Purdue Agricultural Economics Report

PURDUE AGRICULTURAL ECONOMICS

REPORT AUGUST 2006

Indiana Farmland Values Continue to Increase Craig L. Dobbins, Professor and Kim Cook, Research Associate

Statewide Land Values respectively for poor, average, and the location of the tract. The median top land. The value per bushel for value for rural recreational land in different land qualities was very June was $2,775 per acre. fter several years of similar, ranging from $22.14 to A increasing values, some $23.27 per bushel. On a per bushel Statewide Rents people wonder if farmland basis, the most expensive land is the On a state wide basis, cash rents values may have reached their top. poor land with a value of $23.27 per increased $1 per acre (Table 2). The They point to several factors sharp bushel. Top quality land was the estimated cash rent was $155 per acre increases in energy and fertilizer least expensive at $22.14 per bushel. on top land, $127 per acre on average prices used in crop production, The average value of transitional land, and $100 per acre on poor land. continued low crop prices, the high land, land moving out of agriculture, This was an increase in rental rates value to cash rent multiple, and more increased 11% this year. The average of 1% for poor land, 0.8% for average recently, increasing long-term value of transitional land in June land, and 0.6% for top quality land. interest rates. Yet, the June 2006 2006 was $9,113 per acre. However, The increase from 2005 to 2006 Purdue Land Value Survey found that there is a very wide range of values continued the upward trend in cash in most cases farmland values across for transitional land from twice its rent values but it is the smallest the state continued to march higher. agricultural value to more than ten percentage increase reported for the On a state-wide basis, bare Indiana times its agricultural value. These past six years. Statewide, rent per cropland ranged in value from $2,509 values are strongly influenced by bushel of estimated corn yield ranged per acre for poor land to $3,770 per what the land is transitioning into from $0.91 to $0.93 per bushel. acre for top land (Table 1). Average and its location. Due to the wide Cash rent as a percentage of value bare Indiana cropland had an esti- variation in estimates for transitional continued to decline. For top quality mated value of $3,162 per acre. For land, the median value* may give a farmland, cash rent as a percentage the 12-month period ending in June more meaningful picture than the of farmland value was 4.1%. For 2006, this was an increase of 6%, arithmetic average. The median value average and poor quality farmland, 7.4%, and 6%, respectively for poor, of transitional land in June 2006 was cash rent as a percentage of farmland average, and top land. $7,750 per acre. In 2005, the median value was 4.0%. Over the 32-year Part of the difference in land value for transition land was $7,000. history of the survey, rent as a values reflects productivity differ- This year for the first time we percentage of farmland value has ences. As a measure of productivity, asked survey respondents to indicate survey respondents provide an the value of rural recreational land. estimate of long-term corn yields. Rural recreational land is used for The average reported yield was 108, hunting and other recreational uses. In This Issue 139, and 170 bushels per acre, On a state wide basis, the average value of rural recreational land was Indiana Farmland Values $3,059, almost equal to the value Continue to Increase ...... 1 Economic Importance of the * The median is the middle of average quality farmland. But as with transitional land, there is a wide Indiana Poultry Industry ...... 8 observation in data that have been Economic Importance of the range of values for rural recreational arranged in ascending or descending Indiana Dairy Industry ...... 15 numerical order. land and its value is very sensitive to 2 AUGUST 2006

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Ã 7KHODQGYDOXHVFRQWDLQHGLQWKLVVXPPDU\UHSUHVHQWDYHUDJHVRYHUVHYHUDOGLIIHUHQWORFDWLRQVDQGVRLOW\SHV,IDSUHFLVHYDOXHLVQHHGHGIRUDVSHFLILFSURSHUW\ WKLVYDOXHFDQEHGHWHUPLQHGE\DSURIHVVLRQDODSSUDLVHU 7UDQVLWLRQODQGLVODQGPRYLQJRXWRISURGXFWLRQDJULFXOWXUH 5XUDOUHFUHDWLRQODQGLVODQGORFDWHGLQUXUDODUHDVXVHGIRUKXQWLQJDQGRWKHUUHFUHDWLRQDOXVHV

averaged 6.0%. The values in 2006 started. It is important to remember ownership expenses such as real are the lowest reported since the that the rent used in this calculation estate taxes, maintenance, manage- Purdue Land Value Survey was is the gross rent. Subtracting ment, etc. will make the net rate of return even lower.

Area Land Values Purdue Agricultural Economics Report is a quarterly report published Survey responses were organized into by the Department of Agricultural Economics, Purdue University. six geographic regions of Indiana Editor Circulation Manager (Figure 1). As in past years, there Gerald A. Harrison Linda Klotz Purdue University Agricultural Economics Department are geographic differences in land Department of Agricultural Economics www.agecon.purdue.edu value changes. This year Southwest, 403 W State Street PAER World Wide Web West Lafayette, IN 47907-2056 www.agecon.purdue.edu/extension/pubs/paer/ West Central, and Southeast Indiana E mail: [email protected] Cooperative Extension Service Publications reported the strongest percentage Phone: 765 494 4216 or www.ces.purdue.edu/extmedia/ toll free 1 888 398 4636 Ext. 44216 Subscription to PAER increases in land value. Bare farmland Editorial Board Paper copies of the PAER are $12 per year in these areas was estimated to have W. Alan Miller (payable to Purdue University). Electronic Christopher A. Hurt subscriptions are free and one may subscribe increased by 8.3% to 18.3% (Table 1). Philip L. Paarlberg at: www.agecon.purdue.edu/contact/contact.asp The increase in estimated values in Layout and Design Cathy Malady the other regions were more modest. The survey indicated a slight decline Purdue University Cooperative Extension Service, West Lafayette, IN in value for poor quality land in the Purdue University is an Equal Opportunity/Affirmative Action employer. Central region. PURDUE AGRICULTURAL ECONOMICS REPORT 3

Bare farmland values have 7DEOH$YHUDJHHVWLPDWHG,QGLDQDFDVKUHQWSHUDFUH WLOODEOHEDUHODQG DQG consistently been the highest in 3XUGXH/DQG9DOXH6XUYH\-XQH the Central region. This year, values 5HQWEX 5HQWDV*RI-XQH in West Central and Central Indiana 5HQW$FUH &KDQJH RI&RUQ /DQG9DOXH are very similar. While the Central /DQG &RUQ Indiana top and poor quality farm- $UHD &ODVV EX$ +$ +$ * +EX +EX * * land values are slightly higher 1RUWK 7RS than those in West Central Indiana, $YHUDJH average quality land values are 3RRU slightly larger in West Central 1RUWKHDVW 7RS Indiana than in Central Indiana. $YHUDJH Land value per bushel of estimated 3RRU long-term corn yield (land value :&HQWUDO 7RS divided by bushels) is the highest $YHUDJH in the Central and West Central 3RRU region, ranging from $23.41 to &HQWUDO 7RS $YHUDJH $25.03 per bushel. This was followed 3RRU by the North and Northeast with 6RXWKZHVW 7RS values ranging from $21.12 to $22.69. $YHUDJH The Southwest and Southeast had 3RRU land values per bushel ranging from 6RXWKHDVW 7RS $18.78 to $22.29 per bushel. $YHUDJH 3RRU Area Cash Rents ,QGLDQD 7RS All areas of the state except Central $YHUDJH Indiana reported an increase in cash 3RRU rent for at least some land qualities Ã (Table 2). In Central Indiana, cash rents were reported to have declined by 1.4% to 1.8%. Across the three land qualities the strongest percent- ranged from $5,000 to $10,000 per the same, or less land was on the age increase was in the North region. acre (Table 3). Estimated per acre market than one year ago. Only Increases in this region were 2.4% median values of the larger tracts 18.6% of the 2006 respondents to 4.1%. (10 acres) ranged from $6,000 to indicated more land was on the Cash rents are the highest in $10,000 per acre. market now compared to year-ago the West Central region, followed levels (Figure 2). The remaining by the Central region. Cash rent Farmland Supply & Demand 81.4% of the respondents indicated per bushel in West Central Indiana To assess the supply of land on the the amount of land on the market ranges in value from $0.98 to $1.05. market, respondents were asked at the current time was the same In the Central region, these values to provide their opinion of the or less than a year ago. Compared ranged from $0.95 to $0.99 per amount of farmland on the market to 2004 and 2005, more respondents bushel. The per bushel rents in these now compared to a year earlier. The indicated that there was more or the two regions are the highest in the respondents indicated either more, same amount of land on the market. state. The next highest per bushel rent was in the North and Southwest, ranging from $0.87 to $0.94. Per bushel rents in the Northeast ranged Uhiyr"Hrqvhhyrssvrhp rhqrhp rurvr from $0.84 to $0.86. The lowest per Hrqvhhyrr hp r bushel cash rents were $0.73 to $6p r yrs urvr 6p r r s iqvvv $0.75, reported for the Southeast. !" !# !$ !% !" !# !$ !% 6 rh 6 6 6 6 6 6 6 6 Rural Home Sites 1RUWK Respondents were asked to estimate 1RUWKHDVW the value of rural home sites :HVW&HQWUDO with no accessible gas line or city &HQWUDO utilities and located on a black top 6RXWKZHVW or well-maintained gravel road. The 6RXWKHDVW median value for five-acre home sites Ã 4 AUGUST 2006

)LJXUH3XUGXH/DQG9DOXH6XUYH\*HRJUDSKLF5HJLRQV increased farmer interest (Figure 3). The number of respondents indicating an increased interest from farmers has declined steadily since 2004. Forty-nine percent of the respondents indicted that farmer interest remained the same. Respon- dents indicating a decline in farmer interest increased to 6.6%. The demand for land for rural homes continues to be strong. Sixty-six percent of the respondents indicated an increase in demand for rural residences. Thirty-one percent indicated that demand for rural residences remained the same. Less than four percent of the respondents indicated a decline in the demand for rural residences. These responses are similar to those of past years. The stock market has shown some recovery from its decline in 2002, but continues to be highly volatile. In addition, interest rates have increased providing increased competition for investors dollars. Demand for farmland from nonfarm investors seeking good investment opportunities does not appear to be as strong as in the past. This year 41.2% of the respondents indicated an increase in farmland demand from individual investors. This was nearly a 10% reduction from the previous two years (Figure 4). This is the first time in four years that A smaller number of the respondents Respondents were also asked less than 50% of the respondents indicated that there was less land to indicate if interest in a farmland indicated increased interest from on the market than the previous purchase by farmers, rural residents, nonfarm investors. The number of year. While this might indicate or nonfarm investors had increased, respondents indicating the same or a little more farmland on the decreased, or remained the same a decrease in demand from nonfarm market, the quantity of land for compared to a year earlier. A total investors increased. sale remains limited. of 44.5% of the respondents indicated Expected Grain Prices, Interest Rates, & Inflation Making a farmland purchase is a )LJXUH3HUFHQWDJHRIUHVSRQGHQWVLQGLFDWLQJPRUHWKHVDPHRU OHVVODQGRQWKHPDUNHWFRPSDUHGWRSUHYLRXV\HDU long term commitment. As a result, expectations regarding crop prices over the next few years can have a strong influence on farmland values. In order to gain insight into crop price expectations, respondents were asked to estimate the annual average on-farm price of corn and soybeans for the period 2006 to 2010. This year saw an increase in the expected 3HUFHQWRIUHVSRQGHQWV five-year average price of corn but a decrease in the expected five-year price of soybeans (Table 4). Average 0RUH 6DPH /HVV five year expected corn price increased PURDUE AGRICULTURAL ECONOMICS REPORT 5

$0.12 per bushel to $2.48. However, )LJXUH3HUFHQWDJHRIUHVSRQGHQWVLQGLFDWLQJLQFUHDVHGWKHVDPH this was still below the price of $2.54 RUGHFUHDVHGLQWHUHVWE\IDUPHUVLQDIDUPODQGSXUFKDVH that was expected in 2004. The 70% average price for soybeans decreased $0.14 to $6.11. 60%

Increasing long-term interest 50% rates have been a topic of discussion 2004 for a number of years. The respon- 40% 2005 dents expected interest rate has 30% 2006 been increasing for the last three years. This years survey reported 20% an increase to 7.6%. This is the s respondents of Percent 10% highest expected interest rate 0% since 2002, but is still low relative Increase Same Decrease to historical expectations. Survey respondents are also expecting the inflation rate over )LJXUH3HUFHQWDJHRIUHVSRQGHQWVLQGLFDWLQJLQFUHDVHGVDPHRU the next five years to be higher. The GHFUHDVHGLQWHUHVWE\QRQIDUPLQYHVWRUV average expected rate of inflation in 60% the 2006 survey is 3.2%. Expected inflation rates have not been this 50% high since 1998 to 2000. 40% 2004 Expected Future Land Values 30% 2005 Another important expectation that 2006 influences current farmland price 20% is the expected future change in

Percent of respondents s respondents of Percent 10% farmland values. Table 1 indicates that for the six-month period from 0% June to December 2006, survey Increase Same Decrease respondents expect values to continue to increase. On a state wide basis this increase is expected to range 7DEOH3URMHFWHGILYH\HDUDYHUDJHFRUQDQG from 1.1% to 1.2%, a fairly modest VR\EHDQSULFHVPRUWJDJHLQWHUHVWDQG LQIODWLRQ increase. The expected change in farmland values for each region 3ULFHV+SHUEX 5DWHSHU\HDU is similar to the state wide average.

)LJXUH,QIOXHQFHRIVHOHFWHGIDFWRUVRQ,QGLDQDIDUPODQGYDOXHV development. Comments from survey respondents also indicate that in " certain regions of the state, the cash liquidity of Amish buyers is also ! having an influence on local markets. Over this three year period the most notable changes in market influences is the reduction in the 6r htrhyr u p y r p r v r r S p pr v h positive influence of current net D v v y

8 u yh r D Q r Q Q s T farm income, crop prices, the influ- x @ t D y D 6 I $ & ' q 6 h ence of alternative investments B 8 G % G ! " # Dsyrpr ( and the influence of interest rates. The influence of current farm program is also viewed as declining !# !$ !% in importance.

Final Comment The Purdue Farmland Value and of the survey respondents are expect- 10. Current cash liquidity of buyers, Cash Rent Survey indicates that ing farmland values to plateau for and over the past year Indiana farmland the next few years. values and cash rents continued to 11. Current U.S. agricultural policy. move higher. The limited supply Market Influences of land for sale or rent combined To obtain a more comprehensive Respondents were asked to use with strong demand for farm expan- assessment of the relative strength a scale from -5 to +5 to indicate the sion, country residences, and nonfarm that various influences exert on effect of each on farmland values. development provide strength to farmland values, survey respondents If the item had a major negative Indianas farmland market. were asked to assess the influence influence, it would be given a -5. Land values continue to increase of 11 different items on farmland A positive influence was indicated more rapidly than rents. This values. These items included: by assigning a positive weight means that the market is willing between 1 and 5 to the item. An to capitalize current income, rent, 1. Current net farm income, average for each item was calculated. into farmland values at a lower In order to provide a perspective rate of return**. The rent to value 2. Expected growth in returns, on the changes in these influences, percentage can be used as an estimate data from 2004, 2005 and 2006 are of the capitalization rate. As noted 3. Crop prices and outlook, presented in Figure 5. The horizontal earlier, this value is at a historic low. axis of the chart indicates the influ- What reasons might there be for why 4. Livestock prices and outlook, ence in the above list. the market is willing to capitalize In 2004 and 2005, all factors current income at such a low rate? 5. Current and expected interest were positive. In 2006, the positive One possible reason is that rates, influence of all factors declined. long-term interest rates are histori- Interest rates became a negative cally low. Competing investments 6. Returns on competing invest- influence in the market. The factors have lower rates of return, thus the ments, given the most positive influence in rate of return required for a farmland 2006 were the current inventory of investment is also lower. 7. U.S. agricultural export sales, land for sale (9) and the current cash Another may be that market liquidity of buyers (10). These were participants have concluded 8. U.S. inflation/deflation rate, both important influences in 2004 that there is less risk in owning & 2005. The availability of farmland a farmland investment than in the 9. Current inventory of land for sale, for sale was discussed previously. past. Government programs and crop As in the past, the liquidity of buyers insurance may have reduced the risk continues to be enhanced through premium required to get people to ** Income capitalization is a common the use of the 1031 or tax free own farmland. This would lower the method used to estimate the value of exchanges. Section 1031 of the IRS capitalization rate that market farmland. This approach to estimating regulations provides a process by participants require. farmland value divides an estimate of annual income by the capitalization which sellers of real estate can Finally, market participants rate. If estimated income (rent) is $127 reinvest the revenue back into real may be anticipating more of the per acre and the capitalization rate estate without paying capital gains expected total return in the form (rent ÷ value) is 4%, this provides an tax. This is often advantageous to of increased value. If a total return estimated value of $3,175 per acre. individuals selling farmland for of 10% is expected on an investment PURDUE AGRICULTURAL ECONOMICS REPORT 7

in farmland and 4% is obtained from Pasture Rent, Irrigated Farmland, & Grain Storage Rent the annual rent, there needs to be Occasionally we include extra questions in our survey to obtain information a 6% growth in farmland values. about a particular topic. This year, we asked about pasture rent, the value and Since 1990, the increase in value for cash rent of irrigated farmland, and the rental of on-farm grain storage. average quality farmland averaged 6.1% per year. What does an annual 6% increase in farmland values mean 7DEOH3DVWXUHODQG1XPEHURI5HVSRQVHV$QQXDO&DVK5HQWDQG&DUU\LQJ &DSDFLW\ for future values? It means that in five years average quality farmland 1XPEHURI $QQXDOUHQW &DUU\LQJ&DSDFLW\ 5HJLRQ UHVSRQVHV !SHUDFUH DFUHVSHUFRZ in Indiana will increase 34% or have a value of $4,231. In ten years, 1RUWK average quality farmland in Indiana 1RUWKHDVW :HVW&HQWUDO will increase 79% or have a value &HQWUDO of $5,663. 6RXWKZHVW Will a 6% rate of increase in 6RXWKHDVW farmland values be achieved in the 6WDWH future? The survey provides some Ã indicators that the farmland market may be cooling. Sharp increases in fertilizer and energy prices, increased Uhiyr%D vthrqAh yhq)Iir sSrr@vhrqHh xrWhyrhq 6hy8huSr interest rates combined with stable Iir s 8 `vryq Hh xrWhyr 8huSr corn and soybean prices seem to have # Srtv rr ir hp r (r hp r ir hp r slowed the increase in cash rents. 1RUWK Over time, this may also slow the 1RUWKHDVW increase in farmland values. Higher 6RXWKZHVW interest rates may act to reduce the 6WDWH development demand, an important Ã factor in the Indiana farmland 7KHUHZDVDQLQVXIILFLHQWQXPEHURIUHVSRQVHVIRUWKH:HVW&HQWUDO&HQWUDODQG6RXWKHDVW market, and also provide more UHJLRQVWRUHSRUWYDOXHVIRUWKHVHUHJLRQV attractive alternative investments. This will likely increase the capitali- 7DEOH2QIDUP*UDLQ6WRUDJH1XPEHURIUHVSRQVHVDQGDQQXDOSHUEXVKHOUHQW zation rate required for farmland. There is the hope that biofuels 5HJLRQ 1XPEHURIUHVSRQVHV 5HQW EX will lift corn and soybean prices 1RUWK thereby providing better returns 1RUWKHDVW to crop production. Over time, some :HVW&HQWUDO &HQWUDO portion of these better returns will 6RXWKZHVW be bid into farmland values. Such a 6RXWKHDVW scenario could help to lift farmland 6WDWH values. However, part of this hope Ã may already be reflected in current farmland values. The survey provides a broad look at Indianas farmland market. Values even climate changes need to be commodity prices, and production have continued to move higher and accounted for when making a costs is always prudent. it is expected that this trend will decision about buying, selling, continue, but there is increased or renting farmland. Purdue Land Value and Cash Rent uncertainty associated with the For each average in the report, Survey farmland market. It is important there is a distribution of values The Purdue Land Value and Cash to recognize that each local market around the average. Some tracts are Rent Survey is conducted each June. and each individual farm has its more valuable than the average, but The survey was made possible through own factors that make it unique. other tracts are less valuable than the cooperation of numerous profes- The increased uncertainty also the average. If one is considering the sionals that are knowledgeable of makes it important to carefully sale of farmland, it is recommended Indianas farmland market. These watch for factors that could derail that an appraisal be obtained to professionals include farm managers, the upward trend in farmland values. better establish the value of a specific appraisers, land brokers, bankers, The possibility of continued high tract. If a new rental is being made, Purdue Extension educators, farmers, fertilizer and energy prices, increasing budgeting through the expected and persons representing the Farm long-term interest rates, changes in return under alternative yields, Credit System, the Farm Service government programs, and maybe Agency (FSA) county offices, and 8 AUGUST 2006

insurance companies. Their daily Responses from 313 professionals The data reported here provide work requires that they stay well are contained in this years survey general guidelines regarding farm- informed about land values and representing all but three Indiana land values and cash rent. To obtain cash rents in Indiana. counties. There were 51 responses from a more precise value for an individual These professionals are asked the North region, 52 responses from tract, contact a professional rural to provide an estimate of the market the Northeast region, 69 responses appraiser or other professionals in value for poor, average, and top from the W. Central region, 70 your area that have a good under- quality farmland in December 2005, responses from the Central region, standing of the local situation. June 2006, and the expected value 33 responses from the Southwest We express appreciation to Carolyn for December 2006. They are also region, and 38 responses from the Hunst of the Department of Agricul- asked to provide an estimate of the Southeast region. Figure 1 illustrates tural Economics for her help in current cash rent for each land quality. the counties in each region. conducting the survey. To assess the productivity of the land, Appraisers accounted for 14% of Thanks to Professor Chris Hurt, respondents provide an estimate of the responses, farm loan professionals Department of Agricultural Econom- long term corn yields. Respondents represented 58% of the responses, ics, Purdue University and Profes- are also asked to provide a market farm managers or farm operators sional Appraiser, Jay Luse, Frankfort, value estimate for land transitioning provided 14% of the responses, and Indiana, for valuable suggestions to out of agriculture. other professionals provided 14% improve the discussion. of the responses. Economic Importance of the Indiana Poultry Industry Carlos D. Mayén, Graduate Student and Kevin T. McNamara, Professor

he Indiana poultry industry activities. Business activity is meat products was estimated at 607 T is an important part of the also associated with households million pounds with an approximate states agricultural sector. spending money earned from monetary value of $475 million The industry is represented by firms the poultry processors on household dollars. Approximately $38.5 million devoted to the production and consumption. This paper documents of the total sales were due to processing of ducks, turkeys, broilers the size and structure of the exports to Mexico, Russia and Asian and eggs. Total poultry product sales Indiana poultry industry, explains countries. The value of production at processor level were $806.6 million industry structure, presents income for the turkey sector was higher than in 2004 (processor survey). The impact estimates, and discusses that of the broiler and duck sectors. industry paid $142 million in salary the industry outlook. At the national level, Indiana can and wages to the 5,031 persons boast about two rankings in this employed by the industry. Addition- Overview of Indianas sector: 1st in duck production, with ally, the industry had growing Poultry Industry the two Indiana duck companies contracts with 651 farmers. producing 73% of ducks consumed Industry production stimulates Size, Location and Rankings in the U.S. (Ammeson), and 7th in additional income and employment Indianas poultry industry is com- the production of turkeys (Indiana in the Indiana economy. Other posed of two sectors: poultry meats Agricultural Statistics Services). economic activity associated with and table eggs. The poultry meat Turkeys, broilers and ducks have the poultry industry includes spend- sector is devoted to the production been raised in Indiana for more than ing and employment of poultry and processing of the three most 50 years. Official data for duck and industry suppliers, such as grain common avian species: ducks, turkeys broiler production in the state are farmers. Also included is any firm and broilers. This sector represents not published to avoid disclosure selling goods or services used by 59% of the total output value of the of the activities of individual firms. the poultry industry to support Indiana poultry industry (Figure 1). The production of turkeys on the their production and marketing In 2004, the total output of poultry other hand is monitored by Indiana Agricultural Statistics. Figure 2 shows the production volume and farm gate value of turkey production )LJXUH6KDUHRI,QGLDQD·V3RXOWU\6HFWRUE\9DOXHRI3URGXFWLRQ in the state. In 1984, approximately 7DEOH(JJ 116 million pounds of turkey (6.3 6HFWRU million turkeys) were produced in the state. By 2004, production had 3RXOWU\0HDW 6HFWRU increased by 253% to 410 million pounds (13.3 million turkeys). The Source: Poultry Firm Survey increase in poundage has occurred PURDUE AGRICULTURAL ECONOMICS REPORT 9

due to an increasing number of )LJXUH,QGLDQD7XUNH\3URGXFWLRQ /EV DQG,WV0RQHWDU\9DOXH turkeys raised in the state and mostly because of the ever increasing body weight of turkeys. The farm gate value for turkeys raised in Indiana in 2004 was $172 million.

The table egg sector is devoted to the production of table eggs and D processing of egg products. In 2004 V the total output for the Indiana table egg industry was valued at 0LOOLRQ'ROODUV $331 million, representing 41% of the total value of the Indiana poultry

industry. Approximately 6.1 billion 0LOOLRQ/EV eggs were produced by the 22.7 3URGXFWLRQ 7KRXVDQG/E million hens under production in the state. Historically, Indiana has played 9DOXHRI3URGXFWLRQ 7KRXVDQG'ROO an important role as an egg supplier in the nation. Since 1985 Indianas egg production has increased by 9% and has represented 7% to 8% of the total table egg production of the nation (Figure 3). Currently Indianas egg production represents 8% of total U.S. production. In 3RXQGV3URGXFHG 9DOXHRI3URGXFWLRQ terms of number of commercial Source: Indiana Agricultural Statistics layers under table egg production, Indiana ranks third in the U.S. behind Iowa and Ohio. Indiana poultry production is the egg sector, there are six egg facilities in the nation. Every com- centered in the northeast and producing companies of which five pany, except the spent hen processing southern counties of the state. Most have more than one million layers facility, is vertically integrated. bird production occurs in the counties under production. The egg sector Under vertical integration, the closest to a poultry processing facility. also has three commercial layer production, processing and marketing Duck production occurs in the hatcheries operating in the state. of poultry products are organized and northeast region of the state, mainly Two of the hatcheries are owned by coordinated by a single firm (Mar- in Elkhart and Kosciusko counties. egg producing firms. The other is tinez). The poultry production stages Turkey production is centered in the an exclusive breeder/ hatchery that may include breeding the parent southwest region. Dubois and Daviess supplies one day old female chicks stock of birds, producing eggs for counties are ranked first and second to in-state and out-of-state egg hatching, hatching eggs, milling the in turkey production in the state. producing firms. Indiana also has feed, raising the birds to be slaugh- Broiler production occurs in counties one of the five spent hen processing tered, and maintaining the hens of the northeast and south region, mainly in Harrison and Steuben counties. Some of the top egg producing counties in the state include: )LJXUH+LVWRULFDO,QGLDQD(JJ3URGXFWLRQDQG6KDUHRI1DWLRQDO3URGXFWLRQ Dubois, Jackson, Kosciusko, Newton, Pulaski and Wabash. Major Poultry Companies in the State and Their Organization

There are fourteen companies in V Indiana that account for most of 0LOOLRQ the commercial poultry production in the state. Six of the companies 0LOOLRQ(JJV RI863URGXFWLRQ represent the poultry meat sector and eight represent the table egg producing sector. For the poultry ,QGLDQD3URGXFWLRQ RI863URGXFWLRQ meat sector, there are two companies for each of the avian species. For Source: Indiana Agricultural Statistics and ERS 10 AUGUST 2006

)LJXUH3URGXFWLRQ6WDJHVIRUWKH(JJDQG3RXOWU\0HDW,QGXVWULHV firms in the state have their own primary breeding flocks. (JJ,QGXVWU\ 3RXOWU\0HDW,QGXVWU\

Primary Breeders Primary Breeders Replacement Farms The day-old birds which are bought Breeder Farms Replacement Farms from the primary breeders are raised in the replacement farms. In these Hatchery Breeder Farms farms, birds are kept until they reach Feed Mill the age of sexual maturity. These Pullet Replacement Farms Hatchery mature birds are known as parent Egg Producing Farms Grow-out Farms stock. Historically broilers, turkeys and ducks raised for meat consump- Processing/Further Processing Plant Processing/Further Processing Plant tion have had white feathers. The white feathers give birds a cleaner Spent Hen Processing look when raised indoors and any white pinfeathers look less unappetiz- ing if the birds are not completely plucked at the time of slaughter under table egg production. Typically arrangements with 596 farmers in (Bugos). Each of the poultry meat the processor coordinates these the state. producing companies in Indiana has stages. The processor may also own The egg firms in the state are its own replacement farms. the feed mill, the hatchery, the also vertically integrated but do less farms that raise birds for slaughter, contracting with individual farmers. Breeder Farms the farms that house the hens for The egg firms in the state own their Sexually mature birds from replace- the production of eggs, and the own feed mill, pullet replacement ment farms are moved to breeder processing facility. Due to high levels farms, egg production houses and farms. Male and female birds are of integration, poultry firms are able processing facility. In 2004 the egg kept together for the production of to have better control of production industry had contractual arrange- fertile eggs from which the commer- inputs, the quantity and quality ments with 55 farmers for the cial layers, broilers, turkeys and of output, and are able to perceive production of eggs and for raising ducks (fifth generation birds) will consumer preferences and respond replacement pullets. The contract hatch. Poultry meat companies may quickly with products that cater to arrangements are similar to the own their own breeder farms or their needs. poultry meat sector contract with independent farms for In the state, five of the six poultry The production stages for each this stage of production. There are two meat firms own their own feed mill, poultry sector are presented in egg producing firms in the state that all breed their own stock, have their Figure 4. Following is a description have their own breeding farms. There own hatchery, own some grow-out of each of the different production is also a commercial hatchery with its houses (place where birds are fed stages and relevant information own layer breeding farms that produce to market weight) and do their own to Indianas production. the eggs to be hatched. processing. Since high capital investments are necessary to build grow-out Primary Breeders Hatchery houses, poultry meat firms usually Primary breeders are responsible Fertilized eggs obtained from breeder contract with individual farmers for maintaining pure blood lines and farms are sent to the hatchery. Eggs for the raising of birds for slaughter. developing cross-bred blood lines of are placed in large-scale incubators. Under a typical contract, farmers chickens, turkeys and ducks. Each At the time of hatching, chicks (males agree to provide housing, equipment, line of birds has different genetic and females for broilers and only labor, utilities, manure and mortality characteristics. To provide an ade- females for pullets), ducklings disposal and procurement of litter quate gene pool for future desirable (one-day old ducks) and poults material for growing birds destined characteristics, several diverse lines (one-day old turkeys) are vaccinated for processing. The processor on the of birds need to be maintained. and prepared for transport to the other hand agrees to provide Primary breeders offer any of the next stage. The poultry meat compa- the farmer with one-day old birds, first three generations (grandparent, nies typically own a hatchery. There feed, medicine, expert supervision parent, or day-old birds) for lines of are also three commercial hatcheries to monitor farmer operations, and birds which poultry firms ultimately in the egg sector, one of which is a pre-established payment for their market as fifth generation. Typically devoted exclusively to providing services and output on a per pound day-old chicks are purchased as one day old chicks to in-state and basis for live birds. In 2004 the parent stock by the poultry firms out-of-state egg producing firms. poultry meat sector had contractual from primary breeders. Both duck The other two hatcheries belong to PURDUE AGRICULTURAL ECONOMICS REPORT 11

egg producing firms and may also Feed Mills be submitted to further processing sell to other egg producing firms. A feed mill operation is responsible where it becomes the primary for the formulation of the different ingredient for ready-to-cook or Pullet Replacement Farms feeds utilized during the distinct ready-to-eat products such as chicken The day-old female chicks arriving stages of production. Each feed nuggets, marinated duck meat and from the hatchery are raised in the mill has a grain receiving operation, turkey sausages. For the table egg pullet replacement farms. In these an ingredient storage area, a sector, processing includes cleaning, farms, young hens are kept until grinding and mixing system and sanitizing, grading, packaging into they reach the age of egg production. a pellet-making operation. Corn cartons and refrigeration of eggs for These hens will replace hens that and soybean meal are the main transport. Eggs may also undergo have already outlived their produc- feed ingredients, with the addition further processing. For this, eggs are tion period. Pullets typically start of nutritional supplements such broken, separated from the shells, laying eggs at 20 weeks of age, but as amino acids, macro and micro then pasteurized and separated into are sent to egg producing farms at minerals. Every poultry meat and their subcomponents: egg whites, 16 weeks of age for acclimation to egg company in Indiana owns a egg yolks and shells. The subcompo- the new facility. Each Indiana egg feed mill. In 2004 about 17 million nents may also be combined with producing firm has several pullet bushels of corn and 184,000 tons of other ingredients to create a final replacement farms. Most of the farms soybean meal were used in Indiana product. These products can fall into are owned by the processor, yet some as feed ingredients for the poultry four categories: refrigerated liquid are independently owned and under meat sector. This is equivalent to egg products, frozen egg products, contract with the integrating firm. 1.8% of corn and 3% of soybeans dried egg products and non food produced in the state in 2004. The by-products. Table 1 tabulates some Grow-out Farms turkeys consumed most of the corn of the processed and further processed Grow-out farms raise the newly and soybean meal, followed by the products produced in the state. All hatched birds up to market weight broilers and ducks (Figure 5). For processing and further processing or egg production age. The market the table egg sector approximately plants in the state are highly mecha- weight for all birds may vary, yet 24 million bushels of corn and nized and automated to handle high the average live weights of broilers, 252,365 tons of soybean meal volumes of product. Every plant ducks and turkeys are 5.3, 6.7, and were used (Figure 6). This is equiva- still requires a lot of human labor. 27.1 pounds respectively (National lent to 2.5% of corn and 4% of soy- Most of the employment of the whole Agricultural Statistics Service). beans produced in Indiana in 2004, sector is accounted for by the The Indiana poultry meat companies although both ingredients may processing stages. generally contract out this stage be obtained from adjacent states of production. The grow-out farms depending on price and quality. Spent Hen Processing Facility supply the processors with birds A spent hen processing facility that have reached the adequate Slaughter and Further slaughters and processes hens which market weight. Grow-out farms are Processing Plants have ceased their egg production typically within a 30 mile radius In the poultry meat sector, processing cycle. The meat is used as an ingredi- of the processor. includes de-feathering, eviscerating, ent for soups, chicken salad, hot trimming and chilling of the whole dogs and canned chicken (Scanes Egg Producing Complex or cut-up birds. The meat may then et.al.). Indiana has one such facility A typical egg producing complex may consist of one or several layer houses with a capacity for 100,000 hens. The complex may be of two types: )LJXUH&RQVXPSWLRQRI&RUQDQG6R\EHDQ0HDOE\'LIIHUHQW3RXOWU\,QGXVWULHV in-line or off-line. An in-line complex " " refers to an egg collection system that conveys eggs directly from the !$ !$ layer houses into the processing ! ! TirhHrhy plant. An off-line complex consists of independent layer houses whose $ $ 8 production must be transported to 8 a processing facility. Both types of complexes are used in Indiana. The $ $ egg producing complexes are typically owned by the egg producing company, U xr 7 vyr 9px @tt and just a small portion of egg 8 iury TirhHrhy production is contracted to independent farmers. Source: Poultry Firm Survey 12 AUGUST 2006

)LJXUH&RVW6WUXFWXUHIRUWKH3RXOWU\0HDWDQG7DEOH(JJ6HFWRU

3RXOWU\ 0HDW 6HFWRU 7DEOH(JJ6HFWRU

6DODULHV DQG %HQHILWV 6DODULHVDQG%HQHILWV )HHG 3DFNDJLQJ

3DFNDJLQJ 7UDQVSRUWDWLRQ 0DWHULDOV IRU )HHG 3URFHVVLQJ 8WLOLWLHV

7UDQVSRUWDWLRQ 0DLQWHQDQFH5HSDLUDQG +HDOWK RI %LUGV 'HSUHFLDWLRQ 8WLOLWLHV 3D\PHQWV WR 3URGXFWLRQ!3URFHVVLQJ 0DLQWHQDQFH &RQWUDFW *URZHUV +HDOWK 5HSDLU # 'HSUHFLDWLRQ &RQWUDFW*URZHUV 2WKHU 3URGXFWLRQ # 3URFHVVLQJ &RVWV

Source: Poultry Firm Survey

and it obtains hens from in-state and payments are the three most impor- meal cost would represent and extra out-of-state egg producing companies. tant cost inputs. The purchasing expense of $8 million to the poultry of feed ingredients represents the meat sector and $10.5 million to Cost Structure for the Poultry Meat highest cost to both sectors of Indi- the egg sector in Indiana. and Table Egg Sectors anas poultry industry (Figure 6). The second highest cost category This section describes the cost Feed represents 32% of total costs is employee salaries and benefits structure of the meat and egg sectors for the meat sector and 50% for which represent 22% and 13% of in Indiana. Data was obtained from a the egg sector. The two main feed the total costs for the meat and egg survey administered to the 14 poultry ingredients, corn and soybean meal, sectors respectively. Most of the firms in the state. The data repre- are abundant in Indiana at lower salaries were paid to employees who sents the cost structure of the poultry costs than states in the west, east work at the processing facility. The industry at the processor level. and southern United States. Any meat sector had 3,344 employees Only three production inputs price increases in feed ingredients and paid salaries of approximately account for 64% of total costs for would have a major effect on the $96.3 million (Table 2). The average the meat sector and 74% for the cost of producing poultry products. income for each employee was egg sector. Feed, salaries and contract A 10% increase in corn and soybean $28,809. The egg sector employed 1,687 employees and paid salaries of approximately $45.6 million. The average salary for an egg sector 7DEOH3URFHVVHGDQG)XUWKHU3URFHVVHG3RXOWU\3URGXFWVIURP,QGLDQD employee was $27,000. 'XFNV %URLOHUV 7XUNH\V (JJV The third highest expense for ³ :KROHGXFNOLQJ ³ ZKROHEURLOHUV ³ )UHVK)UR]HQ ³ 7DEOHHJJVLQFDUWRQV both sectors is the payment to ZRPDULQDGH ³ &XWXSSDUWV ZKROHWXUNH\V )XUWKHU3URFHVVHG ³ %RQHLQSDUWVZKROH EUHDVWVWKLJKV ³ &XWXSSDUWV contract farmers. The meat sector 3URGXFWV OHJEUHDVWTXDUWHU GUXPVWLFNVOHJ EUHDVWWHQGHU paid $53.7 million to 596 contract ³ UHIULJHUDWHGOLTXLG ³ %RQHOHVVEUHDVW TXDUWHUVZLQJV ORLQVWKLJKV \RONV farmers (Table 3), which is equiva- ZRVNLQ ZLQJVGUXPV )XUWKHU3URFHVVHG ³ OLTXLGZKLWHV ³ *LEOHWV/LYHUV EUHDVWVNLQZLQJ lent to 12% of total cost. The egg 3URGXFWV ³ OLTXLGZKROHHJJV ³ 7RQJXHV#)HHW WLSVWDLOV sector paid $14.2 million to 55 ³ /HPRQ3HSSHU ³ GLFHGHJJV )XUWKHU3URFHVVHG 5RWLVVHULH&KLFNHQ )XUWKHU3URFHVVHG ³ SUHFRRNHGVFUDPEOHG contracted farmers which represented 3URGXFWV ³ &KLFNHQ&RUGRQ 3URGXFWV HJJSDWWLHV 11% of the total cost to the sector. ³ 'XFNVWLFNV %OHX ³ *URXQGWXUNH\ ³ GULHGHJJSURGXFWV Due to the processing and further ³ 3UHFRRNHGDQG ³ &KLFNHQZLWK ³ 7XUNH\6DXVDJHV ³ KDUGFRRNHGHJJV 0DULQDWHG%UHDVW %URFFROLDQG ³ 067²PHFKDQL processing of meats and eggs, packag- )LOHWVZKROHOHJV &KHHVH FDOO\VHSDUDWHG ing is important for the integrity of DQGIXOO\FRRNHG ³ %UHDGHGFKLFNHQ WXUNH\ the final products. Packaging (paper UHDG\WRHDWKDOI SDUWV GXFNV ³ )ODYRUHGVHDVRQHG and plastic) represents 5% of total FKLFNHQSDUWV cost to the meat sector and 10% Ã to the egg sector. The poultry firms PURDUE AGRICULTURAL ECONOMICS REPORT 13

also incur transportation costs to 7DEOH1XPEHURI(PSOR\HHV7RWDO6DODULHVDQG$YHUDJH,QFRPHSHU3RXOWU\6HFWRU deliver final products to their (PSOR\HHV 6DODULHV $YHUDJH,QFRPH customers. For the meat sector 3RXOWU\0HDW6HFWRU transportation represents 4% of 7DEOH(JJ6HFWRU total costs, while for the egg sector 7RWDO transportation represents 1% of the Ã total cost. Maintenance, repair and 6RXUFH 3RXOWU\ )LUP 6XUYH\ depreciation of facilities represent 4% of total costs for both sectors. The utility cost (use of water, electricity, gas, telephone) represents 7DEOH1XPEHURI&RQWUDFW)DUPHUVDQG

7DEOH7RWDO(FRQRPLF(IIHFWV$WWULEXWHGWR,QGLDQD·V3RXOWU\,QGXVWU\E\6HFWRU associated with the Indiana poultry 2XWSXW /DERU,QFRPH (PSOR\PHQW industry was $30,050. 3RXOWU\,QGXVWU\ 2WKHU$JULFXOWXUH Indiana Poultry Industry Outlook 8WLOLWLHV 0DQXIDFWXULQJ U.S. per capita poultry consumption 7UDGH (broilers, turkey and eggs) has 7UDQVSRUWDWLRQ :DUHKRXVLQJ increased by 47% over the past 30 )LQDQFH,QVXUDQFH 5HDO(VWDWH years (Figure 7). In 2004 U.S. per 6HUYLFHV capita consumption of poultry +HDOWKFDUH 6RFLDO$VVLVWDQFH products was 104 lbs, more than 2WKHUV beef and pork. Poultry product 7RWDO consumption is expected to increase domestically due to several factors Ã 6RXUFH,03/$1 including population growth, increasing disposable incomes, health benefits and relatively low prices compared to other protein sources. $368,929,866 to the people income and 62% of total employment. The poultry industrys ability to of Indiana. The average labor income for an develop and market a variety of ready Table 5 presents the total employee in this sector was $26,568 to cook products will continue to economic activities obtained from per year. Further economic activity, support future consumption growth. IMPLAN separated into nine differ- sales and employment, were gener- Of total U.S. production, about ent industry sectors (i.e., effects on ated by the poultry industry in 16.4% of broiler meat, 8% of turkey the 509 sectors of the IMPLAN other industry sectors of Indiana. meat and 10.4% of duck meat were model were aggregated into 9 The service sector which encompasses exported in 2004. Historical export different sectors). The poultry educational services, professional quantities of broiler and turkey industry & other agriculture sector services, food services and entertain- meat are presented in Figure 8. had the highest effects on output, ment accounted for 1,511 jobs and From 1990 to 2003, total exports labor income and employment. $75,526,107 in sales. The trade of broiler and turkey meat has almost The output for this sector represents sector accounted for 997 jobs and quintupled from 1.2 billion pounds the total amount of sales of the $74,771,658 in sales. Economic 5.3 billion pounds. This increase in poultry industry and of other agricul- activity was also created in the exports has occurred due to competi- tural industries supported by it, utilities sector, manufacturing tively priced, high quality U.S. such as corn and soybean farming. sector, transportation & warehousing products and income increases in The sales of agricultural products sector, finance, insurance & real the importing countries (Salin et.al.). were valued at $1,251,769,619, which estate sector, healthcare & social Most of the poultry exports are represents 72% of the sales in Indiana assistance sector, and others sector. destined to Russia, Mexico, Japan, associated with the poultry industry. These sectors aggregately represent Canada, China, Hong Kong, Taiwan, This sector paid $201,572,488 in 23% of total sales, 27% of total labor Latvia and Estonia. Exports of salaries for its 7,587 workers, which income, and 18% of total employ- poultry meats and eggs are expected is equivalent to 55% of total labor ment. The average salary for all jobs to continue to increase due trading countries that have higher disposable incomes and to trade agreements, such as DR-CAFTA with Central )LJXUH+LVWRULFDO3HU&DSLWD&RQVXPSWLRQRI0DMRU3URWHLQ6RXUFHVLQWKH86 America and the Dominican 3HU&DSLWD&RQVXPSWLRQRI0DMRU0HDW3URWHLQ6RXUFHV Republic, that facilitate trade. Growth in domestic consumption and exports is likely to translate into overall industry growth. The Indiana poultry industry is in a good position %HHI 3RUN to grow. Indiana has a competitive

&KLFNHQ position compared to other poultry 7XUNH\ and egg producing states. The )LVK%6KHOOILVK primary advantage of Indiana producers is the availability of low

/EV ERQHOHVVWULPPHGHTXLYDOHQW cost feed. Feed represents 32 % and 50% of the total cost of producing and processing meats and eggs. Any Source: ERS savings on feed has a relatively large PURDUE AGRICULTURAL ECONOMICS REPORT 15

impact on production costs. The )LJXUH86%URLOHUDQG7XUNH\([SRUWV second advantage for the state is market access. Indiana processors are close to major urban areas such as Chicago, St. Louis, Indianapolis, and have an efficient transportation

0 0 systems to distribute their products 000 000 to the densely populated eastern U.S. markets. With increasing fuel prices,

Indiana processors will face lower 0LOOLRQ/EV 7XUNH\ 0LOOLRQ/EV %URLOHU distribution costs than producers located farther from major markets. Results from the producers survey indicate that during the next five %URLOHU 7XUNH\ years, the Indiana poultry industry Source: ERS will be expanding through capital investments of $189 million in new production and processing facilities in the state. Industry expansion Professor of Animal Sciences, Economic Report No. 777, U.S. Department in the state means improved farm Purdue University. of Agriculture, Economic Research Service. income through backward linkages Minnesota IMPLAN Group, Inc. 2002. IMPLAN to the farm. It will also add income References Professional: Social Accounting and Impact and employment in the processing, Ammeson, J. 2004. No Ducking It. Northwest Analysis Software. marketing and distribution sectors Indiana Times. November 3 edition. National Agricultural Statistics Service. 2005. of the industry. Bugos, G.E. 1992. Intellectual Property Protection Poultry Slaughter 2004 - Annual Summary. Thanks for valuable suggestion in the American Chicken-Breeding Industry. Salin, D.L., W.F. Hahn and D.J. Harvey. 2002. for this article to Lee Schrader, Business History Review, 66 (1): 127 168. U.S.Mexico Broiler Trade: A Birds-Eye Retired Professor, Department Martinez, S.W. 1999. Vertical Coordination in View. Electronic Outlook Report No. of Agricultural Economics, Purdue the Pork and Broiler Industries: Implications LDP-M-102-01, U.S. Department of University and Mickey A. Latour, for Pork and Chicken Products. Agricultural Agriculture, Economic Research Service. Poultry Specialist, Associate Economic Importance of the Indiana Dairy Industry Carlos D. Mayén, Graduate Student and Kevin T. McNamara, Professor

he Indiana dairy industry all inputs and services utilized and Indianas Dairy Industry Production, T is an important part of the paid for by the dairy producers. Value and Location states agricultural sector. The dairy industry input and service Milk production has historically been Indianas milk production in 2004 suppliers, such as grain farmers and an important farm enterprise in was estimated at 3 billion pounds veterinary services, in turn generate Indiana. In 1978 about 2.2 billion (344 million gallons) of milk, equiva- more economic activity through pounds of milk were produced in lent to 1.7% of the total milk pro- their spending and employment. the state. This represented $230 duced in the United States. This Economic activity is also associated million in cash receipts. During the production represented $491 million with households spending money next decade production was rather in cash receipts to the state at the earned from the dairy operations stable at 2.3 billion pounds of milk. farm gate level (Indiana Agricultural or input suppliers on household By 2004 production had increased Statistics). The industry also provided consumption. This paper estimates by 30% to 3 billion pounds. This fulltime employment to about 3,750 that the Indiana dairy industry is production ranked Indiana 14th Indiana residents and paid a total of responsible for $986.4 million in in U.S. milk production (Indiana $107 million in salaries (estimates gross sales in the state, and supports Agricultural Statistics), and the farm from IMPLAN model for Indiana). the employment of 7,357 Indiana gate value was estimated at an all The economic importance of the residents who earn incomes of time high of $491 million (Figure 1). Indiana dairy industry goes beyond $229.4 million. In 2004 dairy farmers received the farm cash receipts. Milk production This report documents the size highest annual average milk prices in the state also generates additional and structure of the Indiana dairy ever. Farmers received on average income and employment in the industry, and presents the total $16.70 per hundredweight of milk. Indiana economy through backward economic activities associated with The price was $3.80 higher than the linkages. Backward linkages include the dairy industry in the state. previous annual average and $3.06 16 AUGUST 2006

)LJXUH+LVWRULFDO,QGLDQD0LON3URGXFWLRQDQG&DVK5HFHLSWVDW)DUP/HYHO 84% to 19,747 lbs. This increasing productivity is due primarily to improved genetics, improved feeding rations, changing technology and V E higher intensity management of &DVK5 the dairy herds. In 2004 Indiana ranked 10th in the U.S. in milk GIG GIG HFH WLRQ PLOOLRQ/ production per cow. The increase in XF LSWV productivity has been able to outpace URG

3 the decreasing number of cows in the LON

0 state. The lowest number of cows in the state for the past quarter century occurred in 1999 with approximately 0LON3URGXFHGRQ)DUPV 0LOOLRQ/EV &DVK5HFHLSWV 136,000 milk cows, a 33% decrease of cow numbers in 1978. By 2004, the number of cows in the state increased marginally to 150,000 higher than the average for the supply was the lower amount of bST cows (Indiana Agricultural Statistics). previous decade. (bovine somatotropin) available to Milk production occurs in 99% High milk prices in 2004 were U.S. dairy farmers. The hormone is of all Indiana counties. Yet most the result of limited supply and used to increase average milk yield of the milk production occurs in the increasing demand forces. During by 10 pounds per cow per day. About northern and northwestern counties the first half of 2004 there was a 2% of the U.S. milk supply is attrib- of the state. Table 1 presents the significant reduction in U.S. farm uted to the use of bST. The Coopera- counties with the highest dairy cow milk supply. USDA estimates tives Working Together (CWT) inventory in January 1, 2005 (Indiana showed an average 1% decrease in program was also created in July Agricultural Report). The top five production levels of the top 20 dairy 2003. This program was created and counties which represent 43% of producing states compared to the funded by dairy cooperatives, whose the total dairy cows in the state are same period in 2003. The reduction interest is to address the supply and Elkhart, Newton, Jasper, Lagrange in milk supply was due to several demand imbalances that can depress and Marshall. factors. Due to low prices for the milk prices by retiring dairy herds, previous 2 years, farmers cut produc- reducing milk marketings, and Changing Structure of Indiana tion by reducing the sizes of their increasing exports (GAO, 2004). Dairy Farms herds. In May 2003 the U.S. banned Milk production in the state has The dairy industry is undergoing the importation of replacement increased despite the decline in the dramatic structural changes. Fewer dairy cows from Canada following number of dairy cows. The increase dairy farms are producing larger the disclosure of a bovine spongiform in milk production for the last 26 amounts of milk. In general the encephalopathy (BSE) case. As milk years has occurred due to the increas- industry is becoming more concen- prices started to increase, dairy ing milk productivity of cows. Yearly trated. According to the Agricultural farmers had difficulties increasing milk production per cow (lbs) in Census (1978), there were 7,590 production because of the limited 1978 was 10,729 lbs per month farms with at least one milking cow supply of replacement heifers. (Figure 2). By 2004, the yearly milk in Indiana in 1978. About 56% of Another factor that affected milk production per cow had increased by these farms had 1 to 19 cows and

)LJXUH0LON&RZVRQ,QGLDQD)DUPVDQG0RQWKO\0LON3URGXFWLYLW\ 7DEOH0LON&RZ,QYHQWRU\LQ-DQXDU\ `

HDU E

y q

y \ V UH &RXQW\ 0LON&RZV q 0 q vy UH &R N q (ONKDUW Q KXQ HU UR V 1HZWRQ KXQ q XFW RQ V v DU

-DVSHU A v RQ XFW DU q RQ /DJUDQJH A UR V HU RQ Q 0DUVKDOO V \ &R y &R $GDPV N vy &R

0 N y /D3RUWH 0RQWK EV vy 0 1REOH (&' ('('% ((((# ((' .RVFLXVNR 0vyN&RVRQADUV CXQqUHqV 0RQWKy\0vyNQURqXFWvRQHU&R yEV &DVV Ã PURDUE AGRICULTURAL ECONOMICS REPORT 17

2.7% had herds of 100 cows or more. )LJXUH1XPEHURI)DUPVZLWK0LONLQJ&RZVLQ,QGLDQDLQDQG There were only 2 farms with herds of 500 or more cows (Figure 3). On average there were 24 milking cows per farm in 1978. By 2002, the number of farms with at least one V P DU milking cow had decreased by 63% ) to 2,799. Of these, about 47% had RI % herds of 1 to 19 cows and 10.5% had herds of 100 cows or more.

The number of farms with more than 500 cows grew to 28 farms WRWR WR WR WR RUPRUH (Agricultural Census 2002). The average milking cows per farm increased to 52. The changing structure of Indiana dairy farms and dairy farms in general has occurred due to the has increased for the last decade. The minimum prices set by the industrialization of the farm by The production of ice cream and FMMO are based on the type of technological changes and improved low fat ice cream have increased dairy products the milk is used management skills of farmers. by 103% and 54% respectively since to produce: Class I (fluid milk used Technological advances that have 1994 (Figure 4). Approximately for beverage products), Class II been adopted by dairy farmers twelve pounds of milk are necessary (milk for perishable manufactured include: on-farm refrigerated bulk for the production of one gallon of products such as ice cream and milk tanks for storage, improved ice cream. Thus the equivalent of cottage cheese), Class III (milk milking equipment, modern and 53% of Indianas milk production for cream cheese and hard cheese efficient milking parlors, better in 2004 was processed into ice cream. manufacturing), and Class IV (milk animal housing, improved feed Milk from other states was also for butter and dry product manufac- handling and waste handling systems, utilized in the production of ice turing). There are 10 Federal milk and improvements in animal nutri- cream, thus it is not clear the orders in the United States: Appala- tion and health. These technological proportion of Indiana milk destined chian, Arizona-Las Vegas, Central, advances coupled with the manage- for fluid milk products and Florida, Mideast, Northeast, Pacific ment of larger herds of milking processing products. Northwest, Southeast, Southwest and cows has allowed dairy farms to Data regarding Federal Milk Upper Midwest (Figure 5). In 2004, take advantage of economies of Marketing Orders (FMMO) in 2004 Indiana produced about 13% of the size, i.e. lower per unit production showed that approximately 94% milk marketed in the Appalachian costs as total milk production of all milk produced in Indiana order, 11% of the milk marketed increases. Larger farms tend to was marketed under Federal Milk in the Mideast order and 0.7% be more cost-effective because fixed Marketing Orders (FMMO). FMMO of the Central order. Indiana also costs like land and machinery are is a federal program that establishes sourced the Florida, Southeast, spread over more units of production. minimum pricing rules for the sale and Upper Midwest orders, but In addition, larger farms may receive of raw fluid-grade milk from the Indiana specific data is not available volume premiums and hauling producer to the processor or manufac- due to confidentiality. discounts because greater volumes turer (Blayney and Normile, 2004). of milk can be marketed (Blayney, 2002; GAO, 2001).

)LJXUH+LVWRULFDO,FH&UHDP3URGXFWLRQLQ,QGLDQD Marketing of Indiana Milk

Milk produced in Indiana is both marketed direct as fluid milk products and processed into other Q dairy products, especially ice cream and milk sherbet. In 2004 Indiana ranked 2nd in ice cream production in the United States. Approximately 7KRXVDQG*DOOR

7KRXVDQG*DOORQV 91.2 million gallons of ice cream, 34.5 million gallons of low fat ice cream, and 4.6 million gallons of milk sherbet were produced in the ,FH&UHDP /RZIDW,FH&UHDP state. Production of these products 18 AUGUST 2006

Total Economic Activities as income payments to their (most recent available) was con- Associated with the Indiana Dairy employees and to purchases from structed for the state of Indiana and Industry other vendors. The transactions was utilized to measure the indirect Total economic activities associated between the dairy industry and their and induced economic activities with the dairy industry can be vendors and between vendors of the related to Indianas dairy industry. separated into three categories: vendors result in multiple rounds The IMPLAN model contains the direct, indirect and induced. The of linked economic activities. linka ges between 509 sectors of direct economic activities are related The induced economic activities the Indiana economy. to the sales, income and employment occur because the employees and The direct economic activities that are generated solely by the business owners that spend at least were estimated using enterprise Indiana dairy industry. Sales repre- some of their incomes on consumer budgets for the dairy industry from sent the total value of all the dairy goods and services within the state Ohio State University and Iowa State products and byproducts that are of Indiana. The purchase of food, University. The budget includes the sold by the industry. Income television sets, air conditioners, cost of one cow lactation plus dry represents the salaries received vehicles and the like by people period as well as a replacement by the people that are employed by that earn their incomes through heifer. Cows are assumed to be the dairy industry. the dairy industry and its vendors in the herd for three years, thus The indirect economic activities would then be credited as induced the budgets include one third of the are related to the dairy industrys economic activities. feed costs required to raise a heifer. purchases of materials and services The sum of the direct, indirect Since there were three times as from ancillary industries within and induced economic activities many cows as heifers raised in the state. Examples of ancillary make up the total economic activities Indiana in 2004 (Indiana Agricultural industries to the states dairy related to Indiana dairy industry. Statistics) the budget gives a good industry include trucking firms For this study, an Input-Output approximation of the costs of main- that transport raw and finished model for the state of Indiana was taining the herd of cows and raising product, vendors of farm equipment used to assess the interaction among the replacement heifers in 2004. and plant equipment, vendors of sectors of the economy of Indiana. Data from Indiana Agricultural processing equipment, veterinary Specifically IMPLAN (IMpact Statistics for 2004, such as input services, real estate agencies and Analysis for PLANning) software prices, milk production levels and financial institutions. The purchases was used to identify and estimate cow inventories, were used to com- by the Indiana dairy industry repre- the value of the linkages of purchases plete the budget. Table 2 presents sent sales to the vendors who provide and sales of commodities between the income and cost of producing their services and materials. The industries, businesses and final milk in the state of Indiana. vendors sales are then allocated consumers. A model using 2002 data Income from milk production in 2004 was estimated at $533 million dollars. Dairy farmers produced 2.962 billion pounds of milk and )LJXUH0DSRI)HGHUDO0LON0DUNHWLQJ2UGHUV obtained an average return of $16.70 per hundredweight of milk. Indiana farmers received $490,646,000 for their production. Dairy farmers complemented their incomes by selling calves and cows that were taken off production. Indiana farmers received $42 million from the sale of cull milk cows and calves. The cost of producing milk was estimated at approximately $483 million. Feed expenses accounted for 38% of the total cost. The Indiana dairy industry made the following purchases to feed their cows: 9.3 million bushels of corn at a cost of $18 million, 219 thousand tons of soybean meal at a cost of $64 million, 1.8 million tons of corn silage at a cost of $32 million, 486 thousand tons of hay equivalents at a cost of Map from Agricultural Marketing Service (AMS), USDA $40 million and other feed additives, PURDUE AGRICULTURAL ECONOMICS REPORT 19

such as vitamins, minerals and fats, 7DEOH%XGJHWIRUWKH3URGXFWLRQRI0LONLQ,QGLDQDLQ at a cost of $27 million. ,QFRPH The second highest cost category 0LON6DOHV for milk production after feed is 6DOHRI&XOOHG&RZV&DOYHV labor. Our budget assumes that 60 7RWDO hours of labor a year per cow are )HHG&RVWV employed by the industry. We &RUQ PLOOLRQEXVKHOV utilized a labor charge of $11.90 6R\EHDQ0HDO WKRXVDQGWRQV per hour which includes workers &RUQ6LODJH PLOOLRQWRQV compensation, social security, and +D\HTXLYDOHQWV WKRXVDQGWRQV fringe benefits for operations and )HHG$GGLWLYHV management employees. To approxi- 7RWDO mate employment in the industry, 2WKHU&RVWV the required labor to manage the +DXOLQJ 150,000 cows in Indiana was calcu- 9HWHULQDU\DQG+HDOWK lated. This figure was then divided )XHOXWLOLWLHVDQGUHSDLUV by 2400 hours, considered to be the '+,$$FFRXQWLQJ hours of labor per year required for %UHHGLQJ)HHV a full time job. It is estimated that %HGGLQJVXSSOLHVDQGPLVFHOODQHRXV the industry employed 3,750 Indiana /DERU residents working full time in 0DFKLQHU\(TXLSPHQW)DFLOLWLHV 2004. These employees earned total ,QWHUHVW,QVXUDQFHRQKHUGDW6DQQXDOO\ salaries and benefits of $107 million. 7RWDO It is important to point out that the 7RWDO&RVWV dairy industry may indeed employ Ã more people. Dairy farmers with smaller herds of cows may have a second job and thus devote only a fraction of their time to milk $533 million. The industry paid from the IMPLAN model separated production. Estimating the total $107 million in salaries to its 3,570 into 9 different industry sectors number of part time jobs in milking full-time employees. Indirectly, (i.e., effects on the 509 sectors of is difficult, and a full time equivalent the dairy industry supported sales the IMPLAN model were aggregated estimate seems more appropriate. of $313 million in the Indiana into 9 sectors). The dairy industry Other costs to the industry economy. These sales further gener- and other agriculture sector includes included: 1) the hauling of animals ated 2,189 full time jobs in Indiana both the dairy industry, and other and milk products $9 million, with labor income of $76 million. agricultural industries such as corn 2) medicine and services to maintain The induced activities associated and soybean farming. The output animal well being - $14.7 million, with the dairy industry resulted for this sector represents the total 3) fuels, utilities and repairs - $22.5 in sales of $140 million, with further amount of sales of the dairy industry million, 4) cost of accounting and full time employment of 1,598 and other agricultural industries Dairy Herd Improvement (DHIA) - Indiana residents who received $46 supported by it. The value of sales $4.2 million, 5) breeding fees - million in labor income. Thus, the in Indiana for this sector was $689.5 $6 million, 6) bedding, supplies total economic activity associated million. This sector accounted for and miscellaneous - $24 million, with the Indiana dairy industry 70% of the total sales in Indiana 7) machinery, equipment and was $986 million in sales and $229 associated with the dairy industry. facilities -$78 million, and 8) interest million in income paid to the 7,357 This sector also accounted for 60% and insurance on herds - $35.85 persons employed in Indiana due of total labor income, and 63% of million. These costs add up to to the dairy industry. the total jobs. The average labor $194.25 million (Table 2). The Table 4 presents the total income for an employee in this residual value between income and economic activity indicators obtained sector was $29,725 per year. The total costs can be described as returns to unpaid labor and management. The economic activity indicators from IMPLAN model which 7DEOH'LUHFW,QGLUHFWDQG,QGXFHG(IIHFWV$WWULEXWHGWR,QGLDQD·V'DLU\,QGXVWU\ include output, labor income and 2XWSXW /DERU,QFRPH (PSOR\PHQW employment are presented in 'LUHFW table 3. The results are separated ,QGLUHFW into direct, indirect and induced ,QGXFHG activities. The direct output by 7RWDO the dairy industry was valued at 20 AUGUST 2006

COLLEGE OF AGRICULTURE Department of Agricultural Economics

economic activity generated by dairy operations with advanced located farther away from major the dairy industry is evident in the technology that will allow reductions markets. Indiana also has a moderate additional jobs and output generated in per unit cost of producing milk. climate that is suitable for dairying. in the other industry sectors of The Indiana dairy industry is Industry growth in the state means Indiana. The services sector, which in a good position to grow. The state improved farm income through includes educational services, profes- has a competitive position compared backward linkages to the farm. It sional services, food services and to other dairy states. The primary will also add income and employment entertainment accounts for 886 jobs advantage of Indiana producers in the processing, marketing and and $20 million worth of output. is the availability of low cost feed. distribution sectors of the industry. The trade sector accounts for 636 Feed represents 38 % of the total Thanks for valuable suggestions jobs and $20 million worth of output. cost of producing milk. Any savings for this article to Michael M. Schutz, The other 6 sectors account for 1,206 on feed has a relatively large impact Associate Professor and Indiana additional jobs and $52 million on production costs. The booming State Extension Dairy Specialist, worth of output. The average salary ethanol industry in Indiana will Department of Animal Sciences, for all jobs associated with the dairy have mixed effects on the dairy Purdue University. industry is $31,184. industry. On one hand, corn prices may increase locally which will References Indiana Dairy Industry in the Future result in an increase in the cost Baker, A. and S. Zahniser. 2006. Ethanol Reshapes The Indiana dairy industry will of dairying. On the other hand a the Corn Market. Amber Waves Vol. 4, Issue 2: continue to be a valuable employment co-product of ethanol production, 30 35. and income generator in the state of distillers dried grains with solubles Blayney, D.P. 2002. The Changing Landscape of Indiana. Milk production in the state (DDGS), may be a substitute for corn U.S. Milk Production. Washington DC: U.S. will continue to increase due to the and in addition provide protein Department of Agriculture, Economic Research high milk prices of 2004 and 2005 supplements to the feed (Baker and Service, Statistical Bulletin Number 976. that have motivated certain farmers Zahniser, 2006). The second advan- Blayney, D.P. and M.A. Normile. 2004. Economic to expand the size of their dairy tage for the state is market access. Effects of U.S. Dairy Policy and Alternative herds. A constraint to dairy herd Indianas state motto indeed is the Approaches to Milk Pricing. U.S. Department expansion is the availability and Crossroads of America. Indiana of Agriculture, Report to Congress, July. the prices of replacement heifers, processors are close to major urban Indiana Agricultural Statistics. 2005. Indiana which are less restrictive with the areas such as Chicago, St. Louis, Agriculture Report. Vol 25, No. 10. easing of restrictions on Canadian Indianapolis, and have an efficient Indiana Agricultural Statistics Services. Indiana imports of replacement heifers. transportation systems to distribute Agricultural Statistics 2004 2005. Continued improvement of milk their products to the densely popu- GAO (General Accounting Office). 2001. production per cow will further lated southern and eastern U.S. Dairy Industry: Information on Milk Prices increase total milk production in markets. With increasing fuel prices, and Changing Market Structure: the state. The industry will continue Indiana processors will face lower GAO-01-561. Washington, D.D.: Government to consolidate into fewer and larger distribution costs than producers Printing Office. GAO (General Accounting Office). 2004. Dairy Industry: Information on Milk Prices, Factors Affecting Prices, and Dairy Policy Options: 7DEOH7RWDO2XWSXW/DERU,QFRPH5(PSOR\PHQWE\,QGXVWU\6HFWRU GAO-05-50. Washington, D.C.: Government 2XWSXW /DERU,QFRPH (PSOR\PHQW Printing Office. 'DLU\,QGXVWU\DQG2WKHU$JULFXOWXUH 6 6Hayhurst, Susan. 2004. Milking It Why is 8WLOLWLHV6 6 Indiana dairy production up so much? 0DQXIDFWXULQJ66 Indiana Business, April. 7UDGH 66 U.S. Department of Commerce, Bureau of the 7UDQVSRUWDWLRQDQG:DUHKRXVLQJ66 Census.1981. 1978 Census of Agriculture. )LQDQFH,QVXUDQFH:5HDO(VWDWH 66 Washington, D.C.: U. S. Government 6HUYLFHV6 6 Printing Office. +HDOWKFDUHDQG6RFLDO$VVLVWDQFH 6 6 U.S. Department of Agriculture, National 2WKHU66 Agricultural Statistics Service. 2004. 2002 7RWDO66 Census of Agriculture, Washington D.C.