Production and financial modeling is the best way to understand the economics of wean-to-finish (W-F) production. Using a model, we can compare the financial consequences of building a production system with W-F barns or standard nurseries and standard finishing barns.
In doing so, we found that W-F systems are here to stay because they are simple and they more than pay for themselves through lower production costs.
For this article, MBA 4.0 (our sophisticated software modeling program for hog production) is used to model a 20,000-sow, farrow-to-finish production system, built using either W-F buildings or conventional (multi-site) nursery and finisher buildings. Both scenarios take 409,085 weaned pigs from the sow operation per year.
The pig flow is based on a sow system with two, 10,000-sow sites flowing four-barn finishing sites all-in, all-out (AIAO). A fixed weaned pig cost of $34.50 was used. A W-F production system of this size would be built using 52 sites with four, 960-head finishing buildings per site, 208 buildings total. A standard nursery-finisher system would be built using 68 sites, one site per nursery building (32 nursery buildings with each nursery holding 2,000 head); 36 finishing sites, four, 960-head finishing buildings per site (144 finishing buildings).
The W-F units run a 26-week, fixed-time flow. The nursery is an eight-week, fixed-time flow. The standard finishers run an 18-week, fixed-time flow (26 weeks total, just like the W-F system).
Kansas State University's (KSU) swine nutritionist Steve Dritz's numbers were used. The KSU veterinarian outlined these W-F performance advantages: 1. A 7- to 20-lb. improvement in ending weight at the same age (3- to 7-lb. increase from less down time and 7- to 15-lb. increase from feed intake-daily gain improvement);
2. No advantage in feed efficiency;
3. No advantage in carcass value and lean premium; and
4. About a 50% reduction in mortality and culls for the W-F building. In the same 26-week, fixed-time schedule, it means that the average weight out of the W-F system is 270 lb. vs. 255 lb. for the conventional nursery-finisher system.
Other production and financial assumptions:
1. Mortality for the nursery-finisher system at 5.5% total and W-F at 3.0% total;
2. Equal feed conversions between the two systems (about 2.65);
3. Equal lean value premium for the two systems ($4 per head);
4. Allocated one full-time employee (1 FTE) for every two nursery sites; and
5. Feed cost/ton is essentially the same for the two scenarios.
The differences in building costs reflect current costs in the Midwest for W-F, nursery and standard finisher buildings.
On per-pig costs going into the model, the electricity cost was slightly higher per pig for the conventional nursery-finisher; the propane cost was higher for the W-F buildings; insurance, property taxes, repairs and maintenance, waste management, transport, animal health, miscellaneous and management fees were all higher for the nursery-finisher system. Depreciation and interest expenses were higher for W-F.
The two production systems were run side-by-side for 10 years, paying off all debt by the end of year 10, leaving the owner with 100% equity in the business. The financial results speak for themselves.
Over 10 years, the W-F system produced more than 10 times the total profit of a standard nursery-finishing system. By building a W-F system, you would make $9.67 more before-tax profit per head sold. Over 10 years, you would have over $38 million more before-tax profit or $27 million before-tax free cash flow (profit plus depreciation less all principal payments).
You may have heard people say that you can't produce as many pounds per square foot in a W-F system. As you can see from our results, that's correct.
But it doesn't matter because the profit per square foot is so heavily tilted to the W-F system. If the total pounds of pork produced annually were equal between the two systems, then pounds per square foot might be a key decision-making number.
However, in our analysis, the W-F system still wins because of lower costs (yes, even accounting for higher building costs). W-F production systems have lower transportation costs, lower animal health costs, lower water costs and lower waste management costs.
And if you figure a management contract cost, they are lower on this, too. (We're assuming no cash difference in labor costs, although you can use labor more efficiently in a W-F system. "No cash difference" means that even though you save a lot of labor in moving pigs and power washing/clean-up time, you still can't really reduce your workforce.)
The same logic holds for asset turnover ratio. It's higher in a standard nursery-finishing system but who cares when you're making almost $10 more per pig sold (Table 2).
These apparent contradictions - pounds per square foot and asset turnover advantages to a standard nursery-finisher system - show that you just can't rely on one number in evaluating the profitability and financial efficiency of a project. You have to look at the total picture. Profit margin per pig sold is the driver.
We'd be happy to run the model with equal costs or even give all cost advantage to the nursery and see what happens. But even before we did it, we could with confidence say - at least according to our models - the performance advantages to a W-F system will blow away the cost advantages, even if we gave every cost advantage possible to the nursery-finisher system.
There's a reason W-F buildings are here to stay and it's simple: You make more money using them.