THE ECONOMIC IMPACT OF THE OSTRICH INDUSTRY IN INDIANA. Dept. of Agricultural Economics. Purdue University

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1 THE ECONOMIC IMPACT OF THE OSTRICH INDUSTRY IN INDIANA by David Broomhall Staff Paper #96-22 September 9, 1996 Dept. of Agricultural Economics Purdue University Purdue University is committed to the policy that all persons shall have equal access to its programs and employment without regard to race, color, creed, religion, national origin, sex, age, marital status, disability, public assistance status, veteran status, or sexual orientation.

2 THE ECONOMIC IMPACT OF THE OSTRICH INDUSTRY IN INDIANA by David Broomhall Dept. of Agricultural Economics, Purdue University West Lafayette, Indiana Staff Paper #96-22 September 9, 1996 Abstract The ostrich industry in the United States is expanding rapidly. This analysis attempts to gauge the economic impact of the ostrich industry in Indiana. The analysis indicates that the industry contributes between $5.3 million and $10.3 million to the Indiana economy based on January 1996 flock sizes. The impact is expected to increase as ranchers increase flock sizes and more birds are processed. Keywords: Input-output analysis, economic impacts, IMPLAN, value added Copyright by David Broomhall. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies. i

3 THE ECONOMIC IMPACT OF THE OSTRICH INDUSTRY IN INDIANA by David Broomhall, Extension Economist 1 The ostrich industry in the United States is undergoing rapid change. Just a few years ago market prices of ostriches for breeding purposes were much higher than for their meat and other ostrich products. This prevented the slaughter of all but a few birds. Prices for breeders provide a signal to the market regarding whether ranchers can make more money holding birds for breeding purposes or sending them to slaughter. Over the past few years the economic return to building flock size has been greater than for processing. Today, prices for breeding pairs have dropped considerably from their highs of a few years ago, and more and more ostriches are being slaughtered. There are several factors that seem to be driving the rapid growth of the ostrich industry. The primary reason appears to be the health-related characteristics of ostrich meat, which has a flavor similar to beef. According to the American Ostrich Association, ostrich meat has less than half the calories of beef and is lower in fat than beef, pork, chicken, and turkey. It also appears that the cost of raising ostriches is comparable to raising other meat animals. This means that when the industry matures, the price for ostrich meat should be comparable to other meat products. The purpose of this analysis is to estimate the economic impact of the ostrich industry in Indiana. It is often difficult to predict the growth pattern of such a rapidly-growing industry and the economic contribution that such an industry provides. Since the industry has undergone such dramatic change over the past few years, this analysis provides a general estimate of the industry s contribution. An economic impact analysis traces the flow of economic activity throughout an economy. There are three distinct effects that occur as money flows through an economy: direct effects; indirect effects; and induced effects. Direct effects are those that occur when a business creates value in some product, such as the production of ostriches for consumption. Indirect effects occur as a result of some direct effect. For example, the production of ostriches requires the production of feed and the manufacture of fencing material, among other things. Individuals involved in the production of a product earn income for their efforts. The spending of their earned income on goods and services for consumption creates additional income for others. The generation of income as a result of this spending is the induced effect. One popular method of estimating the economic contribution of an industry is to use an inputoutput (I-O) model. I-O models contain a set of equations describing the relationships that link the output of one industry with all other industries in an economy. The U.S. Forest Service has developed a comprehensive input-output model called IMPLAN, which was used in this analysis. The estimates provided by IMPLAN include personal income, total output, total income, value added, and employment. In this report only value added and employment impacts are estimated. Value added is considered as the most appropriate measure of the impact of an industry on an economy, and The author thanks Lee Schrader for his helpful comments on earlier drafts of this report. 1

4 is defined as payments made by industries to workers, interest, profits, and indirect business taxes. Employment is measured as the number of jobs. An important limitation of I-O models is that they can describe conditions only at a point in time. This is particularly important for the ostrich industry because it is undergoing rapid change. As the ostrich industry grows other portions of the economy react, which changes the relationship between the ostrich industry and those which produce inputs to the ostrich industry, and the relationship between the ostrich industry and the industries it supplies. For example, producing more and more birds implies that the meat processing industry will need to expand capacity, which will change the relationship between the ostrich industry and the meat processing industry. I-O models cannot account for these changes. A related factor is that changes in consumer preferences cannot be incorporated into the model. This is an important consideration in the ostrich industry because it is not yet known if consumers are willing to accept ostrich meat as a substitute for other meats. The degree to which consumers switch to ostrich meat is critical in providing a reasonable estimate of the economic impact of the industry. The IMPLAN model used in this analysis does not have a separate industry for ostriches. To overcome this limitation, all of the inputs used in ostrich production were assigned to industries that do exist. For example, the cost of farm buildings is attributed to the new farm structures industry and utility costs to the electric services industry. Labor was assumed to be provided by the owner. The difference between the total cost of production and total revenues is the profit returned to the rancher, and this amount was entered into the model as consumer income. The IMPLAN model was developed with 528 separate industries. To simplify the analysis these 528 industries were combined to form a total of 14 industries. Two factors have a particularly significant impact on the outcome of an economic impact analysis of the ostrich industry: the number of birds sent to slaughter and prices for ostrich products. The analysis used in this report attempts to capture these factors by estimating impacts using two levels of flock size and three price levels, which provides six scenarios. A survey of ostrich producers was conducted in the Winter of 1996 by the Indiana Agricultural Statistics Service to determine the number of ostriches by age and sex in Indiana. These findings are shown in Table 1. Female ostriches generally become fertile at 24 months, and the analysis assumes that the average female produces 20 offspring per year. The first three scenarios are estimates based upon the number of offspring produced by all females over the age of 24 months (13,820 birds) on January 1, Scenarios four, five and six are based upon 125% of that amount (17,275 birds) to account for some portion of birds that were less than 24 months old on the survey date being withheld from the slaughter market as breeders, which increases the number of offspring in the following year. This was done in an attempt to estimate what the impacts might be in the very near future. Three levels of revenues were evaluated. At current prices, revenues from the sale of ostrich products provide for a very high rate of return on investment. Such a level cannot be sustained in the long run, as other individuals will enter the market to capture excess profits. In long run market equilibrium it might be expected that a normal rate of return on investment would be closer to 10 to 25 percent. Hence the analysis is conducted at three price levels: current prices; production cost plus 10%; and production cost plus 25%. 2

5 Table 1: The Ostrich Population in Indiana on January 1, Age Range Males Females Less than 3 months to 6 months to 12 months 1, to 24 months Over 24 months Total 2,657 2,775 Total Birds 5,432 Source: Indiana Agricultural Statistics Service. Three aspects of the amount invested in the production of ostriches were not included. In some instances the initial purchase of breeding pairs could be very high. However, for this analysis only the cost of maintaining a breeding pair is included in the rancher s cost, and that amount is included as a cost in producing the offspring. Second, no allowance was made for breeder replacement. This aspect was not considered because the industry is so young that it is likely that very few ostriches have reached the age at which they are not viable breeders. Third, land costs and operating interest were not available and thus not included in the analysis. Since the raising of ostriches is not as land intensive as raising beef or crops, the omission of land costs is not believed to have a large impact on the final estimates. The seriousness of the omission of interest costs is not known. However, not including interest costs does not reduce the direct impact. It simply reduces total expenses to the producer and redirects this amount to profits rather than to the finance industry. The analysis assumes that all birds are slaughtered at 14 months of age and weigh 250 pounds. The annual cost of a breeding pair, which does not yield revenue directly but require maintenance costs, is spread over all 20 offspring. All operating cost data were provided by the Indiana Ostrich Association and are shown in Table 2. Estimates of the six scenarios are shown in Table 3. The estimates in Scenario One are based upon 100% of all offspring of current birds over 24 months old being slaughtered at current prices. Impacts under these conditions are estimated to be $8.2 million, and 227 jobs. Scenario Two differs from Scenario One because it assumes a slaughter that is 25% larger. Since I-O models are strictly linear, the estimate is 25% larger than the results of Scenario One, or $10.3 million and 284 jobs. Since profit margins at today s prices are higher than normal, the estimates based on current prices will be substantially larger than those restricted by a rate of return on investment of 10% and 25%. 3

6 Table 2: Operating Cost Data per Ostrich. Cost Category Industry Receiving Direct Impact Total Cost Utilities Electric services $ Buildings* New farm structures 8.80 Feed Wholesale trade Medicine Wholesale trade Fencing* Wholesale trade 8.50 Equipment Wholesale trade 0.55 Incubation Ag services Slaughter Meat packing plants Total expense $ * Includes depreciation Scenarios Three and Four estimate the impact of the industry if the rancher s return on investment is 10% above operating costs. These estimates are about half the magnitude of the analysis using current prices, and are more representative of the medium or long run impact of the industry on a per bird basis if flock sizes remain constant. If demand for ostrich continues to grow, the impact of the industry will increase in direct proportion to the number of birds slaughtered. Scenarios Five and Six differ from Three and Four only by imposing a rate of return on investment of 25%, which is high for typical agricultural enterprises, but much lower than the ostrich industry s current estimated rate of return on investment. Estimates under these circumstances range from $5.8 million to $7.3 million. The reader is reminded that the analysis reported here provides only a rough estimate of the economic impact of the ostrich industry in Indiana at one point in time. The long term growth of the ostrich industry in the United States is dependent primarily on the demand for ostrich meat. If consumers are willing to accept ostrich as a substitute for other meat products, then the industry can expect to continue to expand rapidly and earn above average profits until flock size is in line with consumer demand. In addition, a large portion of the current value of each bird is attributed to other products, particularly the hide. An expansion of the industry to provide more ostrich meat would increase the supply of ostrich hides. Ostrich prices could be dampened if demand for hides does not rise at the same rate as the demand for meat. When the market for ostrich products stabilizes and profit rates are comparable to other investments, estimates of the economic contribution of the ostrich industry will be more reliable. 4

7 Scenario 1(a,c) Scenario 2 (b,c) Scenario 3 (a,d) Scenario 4 (b,d) Scenario 5 (a,e) Scenario 6 (b,e) Value Jobs Value Jobs Value Jobs Value Jobs Value Jobs Value Jobs Industry Added* Added* Added* Added* Added* Added* Agriculture Agricultural Services Mining Construction New Farm Structures Meat Packing Plants Manufacturing Transp., Comm., & Utilities Electric Services Wholesale Trade 2, , , , , , All Other Trade , Finance, Insurance, & Real 1, , Estate Services 1, , , , Government Total 8, , , , , , Table 3: The Economic Impact of the Ostrich Industry in Indiana. *In thousands of dollars. Basic assumption of all scenarios: 1. Birds slaughtered at 14 months of age and weight of 250 pounds. 2. The annual cost of a breeder pair is spread over 20 offspring. a. Ostrich production based on 100% of offspring per female over 24 months old. b. Ostrich production based on 125% of offspring per female over 24 months old. c. Revenues based on current price of $2.25 per lb. live weight. d. Revenues based on production cost plus 10%. e. Revenues based on production cost plus 25%.