possibility, of course, is that it's just a transcription error by
the authors, and the farmers say "grow corn and raise chickens".

------
chiph
Disclaimer - my current contract is with the Farm Credit bank system, and
they're likely to be the ones to lend to these farmers. Mainly because they
understand agriculture and farmers & ranchers, and the big banks don't. But
also because even though we're a government-sponsored entity (the feds
guarantee our loans), we are run as a co-op. If we have a good year (i.e. not
many losses) we will refund patronage dividends to our customers. And this can
be significant - one association alone paid out $160 million last year.

These farmers are pretty smart - yes they're taking a risk by borrowing money.
But diversification can only help them in the long run. And $2-6 million for
new barns isn't a lot in a business where field equipment can easily run a
half-million dollars, and wears out/becomes obsolete in 10 or 15 years.

------
fencepost
The company that you're going to be working with/for is going to make a huge
difference here. Costco has a reputation of being a good corporate citizen and
taking care of its staff, suppliers, etc. (FWIW including a code of ethics
that prioritizes: Obey the Law, Take care of Members, Take care of Employees,
Respect Suppliers, Reward Shareholders.)

If I were a supplier I'd be a lot more willing to sign on with someone like
Costco with a DBAD reputation than with anything owned by Walmart with a "you
need to cut your margin another 5% this year or we'll drop you and leave you
with no way to pay those loans" reputation.

------
superplussed
I'm really hoping that in the next 5 or 10 years that "clean meat" or meat
created from animal cells becomes a viable alternative. This is the future,
and with it we will drive costs down and food safety up.

------
Paul-ish
> And farmers can always lose money on a bad batch of birds.

> "A disaster flock I call them," says OCM President Mike Weaver, who raises
> poultry on contract in West Virginia. "They contract a disease that stunts
> their growth. And that's going to happen to (the farmers) eventually. The
> feed and the chicks, they don't have control over, but their pay is going to
> be based on those."

Wouldn't some sort of insurance be useful here?

------
JPKab
This is a very, very typical pattern in poultry and egg production.

Source: Grew up in rural Virginia near a bunch of big poultry processing
centers and the surrounding area is filled with family farmers who are debt
slaves to the poultry processors.

------
droopyEyelids
The idea of "having faith" that a mega corporation will take pity on your
business when inevitable negative variance hits the farm sends a shudder down
my spine.

~~~
FussyZeus
The hell else are they supposed to do exactly? The economic crash hit the
middle states hard, and the recovery has gone almost exclusively to the
coasts. The real question is why we're allowing an entire region of the
country's "best option" to be being debt slaves to a handful of chicken
companies.

------
sjg007
Interesting to see Costco taking out the middle man. Chicken is going to get
even cheaper.

~~~
loco5niner
Possibly, but in my opinion probably not. Costco is selling these chickens for
$4.99 each. It's a loss leader, and (as far as I have heard) Costco is adamant
that this price will not change. I think Costco is simply trying to reduce the
amount of loss they are taking at that price.

* I know it works on me, I go in for the free samples mostly and regularly spend $50+ on a visit (maybe half the time), and just recently spent $7,000 on a massage chair.

~~~
madengr
They used to be $3.99, but even at $5 they are twice as big and 1/2 the cost
of grocery store chickens.

~~~
Mankhool
Yes, but what is the quality? What have they been fed and injected with on
their way to an assembly line that kills them at the rate of 200/minute?

~~~
madengr
The Costco chickens taste good.

~~~
loco5niner
They do taste good. I have to admit though, after eating a lot of them, I
suspect they have some brine added. Not a big deal, and not for sure, but I
don't get them as much as I used to.

------
ocschwar
And elsewhere on the front page, a dotcom is hiring and is in the business of
facilitating yet more borrowing by poor people.

------
Luc
In the US, 25 million chickens - sentient, feeling creatures, killed in their
infancy after a short, miserable life. Genetic freaks, too.

Every day, over and over again, a cycle of suffering.

Perhaps this is a business one could choose not to get in to.

~~~
FussyZeus
Rhinos are endangered and hunted by poachers nearly to extinction because they
aren't allowed to be domesticated and "farmed" for ivory. The best way animals
can ensure long term survival is to be useful to man, not only because farm
animals are in much greater numbers and protected as property is in our
society, but also because we are rapidly running out of "wild" area for them
to exist in.

I shudder to think how many species are going to go extinct once we can grow
meat directly in labs.

~~~
ceejayoz
> I shudder to think how many species are going to go extinct once we can grow
> meat directly in labs.

Cows, chickens, turkey (although they've got a wild variant), sheep and pigs.
Add in a few less common meats and you're up to about a dozen?

Not even a drop in the bucket for the
[https://en.wikipedia.org/wiki/Holocene_extinction](https://en.wikipedia.org/wiki/Holocene_extinction).

