Indian Poultry Sector needs Urgent Cost Audit to ensure Competitiveness

Indian Poultry Sector needs Urgent Cost Audit to ensure Competitiveness

Defective Costing Methods in Poultry Production Responsible for Farmers’ Financial Stress

Why no department is monitoring cost & price in Poultry Sector?

By:

Vijay Sardana

If I say in Indian broiler industry is the most expensive in the world. Don't be surprised. Please do the calculation and share your method of calculation in the open platform before dismissing my statement. I am willing to discuss the same with anyone.

Poultry sector is going through taxing times. Majority of the farm owners are not happy with the returns on investment. There are many reasons and factors for financial challenges in the poultry sector.

Today, the whole broiler industry is dominated by large Integrators and at the same time, there is many small players in the sector. The cost structure is very different in both the situations.

In case of integration, the cost is highly influenced by the efficiency whereas in case of independent farms market forces do play a role in deciding the cost structure. The situation becomes more complex when both sell the same product in the same market with no product differentiation. This leads to competition in poultry market and results in the crashing of prices in wet market and farmers are forced to sell below the cost of production. This raises the question of livelihood for the small farmers.

Why are small farmers selling below the cost of production?

The main reason for selling below the cost of production is lack of proper cost calculations in poultry production and absence of risk management tools in the poultry system.

It is important to develop a costing formula based on scientific methods. Universities in India and various departments responsible for farmers welfare and livestock sector failed to address the costing issue in the poultry sector. In the absence of any scientific formula, there is massive undercutting of the prices due to competition. A sensible costing formula will help all the farmers.

This will ensure fair pricing.  Size of operation and multi-location of operation should not give scope for predatory pricing and cross-subsidization.

The idea is no one should sell birds below the cost of production, calculated based on standard costing practices according to the prevalent fair market prices.

The proposed cost calculation formula must address the concerned of small farmers as well. All cost break-ups must be calculated based on market prices and must be shared with all to get fair prices. This is a missing component and leading to price distortion.

In poultry production farmer provide the following items:

Ø Shed for the Broiler production

Ø Bedding material

Ø Feeding utensils

Ø Watering utensils

Ø Skilled/unskilled labor

Ø Arrangements for maintaining a temperature suitable for broiler production

How to develop costing formula?

For deciding the cost of production following parameters should be considered as per the accounting standards of India. Any deviation from the standard model must be documents and the reasons must be specified so that government of India should not lose revenue under GST and farmers do not lose their revenue and no unfair trade parties are followed by anyone.

Fixed Cost:

Ø Interest Cost of Land as per prevailing norms in the area

Ø Interest & Depreciation Cost of the Shed with all arrangements for broiler production. This should be verified by inspection by the company.

Ø Labor wages as per prevailing market rates or Minimum Wage Act, whichever is higher.

Ø Medical and Accidental Insurance for the workers

Ø Cost of litter

Ø Cost of Cleaning and Maintenance

Ø Cost of water

Ø Cost of electricity

Ø Cost of brooding equipment

Variable Cost:

Ø Cost of medicines

Ø Cost of Feed

Ø Cost of Chicks

The cost to maintain Weather fluctuations:

Ø Cost of heating material in Winter

Ø The fixed cost of Bukhari or any heating arrangement

Ø The variable cost of fuel

Cost of additional cooling arrangements in Summer:

Ø The fixed cost of additional curtains & fans (other than what is recommended in normal shed conditions)

Ø The variable cost of Electricity & Water (other than what is recommended in normal shed conditions)

Criteria for Cost calculations:

Please note once the farm is prepared for certain number of birds, the cost remains fixed because even if there is mortality of birds during rearing/production process, these costs will have to be incurred by the farmer till the production of the batch is complete because it is not advisable to add new lot of chicks in the existing lot. The concept used in Broiler Farming is “All in All out”.

Either Market prices or Administered Prices whichever is higher will apply for the calculation of financial consideration.

According to the Standard Accounting Practices, all costs should be calculated and as far the contract these can be shared.

Review of Costing: Broiler farmers association should review the costing every three or six months in production and work out the actual cost of production based on accounting standards. This price should be discussed with local Poultry Growers Association and should be used while deciding any price to be paid to the farmers’ or while deciding the Production Contract. This will ensure fair and transparent working arrangement.

Cost Calculation: Fixed cost component should be borne by factored in irrespective of the mortality. In case of poultry production cost of bio-security and mortality should be considered with a fixed cost.

Ø Mortality calculation is also discussed separately.

Ø Variable cost will depend upon the surviving birds.

Ø Method of Calculation should be placed in Schedule.

Unless proper and fair costing formula is not developed by the farms, companies, universities and poultry departments, the poultry sector will continue to suffer and the whole industry will remain unprofessional in approach mainly in marketing.

Important: Ask yourself what is your costing methods used on your farms and have you factored in all the comments mentioned in this article. Also, check if all costings are considered when you enter into contract farming with an integrator.

With emerging competition from the imported products, costing will also help in developing an anti-dumping strategy for the sector, if required.

If any help is required in developing costing formula, the author can be approached.

Suggestions to address poultry sector’s financial distress:

1.   All state universities and animal husbandry departments should be asked to complete cost of production data of all inputs like day-old chick, fertile eggs, feed, biosecurity and cost of rearing the birds. This will help in understanding why some of the inputs are so expensive and how to address these issues at state as well as national level.

2.   Union Government can ask central government departments at ICAR to do benchmarking of these costs with rest respect to other countries and find out the reason why they are so expensive in India. This will help in addressing the issues by suitable policy interventions.

This needs urgent attention because in some of the inputs are most expensive in the world for no reason to be so. This will also derail the doubling farmer's income agenda of the Government of India.