Ten Simple Rules to Profitability

South Central Management Associates (SCMS) has identified 10 cost control points for pig owners to follow in SCMS' contract, wean-to-market program to successfully maximize their returns.

The pork industry is enjoying very profitable times right now with high hog prices and low grain prices. Seldom do both of these factors line up to produce such prosperous times.

However, Steve Hargis, director of operations at SCMS, says producers should not forget the havoc that struck in 1998-2000 when prices plummeted to record lows. All it would take is a sudden shift in pork demand or exports, and prices could start tumbling again, he warns.

SCMS oversees contract production of about 800,000 pigs/year on 160 sites in Iowa and Minnesota (one site in Illinois) in their wean-to-market program.

Most pig owners contract with independent growers. The growers receive $36-$42/pig space to house and feed weaner or feeder pigs in mostly 4,000-head barns.

In good times and bad, Hargis and logistics manager Pete Merna preach that profitability for pig owners depends on sticking to 10 cost control points.

RULE 1

Identify a source of pigs to buy from long-term. “Pete and I both feel that the ideal situation would be a long-term (five-year) contract that will get you a fixed price; for example, $33 per head for segregated early weaned pigs,” says Hargis. “The goal is to take all of the market fluctuation out of it.”

Owners buy pigs through SCMS from a variety of sources; about 70% of the pigs come from Canada because they can provide steady volume.

The biggest challenge right now is locating large volumes of high-health pigs for finishing. Company policy requires that a “vet-to-vet” health check be done on every group of pigs purchased, says Merna. About 20% of groups are rejected. Chief concerns are porcine reproductive and respiratory syndrome (PRRS), Haemophilus parasuis and Actinobacillus pleuropneumonia.

“We've got a lot more people looking for pigs than are available,” says Merna.

RULE 2

Identify what packer you will sell your pigs to. Don't just stop at signing an agreement. Pick a packer who wants the type of market hogs that you can provide.

You can go a long way toward controlling your costs if you select a packer who wants the weight of hogs and the type of genetics you intend to produce, stresses Hargis. Make sure you get answers to detailed questions about fulfilling a market contract. Don't leave the specifics up to the packer to decide at the time hogs are shipped.

RULE 3

Project the level of return, profit or loss you intend to receive for groups of pigs. Set a goal for a projected return on every pig that is sold out of the finishing barn.

“If you have a business plan where you want to make $5 a head on every pig you sell, you have to set that goal and stick to it,” says Hargis. “You can't be a speculator and wait out the market in hopes of a higher return.”

For most owners, a $5-7 profit/hog long-term is a solid return. “If you can't make it on $5-7/hog, you need to either find an exit strategy or raise more pigs,” says Hargis.

Ninety percent of the producers on the SCMS wean-to-market program sell their hogs when prices hit a designated target price.

Declares Merna: “I keep hammering on these guys all the time. Let's take that $10-12/head profit so we don't have to make $20 a head on the next group to make up for failing to hit a home run.”

Refer to Table 1 for cost and revenue projections for feeding out pigs, and Table 2 for some marketing projections. Details are provided in the sidebar below.

RULE 4

Assemble your financial team to help set profit and loss figures. Include a banker, an accountant-tax person, production management consultant (such as SCMS), hog and grain brokers to provide marketing expertise, and a business consultant who can tie all of the production and financial information together, states Hargis.

A financial team will add about $1/head to your production costs. However, management expertise can help ensure that your cost and revenue projections ring true, he notes.

The financial team can help dispel many production fallacies that pork producers face. Pounds of pork produced per square foot of building space is often thought of as the ultimate barometer of pig efficiency. This legitimizes overcrowding.

But Hargis says when looking at cost control, net revenue per pig is king, and that is achieved by providing most finishers with 7.5 sq. ft./pig, not 7 sq. ft./pig.

A consistent, single pig flow or throughput can be the difference of a dollar or two of profit or loss on a pig, he says.

The percentage of optimal pigs sold at the packing plant generates more return for owners of finishing operations. The SCMS group averages about 94% optimal pigs sold feeder to finish.

RULE 5

Select who will care for the pigs. This is actually one of the most critical factors in a contract grower production system, stresses Hargis. He advises that when selecting a grower to follow up on references, interview prospective growers and review past production records and financial closeouts of past contracts.

“If a grower has a nice, isolated building and it's sitting empty, it's really important to find out why,” he observes.

RULE 6

Never buy pigs for feeding out without having every input cost locked up and targeting your market price.

“If you are putting pigs on feed, and you're not looking at what corn and meal and rent costs are going to be, and how much you are going to make, you are essentially saying, ‘I don't care whether I make money or not on these pigs,’” emphasizes Hargis.

RULE 7

Make sure someone from the management team (not the grower) sees those pigs once each week. When profit margins averaged $20/head, it was common for owners not to review grower performance until after a turn was completed. Today's slimmer margins require closer scrutiny.

RULE 8

Decide when pigs will physically be sold. Owners need to set the timeframe with their packer for actual delivery of the pigs. Trucks need to be lined up so the pigs can be sold on time and in the right weight range.

If there is a month's window for marketing, don't wait until the last week to nail down a delivery date, or you may be too late and the contract with the packer could be voided.

An automatic sorting system or a weigh scale can avoid costly weight errors.

Merna says not long ago, two producers each sold a semi-load of hogs on the same day, and both groups had cash bids of $62/cwt. At the plant, one group brought three cents under the base price, or $61.97/cwt., while the other group brought $65.01/cwt. The whole difference between the two groups was sort loss. One group weighed 268 lb., while the other group weighed 271 lb., just over the packer's weight limit of 270 lb. The producer with the sort loss didn't own a scale for weighing hogs.

RULE 9

Ensure each group sold has a production and financial closeout. The final results of marketings have to be on paper to know whether you hit your production numbers and price projections, points out Hargis.

RULE 10

Plan for an exit strategy if your business plan is not reaping financial rewards. “I call it an exit strategy, but it might not be an exit strategy out of the hog business,” says Hargis.

“For example, one producer who used to own barns and feed pigs for himself got into trouble because he was highly leveraged and failed at throughput. SCMS developed an exit strategy for him, and he became one of our best contract growers and oversees other contract sites for our management service company,” he says.

Hargis observes: “Our goal as a company is to keep producers from exiting the industry. We want to try to get them out of bad business plans, but keep good people in the pork business.”

SCMS is based in Wells, MN, and is affiliated with South Central Veterinary Associates.

‘Real Time’ Worksheet, Tables Explained

Steve Hargis of South Central Management Associates (SCMS) has developed a “real-time” spreadsheet to track such things as feed usage, water usage and death loss on a weekly basis.

Data is collected automatically through sensors in the growers' barns that monitor water and feed consumption; the number of deads, culls, etc. are recorded manually by staff. For grower barns with automatic sorting equipment, pigs go through a scale and the information is uplinked directly to SCMS computers.

Data is sent by e-mail, voice mail or by Internet connection to SCMS. Hargis likes the regular submissions because it permits him to monitor performance of pigs as they grow to see if data meshes with cost and revenue projections.

“It shows you the actual feed you used and the pounds of feed budgeted and how many dollars spent vs. what's budgeted,” he explains.

Projecting Costs, Returns

As shown in Table 1, production costs highlighted in red are “live” figures. As they are adjusted, revenue projections automatically change.

“If I change average daily gain, it is going to change how much my barn costs are, and if I change feed conversion, it is going to change how much my feed costs are,” says Hargis.

“This can be a daily update to track your costs,” Hargis notes.

The projection sheet Hargis modified comes from a computer program developed by LeRoy, MN, pork producer Bob Baarsch, who uses it to operate several auto-sort barns at Next Generation Pork.

Pete Merna, logistics manager at SCMS, points out another unique feature of the projection sheet is that it includes deads, lights and culls as an actual cash expense.

This enables producers to pinpoint actual numbers of top hogs sold, adds Hargis, which is a key number in optimizing returns on a group closeout.

The worksheet is a very complete projection of all production expenses. It also includes deductions for pork checkoff and management fees (to SCMS or other consultants).

By closely estimating total costs, pig producers can come fairly close to knowing what they can afford to pay for weaner or feeder pigs to finish out, says Hargis.

Market Projections

A second sheet Hargis has developed projects marketing times. The example in Table 2 on page 31 depicts an incoming group of 65-lb. feeder pigs, estimated performance levels and five projected marketing cuts.

“If we are looking at controlling costs, and we want to make sure that we lock in a profit, then we better know what timeframe or selling period we need to sell these pigs on the Chicago Board of Trade,” he says.

For details, visit www.scvet.com.