As we look at potentially low market prices for an extended period of time, we need to ask ourselves as producers how to minimize our costs. The answer will not be the same for all producers.
Case Study No. 1 Our first case is an example of a decision many producers face - maintain their own finishing barns or contract finish in new facilities. Many producers have older, less-efficient facilities, but they are paid for and fully depreciated. Feed efficiency is poor. To improve efficiency, better facilities are needed. Then the question is asked, "How much can we afford to pay for new buildings?"
This producer is a 200-sow, farrow-to-finish operator who finishes pigs in various old barns in his immediate area. In most of these farms, the only obligation he has is the upkeep of the farm and buildings. However, the feed efficiencies are between 3.4 and 3.9. He had the opportunity to put pigs in a contract finishing barn for a payment of $36/pig/year. If he is able to turn the barn 2.7 times, his cost per pig is $13.33. He asked us for some advice.
We advised him that it was important to look at the feed efficiency for his existing locations and insure that it was accurate. We also advised him to figure what improvement he could expect in his new location. If feed cost is 6 cents/lb., a 0.7 feed efficiency improvement would equal $9.10/pig.
The producer has to decide if he can get enough feed efficiency improvement and other advantages to justify the additional $13/pig expense.
In this example, he made the decision to do some minor repairs and replace the feeders. He did not feel he would see a big enough improvement to justify the increased building payment of the contract finisher. If he is able to keep his feed efficiency under 3.6 consistently, he felt he would have a lower, overall cost of production. If he is unable to control his feed efficiency and he needs to lighten his work load, contract finishing is more appealing.
The decision simply comes down to cost justification of added expense. If the improvement in performance does not easily cover the added production cost, it is not a sound management decision.
Case Study No. 2 Our second case is an example of a comparison of two, 1,500-sow farms. Both of these farms are breed-to-wean with weaned pigs going off site. One is a new farm with an overall construction cost of around $1,000 per sow.
The second is a 600-sow farm that converted existing facilities and built some new facilities to reach 1,500 sows. His total remodeling cost was $150,000 with an existing debt on the facility for $300,000. His total finished cost was $450,000 or $300/sow.
It is not completely fair to compare these farms side by side from a facility standpoint. But from a cost standpoint, it does show the difference of a facility cost/pig. Some older farms with less debt will have some advantages over the more expensive facilities at least for the short term.
The first farm with the new facilities had a principal and interest cost of $6.94/pig, based on 22 pigs/sow/year spread over 10 years.
At the same production level and time frame, the second farm with the remodeling had a principal and interest cost of $2.18/pig for a $4.76 advantage over the other new farm.
Production greatly affects the facility cost per pig. We are assuming equal production levels between the two farms.
This is an example of a producer using some equity in his existing building to keep facility cost and overall production cost down.
A couple of disadvantages with the remodeling is that it may not be as saleable as a newer unit. Plus, employees may rather work in a new barn than an older, remodeled one.
Individualize There are many factors that go into making decisions about which direction to take in the industry. It is important that each producer look at his own situation and decide what is best.
When approaching the decision from a cost basis, three-site system and contract growers may not always be the best paths to take. There may not be enough improvement in performance in these systems to justify the increase in cost over your current system.
Remodeling buildings and using existing building equity will allow some producers to lower overall cost of production. Many of our producers who have stayed independent and expanded and retrofitted their facilities over time have a lower cost of production than the newer systemswith newly constructed facilities. Facility cost per pig is not the only difference but it is a significant contributor.
However, the decision to change your production system is not always a financially driven one. Reducing work load, outdated genetics, and buildings with no salvageable value also are key things to consider when looking at your future in this industry.
Regardless of what the hog market outlook is, survivors in this industry will identify what they are good at and where their advantage is so they can capitalize on it.