Global Prospective: Chicken Farmers in the US Hit by Economic Crisis

Farmers Face Empty-Nest Syndrome Amid Chicken Housing Crisis
Wall Street Journal, 12-Feb-09
By LAUREN ETTER

Poultry Growers Lose Contracts, Can't Pay Off Their Pricey Coops; $200,000 Per House

Like many Americans, Darris and Sarah Dixon are struggling with mortgage payments and trying to avoid bankruptcy.

But the home the Dixons live in isn't the problem. The problem is their three chicken houses, on which they owe nearly $500,000.

"There's no way we'll make the chicken house payments," Mr. Dixon says from his farm abutting the Ozark Mountains.



A chicken housing crisis has cropped up in the U.S., and it's producing some of the same bleak results as the human one -- foreclosures, lawsuits and devastated homeowners.

In the wake of last year's bankruptcy filing by poultry giant Pilgrim's Pride Corp., hundreds of farmers suddenly find themselves unable to make mortgage payments on their pricey chicken coops.

To cut costs, Pilgrim's, the nation's second-largest chicken company, has terminated contracts with at least 300 farms in Arkansas, Florida and North Carolina. Under these contracts, farmers receive a set price per pound for raising chicks supplied by Pilgrim's until they are ready for slaughter. The company turns the birds into nuggets, wings and other food.

Pilgrim's still has contracts with more than 5,000 growers nationwide, and executives say they are trying to cut as few as possible. They say the reason the 300 farms weren't needed was that Pilgrim's stopped or reduced production at processing plants in those areas. "It's a very sad situation," says Don Jackson, the company's president and chief executive. But "the company is in bad shape." Last year Pilgrim's had a loss of nearly $1 billion.

For the farmers who have been cut loose, no contract means no chicks, which means no revenue -- and no money to pay off the coop mortgages. Chicken houses without chickens or contracts have virtually no resale value. And with the poultry industry in retreat, rival producers aren't looking for new growers. Tyson Foods Inc., the largest chicken company, and Perdue Farms Inc., the third largest, both say they're not cutting contracts with their farmers because of the industry downturn.

Today's chicken houses are bigger and more sophisticated than the coops of yore. Made from corrugated metal and wooden beams, the cavernous shacks can be longer than a football field and cost more than $200,000. To maximize profits, many farmers own at least four, meaning high-six-figure mortgages are common.

Inside the biggest such coops, more than 20,000 chickens spend their lives pecking at feeders and water spigots on a dirt floor. Computers regulate temperature. Most houses are kept dark to minimize activity so birds pack on more pounds.

A chick typically arrives weighing about three ounces and leaves six to nine weeks later at a plump four to eight pounds. Pilgrim's growers say they earn about 5 cents per pound per bird, although that varies. A typical farmer with four large chicken houses can gross between $125,000 and $150,000 a year. Expenses often amount to more than 30% of their income.

The houses grew in number and size as world-wide chicken consumption spurred greater production. In 2008, a record 36.5 billion pounds of chicken were produced in the U.S., up 32% from a decade earlier, says the National Chicken Council. Pilgrim's expanded its contract base to more than 5,000 growers, up from 1,300 in 1998.

But chicken demand has slowed along with the global economy. For the first time since 1975, the U.S. is expected to produce less chicken than in a prior year. Poultry companies typically cut back by reducing the number of chicks given to each farmer, but Pilgrim's finances were so dire that it decided to terminate some contracts, says Mr. Jackson, the president and CEO. The Pilgrim's spokesman says it's "not unusual for contracts to be terminated on an ongoing basis -- albeit at a very low rate."

Brad and Robin Dunlap of Springfield, Ark., lost their contract with Pilgrim's in August. The couple, who have three small children, say they owe about $200,000 on four chicken houses.

To make ends meet, Mrs. Dunlap, 27 years old, took a job at a medical-device company and Mr. Dunlap, 31, went into dairy farming with his father. They worry about having to file for bankruptcy protection.

"It makes you sick," Mrs. Dunlap says over beef-stew in her dining room. "Right now we're still feeding our kids. But our credit will probably be ruined after all this is over with."

Plumerville, Ark., farmer Steve "Peewee" Dixon (no relation to Darris or Sarah Dixon), 50, had his Pilgrim's contract terminated while still owing more than $100,000 on two chicken houses. Last month, he filed for bankruptcy after his lender foreclosed. "That was my retirement," Mr. Dixon says.

In Arkansas, 74 chicken farms have banded together to sue Pilgrim's. In their lawsuit, filed in state court in Van Buren County., the farmers say company representatives induced them to build chicken houses by making promises like their "grandkids will have chickens," according to court documents.

A Pilgrim's spokesman declined to comment on pending litigation. The company says contract terminations were a legal, necessary step to reduce costs amid volatile commodity markets and depressed chicken prices.

Losing their contract was a blow to Darris Dixon, 30, and wife Sarah, 27. In April 2005, they'd been married just over a year when Mr. Dixon quit his job delivering ice and took out a $532,000 loan from Farm Credit Services of Western Arkansas to build three chicken houses.

Under the Dixons' contract, Pilgrim's provided chicks, feed and other services in exchange for shelter and waste disposal, among other things. Things went well for three years. "We had no trouble making our loan payments," says Mr. Dixon, a lanky man in blue jeans and a John Deere cap. "I had more money than I ever had." The family spent $140,000 remodeling their three-bedroom home and bought a new tractor for $25,000.

Last May, a tornado whipped through Center Ridge, population 1,332, demolishing two of the Dixons' chicken houses. Their $370,000 insurance payment wasn't enough to rebuild; they grappled with whether to quit.

Mr. Dixon says he received a visit from a Pilgrim's representative who said, "Build them back as quick as you can and get 'em rolling again."

The Pilgrim's spokesman says, "At the time of the May tornado, the company was in need of square footage for housing...But no one could have foreseen the dramatic changes that occurred in the U.S. chicken industry last summer."

The Dixons tapped their savings to rebuild. On Aug. 1, a fresh batch of Pilgrim's chicks took up residence. Ten days later, Pilgrim's called to say those chicks would be the last.

"It was just a shock at first," recalls the Mrs. Dixon, tears welling as her newborn son slept in a bassinet.

One recent day, Mr. Dixon swung open the door to one of his 500-foot-long chicken houses. Feathers blew around the cool, damp floor. Instead of clucking chickens, silence filled the air. "It's hard to just see [the houses] sitting there," Mr. Dixon said.

He fears the Dixons won't be able to afford the $60,000 payment they owe in May. They've cut back on dining out and left unfinished the walk to their home. As for bankruptcy, Mr. Dixon says, "If that's what it takes, we'll just have to do it."