I am often asked about production costs and how U.S. producers stack up against Canada and other countries. I'll admit, I usually hem and haw a bit because there just is not much factual data available.
That wasn't always the case, but with the demise of many publicly-funded farm records systems, or at least the demise or growth of the pork producers who used them, we have far less data on the cost of producing hogs.
There are still a number of private data-gathering systems, but their data are available only to members. Agrimetrics is probably the oldest and most widely discussed system. The last time I heard, it still included most of the large producers in the United States. These producers use the data to benchmark their physical productivity and financial performance.
For many years, I used data from the Iowa State University (ISU) Enterprise Records system. It was reasonably detailed and divided into thirds -- low, average, high -- based on profitability. It provided an idea of the competitive situation among independent Iowa producers. However, the number of producers participating in the system declined steadily during the '90s and the industry sort of grew away from the data. So much of Iowa's production was being held by farms substantially larger than the operations enrolled in the system that the data wasn't representative of the Iowa pork industry. ISU stopped publishing the data in 2000.
I now use ISU's Estimated Costs and Returns, mainly because it is a series with a long history that is based on reasonable assumptions. Figure 1 shows the ISU estimated breakeven costs back to 1991. In preparing this article, I discovered that the ISU cost of production data for 1973 to 1991 has not yet made the jump to an electronic format, so this is as far back as I can graph the data at this time. I'll provide the older data in a future article.
This data series has several strengths: First, it is very public. You can see this year's computations and historical data back to 1991 at www.econ.iastate.edu/faculty/lawrence/EstRet/Index.html. Second, it is reasonably detailed and responsive to changing market conditions. Third, it looks at more than just farrow-to-finish operations. From that same source you can see estimated costs and returns for selling feeder pigs and for finishing feeder pigs. And, fourth and possibly most important, it contains "reasonable" estimates.
The numbers in the ISU series are close to what I hear in the countryside. They seem to reasonably represent an "action point," and when prices drop below it, we begin to hear of financial difficulties and see output changes.
It is the "reasonable" point that trips up USDA's estimates of hog production costs. Since 1990 (the oldest data I could find), USDA has never estimated total costs for farrow-to-finish production to be less than $50/cwt., live weight, and has estimated annual profits to be -$5.53 to -$17.89/cwt., live weight.
In other words, USDA claims that U.S. hog producers have not covered total costs since 1990. If that were true, we would have no pork industry in the United States. You can find USDA cost estimates for many commodities at www.ers.usda.gov/Data/CostsAndReturns/testpick.htm.
The ISU data have some weaknesses, too. The major weakness is the "fixity" of the cost of non-feed items. The costs of medicines, bedding, labor, transportation, buildings, etc. were for many years based on the ISU Enterprise Records data. Since those data have not been available from 2000 to date, the numbers in the current estimates are probably too low, especially with the run-up of energy and building material prices over the past two years. ISU Agricultural Economist John Lawrence reports that an update of these cost components is underway.
When all is said and done, I still believe the ISU estimates are a reasonable barometer of costs in the United States. They are logical and transparent and have a long history. All of those add to their credibility and usefulness.
Speaking of costs, another question that comes up often is, "Where does the U.S. rank in costs of production vs. international competitors?" That's an even more difficult one to answer due to the influence of exchange rates which, when they are fluctuating wildly, can sometimes make even last week's comparisons look pretty silly.
PIC, the worldwide breeding stock supplier, is in an almost unique position to see costs of production around the world and, from time to time, takes a stab at compiling and comparing them. Their latest effort (February 2006) appears in Figure 2. I apologize for the size of the type, but I just got a picture of the figure and cannot change the format. I think you can zoom in to read the details.
Keep an Eye on China
The United States ranks third to Argentina and Brazil in this ranking. China is fourth, Canada is fifth, and Chile is sixth. Interestingly, the United States has an advantage on Brazil in terms of both feed costs/ton and feed cost/kg of gain. Only Argentina has lower feed costs than the United States.
China's status as a low-cost producer is important. While a high proportion of their pigs are still produced in small lots with many fed garbage and other by-products, we cannot write that production off. It is going to be part of the massive Chinese pork sector (five times as large as the United States). That sort of production will only be replaced if "commercial" production can be done cheaper, or Chinese consumers have enough money to turn their backs on products from backyard operations. I'm no expert on China, but it doesn't appear that will happen soon either.
China may still be a large export market for the United States, since it doesn't take much of a share of 1.3 billion consumers to build a nice business. Displacing very much of this low-cost Chinese production, however, will be difficult, and our most likely success will be in capturing segments, such as by-products and offal, where we can be very competitive.
Click to view graphs.
Steve R. Meyer, Ph.D.
Paragon Economics, Inc.
e-mail: steve@paragoneconomics.com