Ontario Swine Farms. Ontario Data Analysis Project

Transcription

1 Ontario Swine Farms Ontario Data Analysis Project by Ken McEwan and Lynn Marchand Ridgetown College, University of Guelph Prepared For Policy Branch Agriculture and Agri-Food Canada Ottawa May 2000

2 AKNOWLEDGEMENTS The Ontario Data Analysis Project - Swine (ODAP-S) was made possible through the generous support of the Policy Branch, Agriculture and Agri-Food Canada. Special thanks are extended to the farm co-operators who participated in this project. Sharing their time and individual farm records is greatly appreciated. By providing production and financial data, the swine industry has helped advance the knowledge of how Ontario pig farms have performed and changed over time. The benchmark data by farm cooperators is critical to understanding our competitiveness in swine production in a demanding global economy. Other people who assisted with this project and deserve recognition are Randy Duffy and Tracey McCallum. Finally, appreciation is extended to any others who assisted with this project in some way. Any remaining errors are the responsibility of the author. It is hoped that this data will be used by industry stakeholders when performing year-end reviews. hhh Ridgetown College, University of Guelph Page ii

3 ABSTRACT Ontario Swine Farms Ontario Data Analysis Project The following report contains a descriptive summary for Ontario farrow to finish farms. In this report, the financial characteristics, swine enterprise, cropping patterns, and some demographic and managerial trends are described. A survey average is given along with the results from six farms who have participated in the Ontario Data Analysis Project (ODAP) each year over the 1995 to 1998 period. The total number of farms surveyed during the 1995 to 1998 time frame varied from 12 to 54. In addition to describing the various performance characteristics on the farms some further analysis was done to try and isolate any statistical relationships between various production and financial parameters to 1998 Overview Between 1995 and 1998 extreme low and high market hog prices were experienced. A critical time period was the severe drop in market prices occurring at the end of Prices dropped to lows ($38.68 per 100 kg dressed - December 21 to December 25, 1998) which had not been seen in decades and resulted in lower gross revenues from pig sales as well as large changes in inventory values reported on the year end balance sheet. This price drop was especially difficult after 1996 and 1997 which were years of record high hog prices and expansion in the industry. Average weekly pool prices ($/ckg) by year are: $151.68; $188.70; $186.69; and $ Interestingly, despite the volatile markets production expanded on nearly all of the study farms during the four year study period. Some grew substantially increasing sow numbers by 20% or more between 1995 and In some cases this was done by the construction of new buildings while others renovated existing facilities. This expansion in farm size is consistent with the general industry trend to larger farms while smaller operations exit the sector. In Ontario, producer numbers have steadily declined at an average loss of 5.97% per year. However, farms marketing more than 3,000 hogs per year have doubled from 146 in 1989 to 285 in To place this study of farrow to finish farms into context within Ontario, the recent report titled Benchmark Perspectives for the Ontario Swine Industry has been used. The Benchmark study estimated that swine farrow to finish farms represent about 57% of the production systems used in Ontario and typically market over 68% of the province s annual hog sales. The results from this Benchmark study also showed that farrow to finish farms are usually small (more than 50% had assets worth $500,000 or less), carry modest debt levels (only 12% had debt levels greater than 66% of asset base), and were profitable the majority of the time. The Industry Benchmark study was conducted in the fall of Summary of Industry Trends This report focuses on the financial and production performance of the various swine farms surveyed. It should be noted however, that frequently the results from the six farms who participated in the

4 project continuously are used to describe the industry because they appear to be representative of the larger survey sample i.e. in terms of size, production, and etc., and they provide consistency when would looking at farm changes over time. Some key summary points are: i) Increased Pig Numbers - Sow numbers for all farms surveyed grew from 133 to 215 sows. For the six farms that participated in ODAP continuously, sow numbers increased from 179 in 1995 to 236 in This is an annual growth rate of 7.9%. Coupled with this expansion in sow numbers, weaner and finisher marketings increased from 3,362 to 3,926 head for the six farms. The range in sow numbers for the six farm group varied between 70 and 440 in ii) Productivity Measures - For the group of 6 farms, the number of litters per sow has been increasing slightly from 2.21 in 1995 to 2.38 in 1998 while the number of piglets weaned per litter has remained relatively constant during this time varying between 9.06 and Weaning weights have remained relatively constant around 6.5 to 6.8 kilograms. These trends in productivity are consistent with the survey average for all farms. iii) Swine Enterprise Profitability - On a per pig basis for the six continuous farms, net income fluctuated from $38.26 to -$10.43 while expenses remained relatively constant varying between $ and $146 per head during the four years. The survey average also had a huge range in profitability per pig ranging from $31.05 to -$ The year in which swine farms had the highest net farm income and the highest swine enterprise income was 1997 but this was followed by the disastrous year of 1998 which saw whole farm and the swine enterprise incomes the lowest. While this report focusses on a relatively small number of farms, a comparison to an OMAFRA swine budget confirmed the poor financial returns experienced by farmers in 1998 (losing $17 per pig). In terms of cost of production, the average break even cost appears to be $1.42 per kilogram which is slightly higher than most industry estimates of $1.35 per kilogram. iv) Balance Sheet Changes - When assets and liabilities were reviewed, the six farm group increased assets on average from $1.1 million in 1995 to $1.4 million in This increase in assets represents a 6.8% growth rate per year. However, debt grew faster at an annual rate of 16.6%, fuelled in part by the expansion of herds, buildings and land. Actual debt levels rose from $511,044 in 1995 to $851,116 in As a result, equity expressed as a proportion of total assets declined from 54.1% in 1995 to 39.9% in For the survey average, equity decreased from 60.5% to 48.2%. Between 1997 and 1998, the farms in the survey average lost $143,389. The average Return on Equity over the 4 year period was 8.0% for the six farms but yearly returns varied between approximately 20% and -13%. The survey average group reported similar results with an average yearly Return on Equity of 7.9%. v) Relationships and Trends - As found in previous studies, there remains tremendous variability in revenue and expenses between farms which impacts greatly on profit per pig. Why so much variability prevails (generally 40% to 50% difference in costs between farms) is unclear. It is speculated that the primary causes are level of technology used and managerial factors such as genetics, feed, and labour commitment but the specific reasons are unknown. However, despite this variability in farm revenue and costs, when expenses are averaged by year for the farms surveyed, yearly fluctuations were modest on a per pig produced basis. The range in yearly expenses per pig went from $ in 1996 to $ in 1997 (i.e. $11.16 difference). There was considerably more variability in revenue from

5 year to year. The range in yearly revenue per pig varied between $ in 1998 and $ in 1997 (i.e. $40.64 per pig difference). In terms of capital investment versus pork produced per sow, it would appear that the average kilograms of pork produced per sow is 1,500 to 1,600 while the capital investment required to produce that amount of pork is roughly $450,000. While there is no statistical difference between capital investment and kilograms of pork produced per sow, average values do show a steady increase over the 1995 to 1998 time period. When expenses per pig were examined, there was no statistical difference in costs between large farms (more than 150 sows) and small farms (less than 150 sows). This result continues to mystify the author because most cost of production studies show lower per pig costs on larger farms. The common reasons stated for lower swine costs on larger farms include: greater purchasing power (i.e. lower input costs); lower overhead costs (i.e. spreading fixed costs over more animals), and better resource alignment (i.e. feed milling and labour). Unfortunately the results did not confirm any of these reasons for possible lower costs on larger farms. To analyse the financial health on pig farms a rating system was developed incorporating the three parameters of percent equity, current ratio, and debt serviceability. When the resulting ratio was examined over time, there was no statistical difference in the financial health of the farms studied despite the record low prices of However, when average current ratio s are examined, they fall from 1.87 (1995) to 0.88 (1998). This means the liquidity on many farms did indeed deteriorate quite severely over the 4 year period. Also equity did fall substantially between 1997 and 1998 which caused the debt to asset ratio to increase from 0.39 in 1995 to 0.52 in 1998 and clearly indicates an eroding balance sheet for the yearly average farm. Still, for the most part, the farms discussed in this report have been profitable except under the severe price drop of hhh

6 Table of Contents Pg. # 1.0 Introduction Ontario Data Analysis Project Ontario Swine Sector Swine Farm Descriptive Characteristics Demographics The Swine Enterprise Land and Cropping Practices Farm Revenue and Expenses Revenue Expenses Net Farm Income Assets, Liabilities and Equity Assets Liabilities Financial Analysis Financial Ratios Comparison to Ontario Ministry of Agriculture and Rural Affairs (OMAFRA) Budget Relationships and Further Trends Revenue Trends Trends in Expenses Swine Enterprise Profitability Capital Investment and Productivity Comparison of Expenses Changes in Financial Health Relationship Between Debt and Farm Profitability Consistency of Farm Profitability Summary Pig Production and Productivity Financial Performance Financial Trends...26 Ridgetown College, University of Guelph Page i

7 List of Figures Figure 1: Ontario Farm Cash Receipts, Figure 2: Cash Receipts of Ontario Livestock and Livestock Products, Figure 3: Average Number of Sows...3 Figure 4: Market Hog and Weaner Marketings...4 Figure 5: Litters per Sow...4 Figure 6: Average Weaning Weight...5 Figure 7: Total Cash Revenue...7 Figure 8: Total Farm Expenses...7 Figure 9: Feed Purchases per Pig...8 Figure 10: Swine Enterprise Expenses per Head...8 Figure 11: Farm Revenue, Expenses and Net Income...9 Figure 12: Swine Enterprise Net Income...9 Figure 13: Net Farm Income: Swine Enterprise Versus Rest of Farm...11 Figure 14: Assets - Ending Market Value...12 Figure 15: Current Farm Assets...12 Figure 16: Total Year End Farm Debt...13 Figure 17: Debt Structure...14 Figure 18: Percent Equity...14 Figure 19: Capital Turnover (years)...16 Figure 20: Return on Equity...16 Figure 21: Revenue per Pig Over Time...18 Figure 22: Expenses per Pig Over Time...19 Figure 23: Profit per Pig Over Time...19 Figure 24: Capital Investment Versus Kg Pork Produced per Sow...20 Figure 25: Per Cent Difference in Total Expenses per Pig...21 Figure 26: Financial Health Rating...23 Figure 27: Yearly Depiction of Farm Profitability and Debt Level...23 Figure 28: Consistency of Farm Profitability...24 Ridgetown College, University of Guelph Page ii

8 List of Tables Table 1: Land Tenure: Acreage Owned, Rented and Share-cropped...6 Table 2: Cropping Mix: Percentage of Land in Corn, Soybeans, Wheat, Barley and Other Crops...6 Table 3: Yearly Swine Enterprise Income - $ Per Pig...10 Table 4: Yearly Farm Balance Sheet (Ending Market Values For Survey Average)...15 Table 5: Comparison of 1998 Swine Enterprise Budgets - OMAFRA vs Survey Average...17 Table 6: Comparison of Expenses by Farm Size...21 Table 7: Criteria Used in Developing Financial Health Scoring Ratio...22 Table 8: Summary of Financial Ratios (Ending)...25 Ridgetown College, University of Guelph Page iii

9 List of Appendices Appendix A - Whole Farm Income Statements...27 Appendix B - Swine Enterprise Income Statements...33 Appendix C - Whole Farm Balance Sheets...39 Ridgetown College, University of Guelph Page iv

10 ONTARIO SWINE FARMS ONTARIO DATA ANALYSIS PROJECT INTRODUCTION 1.1 Ontario Data Analysis Project Ridgetown College began collecting farm level financial data on Ontario farms in fiscal 1990 with an initial survey of farrow-to-finish swine operations. The following year, data was gathered from cash crop and beef farms as well. This report summarizes the data from between 12 and 54 swine farms that were involved with the project during the 1995 to 1998 time period. To analyse the swine data, a group average for all farms surveyed per year has been used plus there were six farms that have participated continuously and their results are reported as well. This report will attempt to describe the swine farms in some depth and the main descriptive areas focussed on include: demographics; farm financial performance; and swine and crop enterprise productivity. For the descriptive portion of the text, frequently the 6 farm average is reported along with the survey average for all farms visited. When reviewing the various graphs please note that the average of all farms participating for each of the four years is referred to as the survey average while the results from the group of six farms is denoted as the six farm average. 1.2 Ontario Swine Sector In 1998, Ontario total farm cash receipts were $6,902 million and hog sales totalled $589.7 million dollars or 8.5% of total farm cash receipts. Over the 1995 to 1998 time period, hog sales as a percentage of total farm cash receipts varied from a low of 8.5% in 1998 to a high of 11.4% in Government Payments 2.8% Other 4.1% Turkeys 3.0% Eggs 5.0% Hens & Chickens 11.8% Dairy 34.5% Crops 43.9% Livestock 53.3% Hogs 16.0% Calves & Cattle 25.5% Figure 1 Ontario Farm Cash Receipts, 1998 Figure 2 Cash Receipts of Ontario Livestock and Livestock Products, 1998 Ridgetown College, University of Guelph Page 1

11 In 1998, hog sales represented 16.0% of Livestock and Livestock Product sales, which is third in value behind dairy product sales (34.5%), and cattle and calf sales (25.5%). Graphically, the relative percentages of cash receipts are illustrated in Figures 1 and 2. Unquestionably these two figures denote the prominence of the hog industry and demonstrate it is an important player in the overall Ontario farm economy in terms of cash receipts. Swine production is centred in Southern and Western Ontario i.e. southwest from Simcoe and Peel counties. According to 1996 Census numbers, these two regions accounted for 93% of Ontario s pig numbers. Approximately 71% of pigs were reported in the 7 county region of Oxford, Middlesex, Lambton, Huron, Perth, Wellington, and Waterloo. The two counties reporting the largest number of pigs were Huron (14.3%) and Perth (16.3%). Ridgetown College, University of Guelph Page 2

12 2.0 Swine Farm Descriptive Characteristics 2.1 Demographics In 1998, the average age of the main decision maker on the six farms was 46 years (range from 37 to 56) and they had been raising pigs for 21.8 years. For the six continuous ODAP participants, nearly two thirds had completed post-secondary education. These operators considered themselves to be full-time farmers and reported very little, if any, off-farm income. In terms of labour requirements, the six farms vary from one full-time family member (usually the owner) to three full-time non-family employees. Most of the farms rely on other family members (spouse and children) for some or all of the remaining labour needs. The business structure types for the six farms were divided evenly between sole proprietors and spousal partnerships, and corporations (business and family). There was little difference in decision maker age, education, labour requirements and business structure type for the survey average of all swine farms. 2.2 The Swine Enterprise During the four years of this study, the average number of sows for the group of 6 farms increased steadily from 179 in 1995 to 236 in This is an annual growth rate of 7.9%. The range in sow numbers for these farms actually varied between 70 and 440 in These six farms were slightly larger on average than the survey average for all farms sampled each year. Sow numbers for all farms surveyed grew from 133 to 215. Avg # of Sows Six Farms Survey Avg Figure 3 Average Number of Sows Ridgetown College, University of Guelph Page 3

13 To analyse total pig marketings the data for the six farms has been used since it is the most complete. Total marketings on these six farms have increased from 3,362 animals in 1995 to 3,926 in 1998 (annual increase of 4.2%). On average, total marketings were comprised of 75% market hogs and 25% weaner pigs sales although there were a couple of farms that did not sell any weaner pigs, but instead sold breeding stock. Total pigs produced in 1998 (based on market hog equivalents and including breeding stock) was 18.2 pigs per sow. Marketings (hd) 4,000 3,000 2,000 1,000 0 Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Mkt Hogs Weaners Figure 4 Market Hog and Weaner Marketings Marketings per farm for the six farm group increased over the 4 year period although there was a slight decrease in Also, it would appear that farms are finishing more hogs as market hog sales increased by 7.7% per annum, while weaner sales decreased by 4.4% from 1995 to In terms of sow productivity for the group of six farms, the number of litters per sow increased slightly from 2.21 in 1995 to 2.38 in Overall, the number of litters per sow has increased 2.0% annually for the six farms. The survey average (all ODAP swine farms) increased slightly at 0.4% per annum. Litters per Sow Survey Avg Six Farms Figure 5 Litters per Sow The number of pigs weaned per litter has remained consistent over the four years of the study. For the six farms, the highest number occurred in 1995 with 9.22 weaned per litter and the lowest occurred in 1997 at 9.06 pigs weaned per litter. Ridgetown College, University of Guelph Page 4

14 The average weaning weights have increased over the 4 year study period for the six farms as seen in Figure 6. The average weight increased modestly from 6.54 kg in 1995 to 6.83 kg in 1998 due primarily to producers weaning a couple of days later. As might be expected, weaning weights for the entire group of farms sampled was much more variable as shown in the adjacent graph. Weaning Weight (kg) Survey Avg Six Farms Figure 6 Average Weaning Weight 2.3 Land and Cropping Practices The land base cropped for most operations remains relatively small at approximately 200 to 250 acres with between 50% and 60% of the land base used to grow corn. The average amount of land cropped by the group of six farms varied between 199 and 243 acres over the four year study period and the proportion of land owned as a percentage of total acreage, increased from 57.9% in 1995 to 70.2% in For the survey average, acres cropped only increased modestly (17 acres) but there was a trend towards more owned land and less rented land. On an individual farm basis, the acreage of the farms ranged from 100 to 530 in 1998 with the larger swine units generally having the larger land base. To analyse changes in crop mix the six farm average will be used. Over the four year period, total corn acreage (dry grain and high moisture) increased from 57% of the crop mix in 1995 to 69% in Dry corn increased (doubled) from 15% to 32% throughout the study period while high moisture corn fell from 44% in 1996 to 37% in Soybean production decreased from a high of 32% in 1996 to 21% in This drop in soybean production was unexpected, given the province wide trend of increased soybean acreage. Other changes in crop acreage of limited significance were: wheat acres increased from 4% to 11% over the four years; barley and other crop acreage falls from 2% and 7% respectively in 1995 to 0% in the last three years. Tables 1 and 2 below show the land tenure and crop mix for the four years of the study for both the six farm and the survey average groups. Ridgetown College, University of Guelph Page 5

15 Table 1 Land Tenure: Acreage Owned, Rented and Share-cropped 6 Farm Sample Owned Rented Share-cropped Total Acreage Cropped Survey Average Owned Rented Share-cropped Total Acreage Cropped Table 2 Cropping Mix: Percentage of Land in Corn, Soybeans, Wheat, Barley and Other Crops 6 Farm Sample High Moisture Corn 42% 44% 41% 37% Grain Corn 15% 19% 26% 32% Soybeans 31% 32% 26% 21% Wheat 4% 5% 7% 11% Barley 2% 0% 0% 0% Other 7% 0% 0% 0% Survey Average High Moisture Corn 35% 39% 29% 26% Grain Corn 17% 22% 36% 24% Soybeans 34% 26% 24% 24% Wheat 10% 13% 7% 9% Barley 2% 0% 3% 1% Other 2% 0% 20% 15% Ridgetown College, University of Guelph Page 6

16 3.0 Farm Revenue and Expenses Income statements for both the six farm and the survey average groups can be seen in Appendix A. 3.1 Revenue In general, farm revenue increased between the years of 1995 and 1997 and then dropped in For the six farm group, total cash revenue increased 5.7% annually from 1995 to 1998 peaking in 1997 at $839,920. On average, total farm revenue increased over the 4 year period by 4.6% per annum. Revenue from swine increased significantly (17.8% annually) between 1995 and 1997 and then dropped substantially as a result of low prices in Crop revenue decreased by 1.3% per annum. The income category other increased dramatically from $5,405 in 1995 to $39,711 in 1998 as farms looked for other ways to increase the total farm income. There was basically no revenue from other livestock ventures. Figure 7 Total Cash Revenue Unsurprisingly, government payments accounted for only 1% to 2% of total cash revenue (given high commodity prices and few new government programs) received by swine farms across the four years. Swine revenue for the survey average (all farms) followed a similar pattern of increasing revenues from 1995 to 1997 and then dropping in Some of these farms reported substantial income from other livestock enterprises. Ridgetown College, University of Guelph Page 7

17 3.2 Expenses For the six farms, total farm expenses increased steadily over the four year period from $494,013 in 1995 to $718,154 in Of total farm expenses, direct livestock expenses (feed, livestock purchases, animal health, livestock building maintenance) accounted for 58% to 64%; direct crop expenses - 7% to 11%; hired non-family labour - 5% to 7%; other cash expenses - 13% to16%; and non-cash expenses (primarily depreciation) was 6% to 11%. $800,000 $600,000 $400,000 $ $200,000 $0 Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Livestock Crop Hired Labour Other Cash Exp Non-Cas Figure 8 Total Farm Expenses The survey average group is similar in terms of expense item breakdown, with 53% to 62% in direct livestock expenses, slightly more in crop expenses and other cash expenses and less for hired labour. Many of the survey average farms are family operated and they do not hire any additional labour. Feed represents the largest portion of the total direct livestock expense. The six farm group and the survey average reported similar portions of the total expense devoted to non-cash items, other cash expenses, and animal health. Feed purchases per head have been volatile over the four year study period for the six farm group. Purchased feed has increased from $65 in 1995 to $76 in 1998 and peaked at $87 in Home grown feed has decreased from $15 in 1995 to $8 per head in $ / HD $120 $100 $80 $60 $40 $20 $0 Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Feed Purchases Home Grown Figure 9 Feed Purchases per Pig The survey average for total feed cost was generally higher than for the six farms. Total feed expenses ranged from $101.77/hd in 1995 to $95.64 in stands out from the other three years with home grown feed accounting for very little of the total feed expense. Ridgetown College, University of Guelph Page 8

18 Swine enterprise expenses decreased on a per pig basis by an average of 2.3% per year during the last 3 years of the study for the six farms. This represents an average decrease in costs of $10.16 per head from 1996 to The largest absolute decrease in costs was for feed, which decreased by an average of $13.18 per head from 1996 to This is related to the decrease in crop prices. Expenses in 1995 were slightly lower than, or similar to, those incurred in 1998 with the exception of other cash expenses which were higher in $ / HD $160 $140 $120 $100 $80 $60 $40 $20 $0 Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Feed Vet and Health Hired Labour Buildings Other Cash Non Cash Figure 10 Swine Enterprise Expenses per Head For the survey average, expenses were generally higher than for the six farm group with the exception of Expenses decreased 1.0% per annum over the four years down $5.82/hd from 1995 to 1998 and down $19.61 from 1996 to Net Farm Income For the six farms, the highest total farm revenue and net farm income were reported in 1997 at $868,807 and $164,324 respectively. The lowest net income was reported at -$92,129 in The average for all farms surveyed also reported the highest revenue and net income in 1997 at $706,666 and $136,204. The lowest net farm income was in 1998 at -$18,396. $ $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 ($200,000) Revenue Expenses Net Income Figure 11 Farm Revenue, Expenses and Net Income Ridgetown College, University of Guelph Page 9

19 Net income on a per pig basis has fluctuated tremendously from a high of $38.26 in 1997 to -$10.43 in 1998 for the group of six farms. Net income in 1995 and 1996 were $29.15 and $21.15 respectively. Expenses have remained fairly constant between $ and $146 per head. For the survey average, net income varied from $31.05 in 1996 to -$17.71 in Total expenses were slightly more variable for the survey average with a range between $133 and $155 per head. $ / HD $40.00 $30.00 $20.00 $10.00 $0.00 ($10.00) ($20.00) Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Figure 12 Swine Enterprise Net Income Figure 12 provides a pictoral view of the net income in the swine enterprise for the six farm group and the survey average described above. To further illustrate the difference in profitability between years within the swine enterprise, Table 3 was constructed. The numbers presented within this table are for all the farms surveyed in the various study years. From this table one can see the variable yearly revenue stream and except for 1996, total expenses were about $135 per pig. Given the huge swings in market revenue it is unsurprising to see net enterprise income vary by over $48 from one year to the next. What this table does not show is interest charges and depreciation costs increasing because of either barn expansion or increased borrowings to offset the poor cash returns of Table 3 Yearly Swine Enterprise Income - $ Per Pig Revenue Feed Cost Interest Charges Depreciation Other Expenses Total Expenses Net Enterprise Income (17.71) Ridgetown College, University of Guelph Page 10

20 In terms of average cost of production it would appear the 4 year average is approximately $135 to $140 per pig. Assuming an 87 kilogram carcass and a average index of 1.08 index, the breakeven cost per kilogram dressed is about $1.42 per kilogram. This seems a little high given that most industry analysts think Ontario s cost of production is closer to $1.30 to $1.35 per kilogram dressed. When total net farm income is broken down into its components of swine and other, the swine enterprise comprises a significant amount of the net farm income (or loss) over the four year study period. Except in 1998, swine enterprise net income met, or exceeded 89% of net farm income. In 1998, swine enterprise income only accounted for 49% of net farm income. $200,000 $150,000 $100,000 $ $50,000 $0 ($50,000) ($100,000) Swine Rest of Farm Net Farm Income For the survey average, the swine enterprise income typically accounted Figure 13 Net Farm Income: Swine Enterprise for 71% or more of the net income (or Versus Rest of Farm loss). Ridgetown College, University of Guelph Page 11

21 4.0 ASSETS, LIABILITIES AND EQUITY Balance Sheets for the four years of the study are found in Appendix C. 4.1 Assets $1,600,000 $1,400,000 $1,200,000 $1,000,000 $ $800,000 $600,000 $400,000 $200,000 $0 Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Long Term Assets Current Assets Figure 14 Assets - Ending Market Value Over the four year period, growth in assets was experienced by all the farms surveyed as total assets increased by 11% per year with total ending assets valued at $1,387,531 in Long term assets for the survey group grew by 12.9% per annum. Total ending assets increased 6.8% annually for the six farms ranging from $1,113,942 in 1995 to $1,415,542 in The asset category called long term assets represented about 75% to 80% of all assets reported and they increased annually by 7.6% over the four year period. The survey average group saw large annual increases in buildings (18.7%), machinery and equipment (13.1%) and land (13.0%). Breeding livestock increased 3.6% annually. For the six farms breeding livestock saw an increase of 9.8% annually, followed by buildings (9%), machinery and equipment (7.2%) and land (3.3%). Market livestock represented 48.7% of total current assets for the six farms. This asset group increased at an annual rate of 8.8%. The category Other current assets, accounted for about 33.9% of the total current assets. Market livestock values were consistently higher for the six farm group than the survey average. Lower values for market livestock were reported in 1998 due to the low prices received at year end. $400,000 $300,000 $ $200,000 $100,000 $0 Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Market Livestock Crop Other Figure 15 Current Farm Assets Ridgetown College, University of Guelph Page 12

22 4.2 Liabilities For the six farms, total farm debt increased by 16.6% per year during the study period. Long term debt increased by 16.7% per year and current debt increased at an annual rate of 16.5% per year. The survey average group reported current debt increasing by 37.0% per annum while long term debt increased by 16.3%. Total farm debt increased by 22.3% per year over the four years for this group. $ $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Long Term Debt Current Debt Figure 16 Total Year End Farm Debt Total farm debt grew steadily during the 4 year study period for both study groups. The six farms reported total debt of $511,044 in 1995 which increased to $851,116 in This is an increase of 16.6% per annum. The survey average also grew from $379,609 in 1995 to $746,997 in The amount of debt decreased slightly in 1998 to $718,223. Overall, it was an increase of 22.3% per annum. 100% 80% 60% % 40% Debt structure i.e. current debt to total liabilities, on a proportional basis, has remained relatively consistent for the six farms. Current debt accounted for approximately 25% to 26% of total debt with the exception of 1996 when it fell to 19.3%. 20% 0% Long Term Debt Current Debt Figure 17 Debt Structure Ridgetown College, University of Guelph Page 13

23 Equity, expressed as a proportion of total assets declined steadily over the four years of the report for both study groups i.e. 6 farm and survey average. Some of the decrease in 1998 can be attributed to the low prices in 1998 and low inventory values reported on the balance sheet. For the survey average, equity decreased from 60.5% to 48.2%. For the six farms it decreased even more from 54.1% in 1995 to 39.9% in % Equity 65% 60% 55% 50% 45% 40% 35% 30% Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Six Farms Survey Avg Figure 18 Percent Equity To further understand some of the changes occurring at the farm level Table 4 was constructed which summarizes yearly ending farm balance sheets for the entire survey group. From looking at this table it is possible to see that farms expanded in 1996 and again in Market livestock, breeding livestock, buildings and land all increased substantially along with mortgage debt in The percent increases from 1995 to 1996 for various assets and liabilities are: market livestock - 84%; buildings - 24%; land - 38%; and mortgage debt - 71%. Likewise in 1997 some assets and liability classes increased again. Building values increased by 41%, land increased by 17%, operating loans went up 90% while term debt stayed constant. This increase in assets values ceased in Market livestock values dropped by 33%; breeding livestock also dropped by 27%; while building and land values remained relatively constant. In 1998, the operating loan and mortgage debt only increased marginally. Unsurprisingly, equity levels increased in 1996 (24%) and 1997 (13%) before tumbling in 1998 (18%). Liabilities grew quickly in 1996 and 1997 but didn t change much in From reviewing this table the unanticipated result is not that equity fell between 1997 and 1998, but rather that total liabilities didn t increase more as prices and profitability plummeted late The majority of the equity loss between 1997 and 1998 was due to falling livestock values not increased debt levels from cumulative weeks of low pork prices. Ridgetown College, University of Guelph Page 14

24 Table 4 Yearly Farm Balance Sheet (Ending Market Values for Survey Average) Assets Market Livestock 81, , ,338 98,957 Total Current Assets 206, , , ,080 Breeding Livestock 51,913 72,125 81,062 59,467 Buildings 218, , , ,819 Land 297, , , ,978 Total Long Term Assets 755,339 1,005,500 1,230,669 1,146,451 Total Assets 961,940 1,297,122 1,559,693 1,387,531 Liabilities Operating Loan 56,138 49,517 93, ,962 Total Current Liabilities 110, , , ,739 Mortgage Debt 200, , , ,719 Total Long Term Liabilities 269, , , ,484 Total Liabilities 379, , , ,223 Equity 582, , , ,308 Ridgetown College, University of Guelph Page 15

25 5.0 FINANCIAL ANALYSIS 5.1 Financial Ratios Capital turnover, in years, was calculated by dividing total assets by Value of Farm Production VFP, where VFP is calculated as total farm revenue net of feed and livestock purchases. The average capital turnover for the four year period is 4.2 years for the survey average. The six farm group had an average capital turnover of slightly better at 3.7 years. Years Survey Avg 3.5 Six Farms Figure 19 Capital Turnover (years) Return on Equity 25% 20% 15% 10% 5% 0% -5% -10% Six Farms Survey Avg Return on Equity (ROE) was calculated by dividing net farm income by average farm equity. This return includes return to operator labour and management. ROE for the four year study period averaged 8.0% for the six farms. Return on Equity (ROE) for 1995 to 1997 was in the 9% to 20% range. The ROE for 1998 was negative 13.7%. -15% Figure 20 Return on Equity The survey average group reported an average ROE of 7.9%. Return on Assets (ROA) was calculated by adding interest expense to Net Farm Income and dividing by Average Total Assets. This return again includes return to operator labour and management. Over the four years of the study the ROA averaged 7.1% for the six farm group and fluctuated between 8% and 13%. The survey average group reported an average ROA of 6.9%. Ridgetown College, University of Guelph Page 16

26 5.2 Comparison to Ontario Ministry of Agriculture and Rural Affairs (OMAFRA) Budget In order to compare the costs between the survey average and other industry cost of production benchmarks, the December 1998 Swine Enterprise Budget, released by OMAFRA, has been used. The OMAFRA budget is based on a 180 sow farrow to finish operation marketing 3,600 pigs per year. The swine revenue in the OMAFRA budget has been adjusted to reflect the 1998 average price whereas the survey average represents actual values received in the 1998 year. Adjustments have been made to account for changes in inventory, accounts receivable and accounts payable in the values reported for the survey average. Table 5 Comparison of 1998 Swine Enterprise Budgets - OMAFRA vs Survey Average OMAFRA Swine Budget Survey Average Swine Revenue ($/pig) $115.77* $116 Feed Cost Depreciation Operating Loan Interest Term Interest Labour Other Expenses Total Expenses Net Profit (Loss) ($17.02) ($17.71) * average 1998 price From reviewing Table 5 it can be seen that while revenue and expense totals align there are three main discrepancies in the values reported. These differences are: feed costs; term interest, and labour expense. The exact reasons for these variances are unclear. With respect to the difference in feed cost, some of the difference could be attributed to the fact many of the farms use homegrown feed which is difficult to track depending on the feeding system used. The difference in labour cost is likely a function of most of the survey farms using family labour whereas the OMAFRA budget would be using all hired labour. In summary, it would appear that the survey average and the OMAFRA swine enterprise budget align well in terms of overall income and expense totals but individual cost items such as feed and labour vary considerably. This is not surprising given the variability that exists in farm level data. Ridgetown College, University of Guelph Page 17

27 5.3 Relationships and Further Trends Revenue Trends To analyze trends in revenue per pig and the amount of variability that exists within this parameter Figure 21 was compiled. Each spot in the yearly plotting of swine revenue represents a farm. It should be noted that individual farm data which appeared to be an anomaly was left out of the analysis for the next three scatter graphs i.e. Figures 21, 22 and 23. Thus, the trend line which is the yearly group average may be slightly different from the entire group average as reported in Appendix B. Revenue $/pig Figure 21 Revenue per Pig Over Time As stated earlier in the report some years had considerably more participants than others, thus the difference in number of dots graphed. Still, despite this unevenness of producer numbers, it is interesting to note the general trend in revenue per pig. It starts at $135 in 1995 and climbs in 1996 and 1997 and then plummets in Surprisingly, the standard deviation (a measure of the variability about the mean )is relatively consistent amongst years at approximately $13 to $15 per pig. Statistically, 68.26% of the farms have a range in revenue per pig of plus or minus $13 to $15 about the yearly mean price. Ridgetown College, University of Guelph Page 18

28 5.3.2 Trends in Expenses As can be seen from looking at the scatter of expenses, there is much more variability despite the average prices being somewhat similar at approximately $120 to $130 per pig. The standard deviation of $19 to $22 per pig is much larger than the values reported for swine revenue. This statistically confirms the amount of variability in expenses between farms. Expenses ($)/pig Figure 22 Expenses per Pig Over Time Swine Enterprise Profitability Unsurprisingly, the profit per pig follows a similar trend to that found with revenue per pig. Profit per pig peaks in 1997 at close to $32/head but plummets in 1998 to become slightly negative. Profit $/pig In a recent study done by the 0 Economic Research Service of the USDA, three critical management -10 strategies were found to be used by -20 small and medium sized farms and they were: using production strategies Figure 23 Profit per Pig Over Time that control cost; actively marketing products; and adopting effective financial strategies. The controlling of variable, fixed, or other economic costs (which provide a return to the unpaid labour, machinery and equipment and other assets used in production) is a main feature of top-performing farms. They also found top performing farms actively marketing their livestock and crops and used marketing strategies like forward contracting and spreading sales over the year. In terms of effective financial strategies successful farms were more likely to maintain cash reserves and have purchased additional insurance like crop insurance to supplement basic catastrophic events. These findings support the 3 graphs depicted in Figures 21, 22 and 23. From reviewing the expense graph it would appear that given the huge variability that exists on farms, exercising Ridgetown College, University of Guelph Page 19

29 tight cost control would indeed appear like an appropriate strategy to use. Likewise, the comments made in the USDA study about actively marketing products also seems logical because while Ontario has a relatively homogenous pricing system variability in revenue does exist meaning some operators are better able to extract additional funds out of the market place. With respect to effective financial strategies to avoid catastrophic events it would appear most farms attempt to accomplish this because yearly current ratios are quite strong i.e. close to 2.0. A current ratio at this level means for every $1 of current debt there is $2 of current assets to cover it. 5.4 Capital Investment and Productivity $600,000 Figure 24 shows the increasing capital investment on the study farms and the $500,000 higher levels of productivity as seen by the right axis depicts kilograms of pork $400,000 produced. The actual number of kilograms $300,000 of pork produced by year is: ; ; ; and 98 - $200, Statistically, there was no relationship between these two variables $100,000 over time when a multi-variable regression $0 was used. The reasons for this are unclear Capital Investment kg pork because it was speculated that with greater capital investment swine productivity as Figure 24 Capital Investment Versus Kg Pork measured by kilograms of pork would Produced per Sow increase. Unfortunately, this was not the case. Capital Investment ($) kg pork produced/sow 5.5 Comparison of Expenses In order to determine if any relationship existed between farm size and costs, sample farms surveyed in each year were divided into 2 categories according to number of sows i.e. less than or equal to 150 sows and greater than 150 sows. Average expenses were calculated for each group. Because of small farm numbers the year 1996 was deleted from the graph. Ridgetown College, University of Guelph Page 20

30 The columns represent whether large farms had higher expenses or lower. For example, in 1995 the larger farms had expenses which were 12.5% higher than the small farms. In contrast, in 1997, the large farms had expenses which were 9.1% lower than the small farms. These results can be seen in Figure 25. % difference in total expenses/pi 15.00% 10.00% 5.00% 0.00% -5.00% % % Figure 25 Per Cent Difference in Total Expenses per Pig To provide greater detail on the comparison of expenses on large and small farms, Table 6 was compiled. Table 6 Comparison of Expenses by Farm Size Average Expenses for < or = to 150 sows > 150 sows Difference # Total Farms # Farms >150 sows 1995 $ $ % $ $ % $ $ % 16 8 From Figure 25 and Table 6 it can be seen that results are very inconclusive regarding whether larger farms have lower costs than smaller sized operations. Exact reasons are unclear but perhaps not enough large farms participated in the study to thoroughly evaluate differences in cost structures. 5.6 Changes in Financial Health To analyze the potential change in financial health of swine farms over time, a rating system was developed based on the three criteria of debt servicing ability, current ratio and % equity. Each farm was given a score of 1 to 4 for their debt servicing ratio, current ratio, and % equity. Thus, the maximum score a farm could receive was 12 and this represented high risk. Ridgetown College, University of Guelph Page 21

31 Low scores can be interpreted to mean low risk based on the three criteria. Recall that debt servicing means the amount of revenue needed to pay all farm debt. For example, if a farm s debt service ratio is.3, this means for every $1 worth of revenue, $0.30 cents is needed to pay debt commitments in the form of interest and principal. The table below displays the possible scores based on debt servicing, equity and current ratio. It should be noted that while high debt servicing ratios and a low current ratio and % equity generally mean poor financial health, because of various risk management strategies e.g. contracting and hedging, this may not necessarily be the case in all situations. Also, be aware that the scores assigned to the various debt servicing ratios, current ratios and % equities are arbitrary and are not necessarily the industry norm. Table 7 seen below summarizes the various scoring criteria. Table 7 Criteria Used in Developing Financial Health Scoring Ratio Score Debt Servicing Ratio % Equity (Ending) Current Ratio # of Farms per year High Risk 4 >.30 <25% < in % in % in 1997 Low Risk 1 <.10 >75% > in Graphically the results can be seen in Figure 26. As shown with previous 10 scatter graphs, there exists considerable variability in farm 8 financial health based on the three 6 variables of debt servicing ability, current ratio, and % equity. However, 4 the results do follow expectations in that one would expect the rating to 2 decline (i.e. financial health to improve) in the good years of and 1997 and the rating would increase in 1998 (i.e. financial health Figure 26 Financial Health Rating to weaken). The average rating by year was as follows: ; ; ; and Perhaps one of the more interesting observations to see from this graph is the relative consistency of farm numbers above and below the group average in both good and bad years from a price perspective. There was no statistical relationship between survey years for the financial health rating. Financial Health Rating Ridgetown College, University of Guelph Page 22

32 5.7 Relationship Between Debt and Farm Profitability To determine if there was any relationship between debt and farm profitability a graph was developed depicting these two variables by year. Statistically, there was very limited evidence to suggest any relationship existed. Less than 12% of the variability in net farm income could be explained by farm debt level in any given year. Yearly R 2 values were as follows: %; %; % and %. This means that in most years over 95% of the variability in net farm income cannot be explained by simply looking at overall farm debt levels. Total Net Farm Income $400,000 $300,000 $200,000 $100,000 $0 -$100,000 -$200,000 50% 50% 50% 50% 0% 100% 0% 100% 0% 100% 0% 100% % Debt Figure 27 Yearly Depiction of Farm Profitability and Debt Level 5.8 Consistency of Farm Profitability Is there any consistency to farm 25% profitability?, is a frequently asked question. 20% To unravel this question, the data from the 6 farms which participated in the ODAP study 15% consistently were sorted by year to determine 10% if there was any consistency in farm 5% profitability. The measure used to determine 0% profitability was return on assets. The results were disappointingly mixed and can seen in -5% Figure 28. The most profitable operation, -10% Farm 1 Farm 2 Farm 3 Farm 4 Farm 5 Farm 6 farm 6, did remain highly profitable over the 4 year study period. Likewise the farm with the lowest return on assets, farm 5, had poor profitability over the entire period. But for thefigure 28 Consistency of Farm Profitability remaining 4 farms, their profitability seemed to vary year to year. Farms performing well in one year would have poor results the next. Return on Average Assets 30% ROA average 95 ROA average 96 ROA average 97 ROA average 98 In summary, it had been hoped that there would be some consistency in farm profitability. While this may be the case for farms at the extremes of profitability (high or low) it would appear that most operations do suffer from inconsistency in profitability. Perhaps given the biological nature of pig farming and the roller coaster hog price swings it is extremely difficult for operations to obtain stable profitability. Ridgetown College, University of Guelph Page 23