The National Pork Producers Council (NPPC) Return on Equity model is an educational spreadsheet template that combines production and financial aspects of pork production systems in a comprehensive, analytic model.
The model is not intended to precisely calculate the financial performance of a business over a defined period. Rather, it may be used to model any pork production business in "steady-state." Nevertheless, it provides reasonable estimates of Return on Equity (ROE), Return on Assets (ROA), Return on Investment (ROI), Asset Turnover (ATO) and many other productivity and profitability measures.
"What If" Capabilities The power of the ROE model is it's "what if" ability. Once baseline values describing the pork production activity within a farm business have been entered in the model, it is very easy to experiment and to investigate the relative changes in output and profitability associated with changing the ways pork is produced.
The ROE model is based on the DuPont Equation, wherein ROE is a function of Net Profit Margin, Asset Turnover and Financial Leverage. In general, improvements in Net Profit Margin and Asset Turnover will result in greater ROA and ROE. Applying ROE Model To MLP Inputs
This study uses a 1,200-sow, farrow-to-wean farm. The what-if question asked is: "If we were to run six identical 1,200-sow herds, each stocked with one of the six genetic lines involved in the NPPC National Genetic Evaluation Maternal Line Program (MLP), how would it affect different profitability measures?"
This question was addressed by using data provided from the analysis of productivity of 130 cohorts assembled to provide measures of longevity and lifetime productivity. This exercise required 130 separate ROE model computer runs.
While the basic financial structure of the model farm stayed constant throughout the experiment, settings were adjusted before each run to reflect the biological performance of each cohort group as described below.
Cohort Performance Profile Based on the numbers of breeding female days (through four parities) per cohort group, the annual replacement rates needed to maintain constant herd size ranged between 29.5% and 52.4%.
Among the cohort groups, the average number of weaned pigs/wean litter ranged between 8.61 and 9.74, with an average of 8.95 pigs/wean litter.
Of 74,922 weaned pigs, 1,896 (2.53%) classified as substandard weaned pigs. Substandard pigs are those sold out of their target market weight range and/or substantially discounted from the price received for other pigs in their contemporary groups.
For the purpose of this analysis, substandard weaned pigs were those that weighed less than 7 lb. at weaning. Standard weaned pigs were valued at $32/head, while the substandard pigs were discounted to $9/head. The percentage of substandard weaned pigs across cohort groups ranged between zero and 10.03%.
Total breeding female days within each cohort were classified into breeding/gestation days and lactation days.
Average daily feed disappearance data for each cohort group was used to estimate feed cost/pig weaned, based on the cost of the breeding/gestation diet ($120/ton or 6 cents/lb.) and the lactation diet ($148/ton or 7.4 cents/lb.)
Feed cost/pig weaned ranged between $10.68 and $12.09 among cohort groups. Addition of other costs, including depreciation, labor, interest, animal health, utilities, insurance and marketing expenses, brought the average cost of producing a weaned pig to $29.92, with a range of $26.72 to $32.23 across all cohorts.
Differences in the cost of producing a weaned pig across the cohort groups in this analysis are attributed to factors influenced by longevity and weaned pig production. To maintain herd size, herds with higher annual replacement rates require more replacement gilts to be purchased annually. Herds with lower average parities of breeding females also tend to produce lower total born litter sizes.
ROE Model Results Using ROE model output for 130 cohort group computer runs, Net Profit Margin (NPM), ROI, ROA and ROE were calculated for each of the six genetic lines (Table 1).
In calculation of the ROE model output values, asset values for a typical 1,200-sow, farrow-to-wean farm were used. Annual return on investment and annual return on assets were based on an average total assets (pork) net book value of $974,036. Return on equity was calculated on an average equity (pork) of $615,407. The leverage measure used in the ROE model (1/Equity/Total Assets) was 1.58. The asset turnover ratio varied between 0.71 and 0.80, depending upon the revenue generated by the sales of standard and substandard weaned pigs from individual cohort groups.
When interpreting the results presented in Table 1, it is important to focus on the differences between the values among the six maternal lines. The absolute values are less important because they will change with pig prices, feed costs and other costs.
The net profit margin indicates how much of each revenue dollar remains after deducting all production costs. The Dekalb Monsanto MPX200 line has the highest net profit margin at 17.33%. As income is a factor in calculation of all measures in Table 1, the Dekalb Monsanto MXP200 line also shows the best ROI, ROA and ROE of the six lines analyzed. The Dekalb Monsanto DK44 is the second most-profitable line.
The superscripts (a, b, c, d) are statistical notations that help in the interpretation of the values in the table. For example, because the values for ROE for the American Diamond Genetics (14.31%) and Newsham Hybrids USA (14.88%) share the same superscript (d), there is no statistical evidence to suggest that one line is better than the other even though the numerical difference between the means is about 0.5%.
And, it is important to point out, just because there are significant statistical differences among values in Table 1, it does not necessarily follow that differences are economically significant.
To attain economic significance, there must be material differences between the numbers. Few would argue that the 6% absolute difference in ROE associated with Dekalb Monsanto MXP200 (>21%) vs. that of American Diamond Genetics and Newsham Hybrids USA (<15%) is economically significant. The 1.73% difference in ROE that the Dekalb Monsanto MXP200 line translates into$10,647 of extra revenue annually or $8.87/breeding female place/year in the exa mple herd.
Model Extended Through Finishing Differences in productivity observed in weaned pig production were modeled through the nursery and finisher stages. Data in Table 2 illustrate the magnitudes of differences that might be expected in a 1,200-sow, farrow-to-finish system.
As the actual cost of production will vary with changing feed costs, it is important to focus on the differences between genetic lines, rather than absolute values. The Dekalb Monsanto MXP200 line results in 58 cents lower cost/cwt. of live pork marketed than the Dekalb Monsanto DK44 line and a 95 cents/cwt. advantage over Danbred USA, the third most productive genetic line.
Therefore, it appears that based on the lifetime productivity data provided to run the ROE model, the results presented suggest significant economic differences exist among the six genetic lines considered in the maternal line evaluation program.