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Economic Organization
of U.S. Broiler Production
James MacDonald
Economic Information Bulletin No. (EIB-38) 33 pp, June 2008
U.S. consumption of chicken averaged 86 pounds per person in 2006, more than triple the 1960
level. Chicken became a preferred option as incomes increased and chicken prices remained
inexpensive compared with other meats, and as processors created new chicken products that
appealed to consumer tastes. Increased consumption required increased production of broilers,
which the industry accomplished through a tightly integrated production system that links chicken
companies, called integrators, with independent broiler growers through production contracts.
The industry’s distinctive organization has contributed to its commercial success, but it now faces
a series of challenges.
What Is the Issue?
After decades of rapid expansion, growth in both broiler production and productivity began to
slow in the mid-1990s. Slowing growth creates challenges for industry decisionmakers, as they
consider how to encourage further investments in capacity and new technology, and attempt to
manage existing and aging production networks.
The broiler industry has a unique organization. Firms called integrators own processing plants, hatcheries,
and feed mills, and contract with independent “grow-out” operations to raise their broilers to market
weight. The contractual relationship between farmers and integrators, however, is coming under growing
scrutiny from Congress and regulatory agencies, and the industry relies heavily on a particular kind of
production contract that has attracted considerable attention.
The broiler industry plays an important role in several public policy issues:
• Large animal feeding operations, including those raising broilers, are under increasingly
strict environmental regulation by all levels of government; and
• The broiler industry has dealt with poultry diseases and associated biosecurity issues for
many years, while growing public awareness of such threats plays an increasingly important
role in industry and public policy planning.
What Did the Study Find?
Other industries use production contracts, but the broiler industry is distinguished by the dominance
of such contracts and the methods by which growers are paid. Almost all broiler growers’
contracts base the compensation on how each grower’s performance compares with that of others.
Beyond that feature, however, contracts are far from uniform. Contracts can include other terms that
tie base payments to actions that affect grower costs or that assign some expense or revenue catego-integrator. Contracts also cover
a wide range of specified durations,
from just over a month to
15 years. Variations in contract
design likely follow from
differences in grower location,
size, and type of broiler
housing, but the wide variation
in terms and payments makes it
difficult for growers to evaluate
contracts.
The industry’s organization
has contributed to its commercial
success. High rates of
productivity growth, along
with new product innovation,
led to high growth rates for
chicken production, domestic consumption, and exports. Growth in production slowed noticeably, however, after the
mid-1990s. With slower production growth, investment in new housing also slowed. New housing embodies new
technology, so slowing investment can hinder future productivity growth, unless older houses can be effectively retrofitted with newer equipment. Integrators are requiring such retrofitting for some operations as a condition of extending
their contract. For newer and larger operations, integrators are offering contracts of longer duration to induce them to
continue to invest in new technology.
Broiler production is gradually shifting to larger operations, a trend common to most agricultural commodities. For
operators of small broiler enterprises, off-farm income is the primary source of the household’s income, and the
broiler enterprise provides a modest amount of additional income. For larger operations, the broiler enterprise typically
is the primary source of the household’s income. As a result, operators of larger enterprises may be more sensitive
to the income risks arising from energy price fluctuations and contract settlements. Contract features may need to
be redesigned to adjust for differing risk exposures faced by growers.
Larger operations may realize scale economies in production, but they also concentrate poultry litter in localized
areas. Litter is bedding material, such as wood shavings, sawdust, or straw, that is spread on the floors of broiler
houses. When it is removed, it consists mostly of poultry manure, along with the original bedding, feathers, and
spilled feed. In 2006, about 40 percent of used litter was spread on the farm’s fields, while the rest was removed from
broiler operations for field application elsewhere or for processing. There was enough of a market for litter in 2006
to allow growers to sell about a third of the litter removed from farms, but farmers had to give away the rest or pay to
have it removed. Litter disposal remains a major issue confronting the industry.
How Was the Study Conducted?
The analysis relies on data drawn from a large-scale representative survey of producers, conducted as part of the
annual Agricultural Resource Management Survey (ARMS), which is the U.S. Department of Agriculture’s primary
source of information on the financial condition of farm businesses and households and farm production practices.
Two ARMS versions collect financial and production information for all types of farms, but other versions target
specific commodities and collect additional information on production practices,
financial performance, and contractual
relationships for those commodity enterprises. ARMS included a broiler version for the first time in the survey
conducted early in 2007, with a focus on performance during 2006. The survey’s target population consisted of
all operations that produced broilers for meat and had at least 1,000 broilers onsite at any time during 2006 in the
17 States that accounted for 94 percent of U.S. broiler production. Analyses in this report are based on responses
received from 1,568 operations, out of 2,100 originally selected for the survey.
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