Cost of Production Benchmark for Ontario, Manitoba and Iowa

Transcription

1 Cost of Production Benchmark for Ontario, Manitoba and Iowa Prepared for: Prepared by: Randy Duffy and Ken McEwan November 2007

2 Acknowledgements The report Cost of Production Benchmark for Ontario, Manitoba and Iowa was made possible due to the generous financial support of Ontario Pork through funding from the Canada-Ontario Research Development (CORD) Program. Appreciation and thanks are extended to the following individuals for their assistance with this project: Richard Vyn who contributed Section 5.0 on Farmland Prices; Lynn Marchand who contributed to the Literature Review in Section 3.0 as well as editing; Janet Boekhorst and Amy Ferguson who gathered data and contributed background information; and Carolyn Lucio for contributing her word processing skills. Funding support for this project This project is funded in part through contributions by Canada and the Province of Ontario under the Canada-Ontario Research and Development (CORD) Program. The Agricultural Adaptation Council administers the CORD Program on behalf of the province.

3 Executive Summary History has shown that production advantages for Ontario include good sow productivity, high health status, a well-established swine system and infrastructure, plentiful land and feed grains, and close proximity to the U.S. border for exporting. Production disadvantages include regulatory pressures, good land is expensive, urban areas are placing pressure on good agricultural acres and more recently, the exchange rate and potentially decreased processing capacity due to Maple Leaf s business decision to leave Ontario. Production advantages for Manitoba include plentiful and relatively cheap land, low input prices especially for feed grains, close proximity to the U.S. border for exporting, high health status, good sow productivity and more recently Maple Leaf s business decision to focus it s pork operations in the province and intention to double-shift it s Brandon plant. Production disadvantages include regulatory pressures, labour availability, the current environmental moratorium, and more recently the exchange rate. Production advantages for Iowa include cheap input prices especially for feed grains, good hog prices due to packer demand, low production expenses, and a well-established swine infrastructure. Disadvantages for Iowa have included regulatory and environmental pressures, and expensive land. The impact of increased ethanol production and it s subsequent increased demand for corn has increased corn prices making it more expensive to feed pigs. Based on the model results for 2002 to 2006, it would appear that the greatest profit potential for farrow-to-wean based on $C margin/pig was in Iowa followed by Manitoba and Ontario. Iowa had the highest revenue and margin per piglet. Manitoba had slightly lower total expenses than Ontario for the key input bundle. However, the question of which region has the advantage in farrow-to-wean really depends on the relative efficiencies of the breeding herds. In the study model, it is assumed that Ontario and Manitoba wean pigs/sow/year while Iowa weans 19.8 pigs/sow/year. If this gap of 1.48 pigs/sow/year were to widen, then the advantage clearly shifts to Ontario and Manitoba relative to Iowa. Haley (2004) observed that Canadian breeding operations were significantly more efficient than U.S. herds in terms of pigs/litter and pigs/breeding animal/year. In 2003, Haley observed that the gap between Canada and the U.S. was 3.4 pigs/animal/year up from 1.9 pigs/animal/year in Haley states that the U.S. breeding herd has become more efficient over time with the exit of small, inefficient farrow-to-finish operations. Anecdotal evidence suggests that sow productivity differences are small, if any, when comparing large, commercial herds between Ontario, Manitoba and Iowa. Based on the model results for 2002 to 2006, it would appear that the greatest profit potential for finishing hogs based on $C margin/hog was in Iowa followed by Manitoba and Ontario. Iowa also had the highest revenue and highest expenses. Manitoba had the lowest feeder pig costs and total expenses for the key input bundle but Ontario had feed grain costs similar to Iowa during the period. With Iowa having the higher margin, this is University of Guelph, Ridgetown Campus i

4 important as it has allowed producers in that region to make more money and pay down debt. The question of which region between Ontario and Manitoba has the advantage in finishing market hogs depends on the relative hog prices and feed grain costs used since most other input costs are relatively similar. The exception is land costs where Manitoba has a clear advantage. According to industry sources, even labour rates are relatively similar between the two provinces although Manitoba is feeling some effects from the Alberta labour market. With the Canadian dollar approximately at par with the U.S. dollar, it would appear that the greatest profit potential currently (as of October 1, 2007) for producing piglets is in Manitoba while the greatest profit potential for finishing market hogs is in Iowa. For finishing market hogs, Ontario appears to be comparable with Manitoba. Again, this depends on which prices are used to compare hog revenue between Ontario and Manitoba. Sensitivity analysis using October 1, 2007 data in the farrow-to-wean model showed that if sow productivity was the same in all three regions, then Iowa would have the advantage followed by Manitoba and Ontario. If sow productivity and building & equipment costs were the same in all three regions, then Manitoba would have the advantage followed by Iowa and Ontario. Sensitivity analysis using October 1, 2007 data in the finishing model showed that if feed conversion was the same in all three regions, then Iowa would have the advantage followed by Manitoba and Ontario. If feed conversion and building & equipment costs were the same in all three regions, then Iowa would have the advantage followed by Manitoba and Ontario. However, at present, after total costs of production are accounted for, none of the three regions are profitable in either raising piglets or finishing market hogs. University of Guelph, Ridgetown Campus ii

5 Table of Contents Page No. 1.0 Introduction Study Objectives Methodology Literature Review Farmland Prices Partial Cost of Production Margin Model Farrow-to-Wean (1,200 Sows) Finishing (1,000 head) Model Results Using Historical Data Farrow-to-Wean (1,200 Sows) Finishing (1,000 head) Greatest Profit Potential Farrow-to-Wean (1,200 sows) Finishing (1,000 head) Observations and Summary...55 Appendix 1 Feed Consumption Assumptions...58 Appendix 2 Model Results Using Historical Data...60 References...71 University of Guelph, Ridgetown Campus iii

6 List of Tables Table 1 MAFRI Farrow-Finish Budget Assumptions, Table 2 Manitoba Farrow-to-Wean Budget Assumptions, Table 3 Manitoba Finishing Budget Assumptions, Table 4 Ontario Farrow-to-Wean and Finishing Swine Enterprise Budgets, Table 5 ODAP Results Table 6 Average Profitability Comparison of Ontario and U.S. Pig Production...15 Table 7 Historic Average Farmland Prices...19 Table 8 Current Farmland Prices and Costs per Hog by Region...19 Table 9 Farrow-to-Wean Model...23 Table 9.1 Farrow-to-Wean Model Under Assumption of Similar Breeding Herd Productivity...29 Table 9.2 Farrow-to-Wean Model Under Assumption of Similar Breeding Herd Productivity and Building and Equipment Costs...31 Table 10 Finishing Model...33 Table 10.1 Finishing Model Under Assumption of Similar Feed Conversions...39 Table 10.2 Finishing Model Under Assumption of Similar Feed Conversions and Building, and Equipment Costs...41 Table 11 Farrow-to-Wean Model using Historical Data from Table 12 Finishing Model using Historical Data from List of Figures Figure 1 Ontario Average Farrow to Finish Net Returns ($/pig)...7 Figure 2 Ontario Average Farrow to Wean Net Returns ($/pig)...8 Figure 3 Ontario Average Farrow to Feeder Net Returns ($/pig)...9 Figure 4 Ontario Average Finishing Pig Net Returns ($/pig)...10 Figure 5 Estimated Average Feeder Pig Finishing Returns in Iowa ($C/pig)...13 Figure 6 Farmland Price Trends (Cdn$/acre)...20 Figure 7 Piglet Revenue ($/piglet)...42 Figure 8 Variable and Fixed Costs ($/piglet)...44 Figure 9 Feed Grain Costs ($/piglet)...45 Figure 10 Margin (S/piglet)...46 Figure 11 Hog Revenue ($/hog)...47 Figure 12 Variable and Fixed Costs ($/hog)...49 Figure 13 Feeder Pig Costs ($/head)...50 Figure 14 Feed Grain Costs ($/hog)...50 Figure 15 Margin ($/hog)...51 University of Guelph, Ridgetown Campus iv

7 1.0 Introduction There has been much written about the movement from traditional agriculture to the new agri-food system. At the production level, there is general consensus that farms will gravitate toward one of two production structures. The first type of production structure will be similar to many current farms in that undifferentiated commodity products will continue to be produced. Only low-cost producers will survive in this sector. Technological change will continue to decrease real commodity prices. The desire of producers to maintain living standards comparable to non-farm peers will force those remaining in this sector to operate farms, on average, larger than is currently the case. The second category of producers will produce differentiated, identity preserved products that focus on certain product attributes and consumer demands. The ability to negotiate contracts, manage risk, and use information technology will be essential for the production of differentiated products. The combination of agricultural industrialization, trade liberalization, information technology, decoupled farm programs, environmental concerns, and consumer demands for food quality, safety, convenience, and nutrition will lead to unprecedented change in the agricultural production and food processing and distribution sectors. Successful farm operations are likely to be those that develop strategies which allow them to survive and prosper in this changing environment. Given this industry trend towards production units of two sizes, there is a desire by some producers to know: Where is the lowest cost of production in North America for the production of hogs? This is important because hog production capital is relatively mobile and there can be dramatic cost differences between various jurisdictions. Currently in Ontario, there is considerable interest by producers to feed pigs in the U.S. Midwest because of possible cost advantages (e.g. low priced corn and soybeans) and stronger packer demand (i.e. higher hog prices). Further, the announcement (October 12, 2006) that Maple Leaf plans on restructuring and possibly selling its Burlington hog slaughtering plant by the end of 2009 has also raised interest in feeding pigs south of the Canadian/U.S. border. University of Guelph, Ridgetown Campus 1

8 2.0 Study Objectives The overall objective of this project is to investigate cost of production between the three jurisdictions of Ontario, Manitoba and Iowa. Each one of these regions are significant pork producers within the North American market (e.g. the state of Iowa routinely produces close to 25% of all hogs marketed in the U.S.). The specific objectives of this project are to: (i) (ii) (iii) Develop a cost of production model that analyzes cost and profitability differences between Ontario, Manitoba and Iowa. To model potential differences between the various jurisdictions a 1,200 sow farrowing unit and a 1,000 head finishing barn will be used. The models will be sensitive to changes in feed costs, interest rates, labour costs, building costs and other input costs; Determine which jurisdiction offers the greatest potential for hog farm profitability. Historical input costs will be entered in the model to simulate past profitability between the three pork production areas; Provide insights into the production advantages and disadvantages associated with each production area. Land costs will not be factored into the models due to the complications of variable land values between regions and within regions. However, a discussion regarding farm land values will be undertaken separately. University of Guelph, Ridgetown Campus 2

9 3.0 Methodology The main steps involved in this project are: (i) Compile price data and input cost data for feed, interest rates, labour, buildings, and etc. for Ontario, Manitoba, and Iowa; (ii) Construct cost of production models for a 1,200 sow farrowing unit and 1,000 head finishing barn with key input variables that can be periodically updated for future monitoring; (iii) (iv) Provide historical and present comparisons between the two production types across the three geographic locations; Discuss differences between the production types and regions. University of Guelph, Ridgetown Campus 3

10 4.0 Literature Review The following section discusses some of the previous research done on estimated costs of production and profitability of swine production in Manitoba, Ontario and Iowa. Manitoba Manitoba is thought to have some of the following historical regional advantages: high health status, good sow productivity, plentiful and low cost land, low input prices specifically feed grains, close proximity to the U.S. border for exporting, and most recently Maple Leaf s business decision to focus pork processing operations in Manitoba. Historical disadvantages have been thought to include: regulatory pressures, plants not running at full capacity, and labour availability. Recently, the exchange rate, environmental moratorium, and the proposed country of origin labeling (COOL) regulations by the U.S. have become issues. Manitoba Agriculture, Food and Rural Initiatives (MAFRI) developed the publication Guidelines for Estimating Swine Farrow-Finish Costs. It is based on assumptions for an operation with 300 sows and 6,204 pigs sold/year. Table 1 shows some of the expense assumptions in the 2006 budget. Table 1 MAFRI Farrow-Finish Budget Assumptions, 2006 Variable $/Hog % of Total Expenses Revenue NA Feed Other Operating Depreciation Investment Labour Total Margin 7.88 NA Source: MAFRI 2006 Note: Investment = land cost, buildings & manure storage, equipment, breeding herd; NA not applicable Table 1 shows a total cost of production of $ for a 113 kg live hog. Of this $127.18, approximately 49.5% was assumed to be feed costs. Feed grains represent 97.5% of total feed ingredient tonnes used in the home mixed feed ingredients used in the budget. The next largest expense category was for other operating at 20.8%. Labour cost represented approximately 12.4%. Revenue has been estimated by using an annual average of the weekly index 100 market hog prices from the MAFRI weekly Manitoba Livestock Market Reports adjusted for annual average carcass weights and an index of University of Guelph, Ridgetown Campus 4

11 109. This market hog price is considered an all-in slaughter value including premiums and discounts. Revenue less total budget costs was then used to estimate a margin. MAFRI s Guidelines for Estimating Swine Farrow-Wean to 5 kg Costs shows the following budget cost assumptions for 2002 to 2006 in Table 2. Piglet revenue has been estimated by taking the annual average of the weekly contract price range low and high for 5 kg isowean pigs from the MAFRI weekly Livestock Market Reports. This piglet revenue less total budget costs was used to estimate a margin. Table 2 Manitoba Farrow-to-Wean Budget Assumptions, Variable ($/pig) Avg Piglet Revenue Feed Labour Other Operating Other Fixed Total Costs Margin Source: MAFRI Livestock Market Reports, Guidelines for Estimating Swine Farrow-Wean to 5 kg Costs Table 2 shows that the average for the 2002 to 2006 period had feed representing about 32.5%, labour 21.2%, other operating 30%, and other fixed expenses 16.2% of total budget costs for farrow-to-wean. MAFRI s Guidelines for Estimating Swine (23 to 113 kg) Finishing Costs showed the following budget cost assumptions for 2002 to 2006 in Table 3. Revenue has been estimated by the same method as mentioned for Table 1. Revenue less total budget costs was then used to estimate a margin. Table 3 Manitoba Finishing Budget Assumptions, Variable ($/hog) Avg Revenue Feed Feeder Pig Labour Other Operating Other Fixed Total Costs Margin Source: MAFRI Livestock Market Reports, Guidelines for Estimating Swine (23 to 113 kg) Finishing Costs University of Guelph, Ridgetown Campus 5

12 Table 3 shows that for the 2002 to 2006 period, feed represented about 41.9%, feeder pig cost was 39%, labour 2.5%, other operating 11.3%, and other fixed 5.3% of total budget costs. In summary, based on the MAFRI swine budgets, Manitoba pig production operations have had varied levels of profitability between 2002 and Farrow-to-wean budgets showed an average loss of $2.20/pig during the time period. Finishing budgets showed an average loss of $5.98/hog during the period. However, the finishing budgets did show profits in 2004 and Ontario Ontario is believed to have some of the following historical regional advantages: high health status, good sow productivity, well-established infrastructure, plentiful feed grains and land, and close proximity to the U.S. border for exporting. Historical disadvantages have been thought to include: regulatory pressures, expensive land, environmental pressures, and increasing pressure from urban areas on good agricultural acres. Recently, the exchange rate, the proposed country of origin labeling (COOL) regulations by the U.S., and Maple Leaf s business decision to focus pork processing operations in Manitoba have become issues. The Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) publishes the Swine Enterprise Budgets. The budgets are updated monthly and establish a net return per pig. These budgets are based on assumptions and market information (Bancroft, 2007). Annual averages for these budgets were obtained from OMAFRA and have been used for this discussion. The results for the farrow to finish budget for 2001 to 2006 are presented in Figure 1. Fixed costs averaged $25.22/pig over the time period displayed while other variable costs averaged $37.36/pig and feed costs averaged $79.65/pig. Feed represented about 53.7% of total costs while fixed costs were 17% and other variable costs about 25.2%. The revenue from the sale of a market hog fluctuated from a low of $ in 2006 to a high of $ in The average net return for the time period shown is $6.05/pig. Figure 1 shows that there has been considerable variability in profits during this time period. University of Guelph, Ridgetown Campus 6

13 Figure 1 Ontario Average Farrow to Finish Net Returns ($/pig) $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 -$ Average Fixed Costs $23.94 $24.66 $26.42 $23.69 $27.40 $25.20 $25.22 Other Variable Costs $37.91 $37.62 $37.57 $35.72 $37.44 $37.92 $37.36 Feed Cost $78.09 $84.93 $87.41 $86.55 $70.03 $70.91 $79.65 Revenue $ $ $ $ $ $ $ Net Return $ $ $14.23 $18.16 $ $2.10 $6.05 Source: Bancroft, OMAFRA OMAFRA also publishes data for farrow to wean budgets as shown in Figure 2. Data is only available for 2002 to The average revenue per pig was $38.14 over the five years. Feed costs averaged $11.65, other variable costs $16.40 and fixed costs $8.34/pig. Feed costs represented about 30.5% of total costs while fixed costs were 21.9% and other variable costs were 43%. The average net return for 2002 to 2006 is $1.75/pig. University of Guelph, Ridgetown Campus 7

14 Figure 2 Ontario Average Farrow to Wean Net Returns ($/pig) $45 $40 $35 $30 $25 $20 $15 $10 $5 $ Average Fixed Costs $8.50 $9.07 $7.54 $9.03 $7.54 $8.34 Other Variable Costs $17.70 $17.51 $15.91 $15.60 $15.30 $16.40 Feed Costs $12.05 $13.09 $12.10 $10.21 $10.82 $11.65 Revenue $39.75 $39.75 $38.40 $37.29 $35.52 $38.14 Net Return $1.49 $0.09 $2.85 $2.44 $1.86 $1.75 Source: Bancroft, OMAFRA Data for farrow to feeder revenue, costs and net returns for 2001 to 2006 is shown in Figure 3. This is for pigs raised to 25kg. Revenue per pig varied from $51.25 in 2003 to $68.00 in 2001, an average of $58.09 over the six years. Feed costs averaged $24.84/pig, other variable costs $23.49 and fixed costs $13.03/pig for the time period shown. Feed costs represented approximately 42.8% of total costs while fixed costs were 22.4% and other variable costs were 40.4%. The average net return per pig for the 2001 to 2006 time period was -$3.27, however, returns ranged from -$13.19 in 2003 to $6.61 in University of Guelph, Ridgetown Campus 8

15 Figure 3 Ontario Average Farrow to Feeder Net Returns ($/pig) $80 $70 $60 $50 $40 $30 $20 $10 $0 -$10 -$ Average Fixed Costs $11.93 $12.18 $14.17 $12.64 $14.52 $12.74 $13.03 Other Variable Costs $24.63 $23.85 $23.70 $22.79 $23.59 $22.40 $23.49 Feed Costs $24.83 $26.13 $26.58 $26.45 $22.41 $22.61 $24.84 Revenue $68.00 $52.00 $51.25 $62.00 $62.50 $52.78 $58.09 Net Return $6.61 -$ $13.19 $0.12 $1.98 -$4.97 -$3.27 Source: Bancroft, OMAFRA Figure 4 shows OMAFRA return data for finishing operations. For the 2001 to 2006 time period, revenue ranged from $131.93/pig in 2006 to $171.45/pig in The average revenue per pig for the time period was $ Feed costs averaged $56.74/pig but varied from $49.49/pig in 2005 to $60.92/pig in Other variable costs and fixed costs averaged $81.71/pig and $11.57/pig respectively for the six years. Feed costs represented approximately 38.3% of total costs while fixed costs were about 7.8% and other variable costs were approximately 55.1%. The average net return for finishing pigs in Ontario for the 2001 to 2006 time period is -$1.73/pig. University of Guelph, Ridgetown Campus 9

16 Figure 4 Ontario Average Finishing Pig Net Returns ($/pig) $175 $150 $125 $100 $75 $50 $25 $0 -$ Average Fixed Costs $12.03 $12.04 $12.22 $10.78 $11.11 $11.24 $11.57 Other Variable Costs $87.18 $83.19 $84.26 $82.25 $80.78 $72.58 $81.71 Feed Costs $53.26 $58.97 $60.92 $60.26 $49.49 $57.56 $56.74 Revenue $ $ $ $ $ $ $ Net Return $ $ $20.23 $10.83 $6.63 -$9.45 -$1.73 Source: Bancroft, OMAFRA Table 4 shows the % of total cost of production that certain expenses represent for 2006 Ontario farrow-to-wean and finishing swine enterprise budgets. It shows that feed represented approximately 29.3% of the total expenses to raise a piglet and 40.7% of total expenses to finish a market hog. The next largest expense for farrow-to-wean was labour at 15.7% while the largest expense for finishing was the cost of the feeder pig at 41.2% of total costs. University of Guelph, Ridgetown Campus 10

17 Table 4 Ontario Farrow-to-Wean and Finishing Swine Enterprise Budgets, 2006 Farrow-to- % of Total Finishing % of Total Expense Wean ($/piglet) Expenses ($/hog) Expenses Feed % % Feeder Pig NA NA % Utilities % % Labour % % Health % % Operating Interest % % Repairs & Maintenance % % Depreciation % % Interest on Long Term Debt % % Taxes & Insurance % % Marketing & Trucking NA NA % Other % % Total Expenses % % Source: Pork News & Views, OMAFRA Note: numbers may not add due to rounding. NA not applicable. A survey called the Ontario Data Analysis Project (ODAP), undertaken by the University of Guelph, Ridgetown Campus compiles financial and production data for a small group of Ontario farrow to finish farms. From 1995 to 2005, the average return was $15.49/pig produced (London Swine Conference, 2007 April, pg. 163). This is considerably higher than the $6.05/pig reported in Figure 1 (OMAFRA figures) and shows that actual farm level data indicates that farrow to finish production in Ontario has been quite profitable for this group of farms. While this time frame is longer than the one used in Figure 1 it follows similar trends and presents representative values for actual swine farm costs and revenues. Some justification for this longer time frame is that it accounts for impacts caused by packer strikes, trade action, disease pressure and etc. Table 5 shows that feed costs represented 61.6% of total costs in Ontario Data Analysis Project results for the years. They varied from 57.2% to 68.3%, depending on the year. Average feed costs and total costs for the period were $81.91/pig and $132.89/pig respectively. Depreciation costs averaged 11.4% or $15.16/pig while interest expenses were 6.9% or $9.19/pig. Other expenses were 20% or $26.64/pig. University of Guelph, Ridgetown Campus 11

18 Table 5 ODAP Results Expense ($/pig produced) Average Std Dev Low High Feed Depreciation Interest Other Total Expenses Source: Ridgetown Campus, University of Guelph 2007 Note: Pig produced is a calculated market hog equivalent figure. Std Dev = standard deviation In summary, based on the OMAFRA swine enterprise budgets Ontario pig production systems have had varied levels of profitability between 2001 and Farrow to finish producers received on average about $6.05/pig during the time period, farrow to feeder producers had average returns of -$3.27/pig, and finishing producers averaged -$1.73/pig. Farrow to wean producers averaged $1.75/pig for the 2002 to 2006 time period. However, farm level data of a group of Ontario farrow to finish farms from ODAP recorded profitability of $15.49/pig produced for the 1995 to 2005 time period. Iowa Iowa is thought to have some of the following historical regional advantages: high pig prices, strong packer demand, plentiful and low cost feed grains, low production expenses, and well-established infrastructure. Recently, the exchange rate has become an advantage in terms of export purposes. Historical disadvantages have been thought to include: regulatory pressures, expensive land, and environmental pressures. Recently, ethanol s impact on corn and other feed grain prices has become an issue. John Lawrence of Iowa State University publishes estimated monthly returns for feeder pig finishing in Iowa. The monthly data published by Lawrence was averaged for each year for this analysis. The average yearly returns were then converted to Canadian dollars using the average annual Bank of Canada exchange rate. All references to revenues, costs and returns are in Canadian dollars unless stated otherwise. Figure 5 shows the returns for 2001 to The returns represent [ ] the estimated profit or loss to a producer that purchases feeder pigs and feeds them to a finished weight of 270 pounds. (Lawrence & Ellis). University of Guelph, Ridgetown Campus 12

19 Figure 5 Estimated Average Feeder Pig Finishing Returns in Iowa ($C/pig) $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 -$ Average Other Costs $ $ $95.82 $93.36 $ $ $ Feed Costs $48.09 $51.32 $49.51 $52.57 $39.09 $38.56 $46.52 Revenue $ $ $ $ $ $ $ Net Return $ $10.68 $8.31 $44.97 $17.99 $9.54 $15.09 Source: Lawrence 2007 and Bank of Canada. Monthly estimated return data has been averaged to determine an annual value and is converted to Canadian equivalency using the Bank of Canada annual average exchange rates. Some caution should be exercised with respect to the numbers provided in Figure 5 however. Similar to the OMAFRA Swine Budgets, this budget is also based on assumptions and not actual farm data. The numbers reported in Figure 5 are based on assumptions that were revised in January The assumptions were revised in order to reflect changes that have taken place in the industry such as the following: larger farm sizes; more expensive facilities; increased labour and feed efficiencies; heavier carcass weight; and so on (Lawrence, 2007). Prior to this, the last update had occurred in In Figure 5 revenue/pig ranged from $ in 2002 to $ in 2004 and averaged $ over the six years shown. Compared to results from Figure 4 this is $19.08/pig higher than the average Ontario revenue for a finished hog. Part of this is due to the higher slaughter weight used in the Iowa budget (i.e. 270 pounds or approximately kg in Iowa budget vs Ontario average carcass weight in 2006 of kg divided by 80% dressing percentage equals kg slaughter weight in Ontario (Lawrence, John D.; Bancroft)). Feed costs fluctuated from $38.56/pig in 2006 to $52.57/pig in The average feed cost was $46.52/pig (or 30.5% of total costs) over the six years. Recall from Figure 4 that the average feed cost for Ontario finishing operations was $56.74/pig or 38.3% of total University of Guelph, Ridgetown Campus 13

20 costs. The Ontario feed cost is for a feeder pig that is bigger when it starts in the production system (i.e. 25 kg or 55 pound Ontario feeder pig versus a 45 pound pig in the Iowa budget) and it is slaughtered at a lighter weight (i.e kg in Ontario vs kg in Iowa). This indicates that it costs more to feed a pig in Ontario than in Iowa. Net returns for finishing feeder pigs in Iowa varied from a low of -$10.68/pig in 2002 to a high of $44.97/pig in The average net return over the time period shown is $15.09/pig. However, if the assumptions from 2000 had been used instead of the revised assumptions that started in 2007 the average net return would have been a loss of $US 6.04/pig (Lawrence, 2007, pg. 5). This would equate to -$C 8.21/pig using $1.36 Cdn = $1 US average exchange rate for 2001 to The difference of $23.30/pig (i.e. from - $8.21/pig using the old assumptions to $15.09/pig under the new assumptions) shows how dramatically the end results can vary when the methodology is changed. The average 2001 to 2006 results for Ontario and Iowa from the previous discussions have been summarized in Table 6. The results in this table show that Ontario farrow to finish farms had the highest average net return for the 2001 to 2006 time period of the four Ontario production systems with an average net return of $6.05/pig. In contrast, Iowa feeder to finish farms had average net returns of $C 15.09/pig during this time frame. This is shown in the last column of Table 6. Revenue/market hog is $19.08 higher for finishing farms in Iowa than in Ontario. Again, this is partly because slaughter weights are heavier in the U.S. than in Canada and also because U.S. packers tend to bid more aggressively for hogs (Grier, 2007 February 23, p.39). Although the total cost to finish a pig is similar between Ontario and Iowa, feed costs are approximately $10/pig lower in Iowa. Also, it is important to remember that if previous assumptions had been used, the net return would have been -$8.21/pig for feeder to finish farms in Iowa. University of Guelph, Ridgetown Campus 14

21 Table 6 Average Profitability Comparison of Ontario and U.S. Pig Production Ontario Iowa Farrow Farrow Farrow to Feeder to $C/pig to to Finish Wean 1 Feeder Finish Finish Revenue $38.14 $58.09 $ $ $ Feed Costs Other Variable Costs Fixed Costs Total Costs Net Return $1.75 -$3.27 $6.05 -$1.73 $ Average of 2002 to 2006 only. 2 Based on assumptions revised in Old assumptions resulted in net return of -$8.21/pig. To further illustrate cost differences between Ontario and Iowa, historical corn prices have been used to show the impact on a typical grow-finish ration. For example, it is normally assumed that to finish a market hog from 25 kg to 115 kg approximately 9 to 10 bushels of corn are required. The price data for this analysis was obtained from the Ontario Corn Producers Association and the USDA. The historical price difference between Ontario and Iowa (i.e. basis) over the 2000 to 2005 time period was on average $0.46/bu in favour of Iowa (i.e. Iowa corn prices lower than Ontario) and ranged from $0.62/bu to $0.30/bu. To calculate the basis in this example the Iowa price was converted to Canadian equivalency using the Bank of Canada average exchange rate and subtracted from the Ontario price. Using the 6 year average difference between Ontario and Iowa corn prices (i.e. $0.46/bu) and 9 bushels of corn to finish a hog, the cost to feed a pig in Iowa is $4.14 lower than in Ontario. This difference in corn basis exists between Ontario and other U.S. states as well (e.g. Michigan, Ohio, Indiana, Illinois and etc.). Similarly, historical soybean prices have been higher in Ontario than Iowa which would further increase Iowa s feed advantage. To further support this U.S. feed advantage research conducted by Grier and Mussell of the George Morris Centre also showed that Canada has become a high-cost feeding region compared with the U.S. (Grier and Mussell, 2007 February 23, p. 13). With respect to relative corn prices and basis between Canada and the U.S. this study showed that Ontario and Minneapolis corn prices are very highly correlated, however, relative spreads and basis can change depending on regional supply and demand (2007, p. 11 and 13). Lagging productivity, declining supplies, and rising freight costs are all quoted as contributing to Canada s rising feed costs compared with the U.S. mid-west (p. 13). They conclude that this differential in feed cost can vary month to month and can affect a region s relative competitiveness (2007, p. 14). A group of Ontario, Manitoba, Ohio and Iowa producers known collectively as CIPHER (Comparative Information Process for Hog Enterprise Reporting), however, believe that competitive advantages for raising pigs exist in both Canada and the United States University of Guelph, Ridgetown Campus 15

22 (Procter, 2007 June, pg. 13). While CIPHER data is confidential it is stated that some costs, such as feed and utilities, have been lower in Ohio and Manitoba but Ontario has had lower costs for artificial insemination (Procter, 2007 June, pg. 13). Ohio s feed cost advantage has been decreasing and may disappear completely noted CIPHER s Bev Hill (Procter, 2007 June, pg. 13). These comments lead to the conclusion that it is very difficult to make concrete statements regarding profitability between the two countries other than to say there are probably times when swine production is more profitable in the U.S, than Canada and vice versa. Summary and Observations Access to feed grain is the most important cost driver for pork production as feed grains can represent a significant portion of total production costs. Tables 3 and 6 above showed that for finishing hogs in Manitoba and Ontario, feed costs represented approximately 41.9% and 37.8% of total expenses respectively. Feed, labour, depreciation, and interest on long term debt combined to represent approximately 64% of total expenses to raise a piglet in Ontario in Those same expenses along with the cost to purchase a feeder pig combined to represent approximately 92% of total expenses to finish a market hog in Ontario in Analysis looking at average budget values for 2002 to 2006 showed that feed, labour, and other fixed expenses represented approximately 70% of total expenses to raise a piglet in Manitoba. Feed, feeder pig, labour, and other fixed expenses represented approximately 89% of total expenses to finish a market hog in Manitoba. In summary, industry budgets showed that Ontario farrow to finish operations were the most profitable between 2001 and 2006 out of the four Ontario pig production systems at $6.05/pig. Farrow-to-wean operations averaged $1.75/pig profit while finishing operations averaged a loss of $1.73/head. Actual farm level data suggests that profitability has been $15.49/pig for Ontario farrow to finish farms during the past ten years. The Manitoba budgets showed that between 2002 and 2006, farrow-to-wean operations averaged a loss of $2.20/piglet while finishing budgets averaged a loss of $5.78/hog for the same period. Feeder to finish operations in Iowa had average net returns of -$C8.21/pig to $C15.09/pig depending on the assumptions used. The evidence provided by various studies, while not conclusive, would seem to point towards the U.S. having a more favourable cost of production given their historical feed cost advantage. Higher average market hog revenue has also been an advantage for the U.S.. University of Guelph, Ridgetown Campus 16

23 5.0 Farmland Prices It should be noted that this section was authored by Richard Vyn, Campus Professor, University of Guelph, Ridgetown Campus. Land and buildings account for a significant proportion of capital costs for hog producers, and thus are an important component of the costs of production. In recent years, the cost of land has received considerable attention, due to the trend that has occurred across the continent. Contrary to conventional wisdom, in the face of declining net farm income and tighter margins, farmland prices have continued to increase. Other rationale has been offered to explain this trend, such as low interest rates, increasing urban influence and increasing demand, due in part to legislation such as the Nutrient Management Act in Ontario 1. This trend has occurred to varying degrees in the three jurisdictions that are under consideration in this study. This section outlines the changes in land prices in recent years for Ontario, Manitoba and Iowa. The provincial average prices of land for Ontario and Manitoba are determined based on 2001 Census data and on the provincial average semi-annual farmland price changes as reported by Farm Credit Canada. The land prices are derived starting with Statistics Canada s Census figures for the average per-acre value of land and buildings. These figures are extrapolated across a 12 year period (1995 to 2006) using FCC s percentage changes in market prices over this period. Farmland prices in Iowa were derived from an annual survey conducted by Iowa State University. Historic land prices for all three jurisdictions are provided in Table 7. Iowa farmland prices are also reported in Canadian dollars, based on the average annual exchange rate, for better comparison with prices in Ontario and Manitoba. In Ontario, farmland prices have increased considerably since the mid-1990s, with the average per-acre price across the province doubling between 1995 and In 2006, the average price was just below $4,000 per acre. The top three hog-producing counties in Ontario are Huron, Perth and Oxford. The farmland prices in these counties are well above the average provincial prices, with prices in Huron County around 10% higher while prices in Perth and Oxford counties are 40-50% higher. A substantial amount of hog production also occurs in Middlesex and Wellington counties, where the land prices are 20-25% higher than the provincial average prices. The land price ascent has not been nearly as steep in Manitoba. In this province, the average price of land was $626 per acre in 2006, an increase of about 48% over the average price in The top hog-producing regions are the Eastern and Pembina Valley regions, where land values tend to be much higher than the provincial average. Farmland prices in these regions, which are averaged across census divisions, are % higher than the provincial average land prices. 1 This legislation imposed minimum land requirements for livestock producers for manure application purposes, based on the number of animal units. University of Guelph, Ridgetown Campus 17

24 The trend in farmland prices in Iowa is similar to that of Ontario. Aside from two years in the late 1990s, land prices have experienced significant annual increases. Average farmland prices across the state increased by 100% between 1995 and A significant proportion of hog production occurs in the Northwest and Central regions of the state. The top five hog-producing counties include Hardin, Sioux, Plymouth, Carroll and Hamilton. Farmland prices in these counties tend to be 15-30% higher than average prices across the state. Hog production in all three jurisdictions under investigation in this study tends to occur in regions with higher than average land prices. After accounting for the exchange rate, the land prices in Iowa are quite comparable with those in Ontario. Land prices in Manitoba are considerably lower, which gives hog producers in this province a comparative advantage in terms of land costs over producers in Ontario and Iowa. However, this advantage is tempered to some degree by the fact that this land is not as productive, and as such, hog producers may need more land to meet their feed requirements. The cost of land on a per-hog basis can be compared across these three jurisdictions. Based on an average Ontario farrow-to-finish hog operation, and, for simplicity, assuming that operations are of similar size in Manitoba and Iowa, the cost of land per hog can be determined. A survey conducted in Ontario found that the average hog operation had 217 sows, marketed 4,182 hogs, and was 343 acres in size 3. Assuming that all land was purchased at the current average regional prices, the average annual interest paid over a 30-year amortization period based on a 6% interest rate was divided by the number of hogs marketed to determine the cost of land per hog. These costs, which are provided in Table 8, indicate that the cost of land for hog operations in Ontario is, on average, $2-3 per hog more than land costs in Iowa and $12-13 per hog more than land costs for hog operations in Manitoba. The substantial difference in farmland prices for Manitoba as compared to Ontario and Iowa is most likely due to the greater productive capacities in these two jurisdictions and the resulting ability to generate greater per-acre levels of revenue. The higher prices for farmland in Ontario are most likely reflective of the influence of major urban centres, which is significantly greater in Ontario than in Iowa or Manitoba. In addition, the Nutrient Management Act in Ontario, legislated in 2002, may have contributed to the higher land prices, as the minimum acreage requirements for livestock producers has resulted in increased demand for farmland. Prior to 2002, the farmland prices (in Canadian $) in Ontario and Iowa exhibited very similar trends. However, since 2002 there has been some divergence evident, with farmland prices in Ontario increasing at a greater rate than in Iowa (see Figure 6) 4. 2 This increase is based on prices in US$. The corresponding increase in Cdn$ was just over 75%. 3 ODAP Data, The strengthening Canadian dollar may also have contributed to this divergence. University of Guelph, Ridgetown Campus 18

25 Table 7: Historic Average Farmland Prices a Average Land Prices Year Ontario Manitoba Iowa (Cdn$/acre) (Cdn$/acre) (US$/acre) (Cdn$/acre) 1995 $1, $ $1, $1, $2, $ $1, $2, $2, $ $1, $2, $2, $ $1, $2, $2, $ $1, $2, $2, $ $1, $2, $3, $ $1, $2, $3, $ $2, $3, $3, $ $2, $3, $3, $ $2, $3, $3, $ $2, $3, $3, $ a 2006 data was not available for Iowa. Table 8: Current Farmland Prices and Costs per Hog by Region a Region Land Price Land Cost/Hog (Cdn$/acre) (Cdn$/acre) Ontario Huron County $4, $14.08 Perth County $5, $18.96 Oxford County $5, $17.96 Middlesex County $4, $15.82 Wellington County $4, $15.70 Manitoba Census Division 2 $1, $3.51 Census Division 3 $1, $4.05 Census Division 4 $1, $3.26 Iowa Hardin County $4, $13.23 Sioux County $4, $14.13 Plymouth County $4, $13.23 Carroll County $4, $12.92 Hamilton County $4, $14.79 a Current prices are 2006 values for Ontario and Manitoba and 2005 values for Iowa. University of Guelph, Ridgetown Campus 19

26 Figure 6: Farmland Price Trends (Cdn$/acre) $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ Ontario Manitoba Iowa University of Guelph, Ridgetown Campus 20

27 6.0 Partial Cost of Production Margin Model This section will discuss a partial cost of production (cop) margin model comparing a 1,200 sow farrow-to-wean operation and a 1,000 head finishing operation between Ontario (ON), Manitoba (MB), and Iowa (IA). Cost of production for individual operations can vary greatly between regions but also even within the same region. There are other sources that estimate a complete cost of production for the various regions. For example, Ontario Ministry of Agriculture Food and Rural Affairs (OMAFRA), Manitoba Agriculture Food and Rural Initiatives (MAFRI), and Iowa State University (ISU) calculate estimated cost of productions for some or all of the following swine operations: farrow-to-finish, finishing feeder pigs, farrow-to-wean, and wean-tofinish. Therefore, to avoid repetition there is no use in trying to duplicate what these sources do. The intention of this study is to estimate a partial cost of production margin for the regions. It should be noted that this margin model is by no means a complete and perfect cost of production. Rather, it is a budget based on assumptions and not actual farm data. It is intended to reflect relative cost and profitability differences between the three regions for a set bundle of key input factors. The model s intent is also to provide one more tool for benchmarking and to provoke discussion and encourage individual producers to examine their own cost of production. Note that the assumptions used in the model are debatable but could potentially be used for benchmarking purposes. Values for prices and costs in the model are from the October 1, 2007 time period approximately. However, these values can be updated in the future using current figures at the time to generate the relative regional differences. The bundle of key input factors include: feed (specifically feed grains) feeder pig prices (in the case of finishing) labour building & equipment costs (depreciation and interest) land values interest rates These input factors were chosen based on examining historical budgets to see which inputs are the largest expense items and/or potentially vary the most between regions. Recall that Table 4 showed that feed, labour, depreciation, and interest on long term debt combined to represent approximately 64% of total expenses to raise a piglet in Ontario. Table 4 also showed that feed, feeder pig, labour, depreciation and interest on long term debt combined to represent approximately 92% of total expenses to finish a market hog in Ontario. Table 2 showed that feed, labour, and other fixed expenses represented approximately 70% of total expenses to raise a piglet in Manitoba. Table 3 showed that feed, feeder pig, labour, and other fixed expenses represented approximately 89% of total expenses to finish a market hog in Manitoba. University of Guelph, Ridgetown Campus 21

28 Other inputs such as health program costs, utilities, manure disposal, trucking & marketing, breeding stock replacement and breeding costs are also important and can vary between regions but tend to be similar in relative magnitude. Breeding stock replacement costs and cull breeding stock revenue are dependent upon individual producer cull rates. For an estimate of these other expenses please refer to the sources indicated above (i.e. OMAFRA, MAFRI and ISU). Note that in the initial proposal for this study, it was stated that land costs would not be included in the model due to the complications of variable land values between regions and within regions. Please refer to section 5.0 for a discussion of land values for the regions. An attempt to incorporate an estimated land cost per pig was included in the model for information purposes. 6.1 Farrow-to-Wean (1,200 Sows) The first model examines a 1,200 sow farrow-to-wean operation. Current model estimates for October 1, 2007 can be seen in Table 9. The figures are presented in both $/pig and total $ figures based on the assumed production from 1,200 sows. The following assumptions were used in the model. Productivity Number of sows: 1,200 Pigs weaned/sow/year: ON: (2.3 litters/sow/year multiplied by 9.25 pigs weaned/litter) MB: (2.3 litters/sow/year multiplied by 9.25 pigs weaned/litter) IA: 19.8 (2.2 litters/sow/year multiplied by 9.0 pigs weaned/litter) Sources: industry sources/estimates, ISU Building & Equipment Costs ON: $1,550/sow MB: $1,600/sow IA: $US 1,300/sow Note: Land values are not included. Sources: OMAFRA, MAFRI, ISU, industry sources/estimates Piglet Prices Revenue is calculated as number of sows times pigs weaned/sow/year multiplied by piglet price. Note that revenue does not include revenue from cull piglets or cull breeding stock. Cull revenue is dependent upon individual producer cull rates and can vary widely. Sources: ON OMAFRA Weekly Hog Market Facts (weaned pig formula value), OMAFRA Swine Budgets University of Guelph, Ridgetown Campus 22