To ensure survival in today's fast-paced pork industry, producers must adopt three basic strategies, says a leading financial expert.
- Know your cost of production
It's been preached forever. But the recent speed in which production costs and hog returns have changed provides added proof that cost of production must be closely managed, says Mark Greenwood, vice president, Swine Group, AgStar Financial Services, Mankato, MN.
“If your cost of production is better than the industry average, you have very good staying power. Those who are less cost-efficient won't survive for long,” he suggests.
- Manage your costs
Greenwood recalls that from 2000-2002, the average corn cost in Minnesota was around $2.10/bu. Soybean meal ran about $180/ton and live hogs averaged 40-41¢/lb. Today those numbers are very different with new crop corn at $3/bu., soybean meal close to $300/ton and hogs averaging 47-48¢/lb.
Those changes should alert producers to work harder on feed costs. Don't lock in feed inputs while prices are historically high, he warns. Watch feed costs every week as North Carolina producers have done for years. Search for ways to reduce those costs, including looking at alternatives.
“We have a fair amount of our clients who are using distiller's dried grains with solubles (DDGS) at 200-300 lb./ton of feed. Historically, we used to see about 150 lb. of soybean meal used per marketed animal. Today we have some clients who are below 100 lb. on soybean meal,” says Greenwood. They are substituting with DDGS and 6-7 lb. of synthetic amino acids/ton of feed.
The goal is still to maximize pounds of pork produced. Feed cost per pound of gain is still the driver in low-cost production, he states.
For example, if your average daily gain on wean-to-finish is 1.55 lb. and you go down to 1.50 lb., that drop of just .05 lb. on 180 days on feed is a loss of 9 lb. of pork produced (.05 × 180). “If you take that 9 lb. times 60¢/lb. estimated price on a carcass basis, that's $5.40 less revenue/pig. That is a huge figure and could make the difference between profit and loss on that pig,” observes Greenwood.
- Become better hog marketers
The days of secure marketing contracts are over, he says. Producers must become better marketers.
Don't always expect profits at the actual time you market your hogs, he says. Use forward pricing contracts; June futures offer profits even at today's high feed costs. Locking in fall futures could at least prevent losses.
Sell the bottom 5% of your sow herd to improve herd efficiency. Cull sows selling for 45¢/lb. make this a good time for inefficient producers to exit the business.
Overall, take advantage of opportunities when they arise, such as locking in feed inputs at competitive prices or selling hogs at a profit. Don't wait for better returns that may not materialize. Use nutrition and marketing experts to devise plans of action.
With proper management and strong expected prices, 2004 and 2005 should be profitable, concludes Greenwood.