3/10/ Much less important today 2. Less important t today 3. Equally important 4. More important today 5. Much more important today

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1 Economic Evaluation of Swine Health and Disease Interventions 2009 Iowa Pork Regional Conferences Dr. Derald Holtkamp, DVM, MS Iowa State University The conventional wisdom that served the industry reasonably well for the last two or three decades is no longer adequate The biology of the pig and the management fundamentals that lead to high levels of productivity i have not changed But, the relative importance of things that can be managed has changed drastically February, 2009 Outline of Presentation 1) The relative contribution of market hog, corn and soybean meal prices and disease to profit risk 2) Impact of health how changes in wean-to-finish productivity measures affect profitability as diet costs rise 3) The trade-off between throughput and producing a healthy, high-quality wean pig that converts feed well Outline of Presentation 1) The relative contribution of market hog, corn and soybean meal prices and disease to profit risk 2) Impact of health how changes in wean-to-finish productivity measures affect profitability as diet costs rise 3) The trade-off between throughput and producing a healthy, high-quality wean pig that converts feed well Relative to 2000, rate the importance of managing: Feed ingredient price risk 2. Less important t 4. More important 5% 21% 74% Relative to 2000, rate the importance of managing: Market hog price risk 2. Less important t 4. More important 16% 16% 68% 1

2 Relative to 2000, rate the importance of managing: Disease / health Nearby monthly market hog futures prices (high-low-close, ) 2008) 2. Less important t 4. More important 23% 14% 64% $30 to $80 / cwt Source: $50 to $90 / cwt Profit Delta 10 is a crude, standardized measure of profit risk contributed by variability in prices or production measures Calculated as the change in profitability over the range of the price or performance measure evaluated divided into 10 equal increments The range may be observed or predicted and is for some specified period of time The change in profitability may be estimated with the aid of a budgeting model A breed-to-finish budgeting model for a 1000 sow herd was used for estimates presented here (will discuss in more detail later in presentation) Assumes all else equal That is, all other parameters are held at baseline levels Profit delta 10 for market hog prices Range of market hog prices from 2005 to 2008 is $90 - $50 = $40 Divide by 10 to get 10 equal increments of $4 Profit Delta 10 is the change in profit ($/sow/year) when market hog prices change by $4 Change is profit is from budgeting model A large negative Profit Delta 10 means greater profit risk is attributed to variability (observed or predicted) in the price or production measure ( ) 2008) PROFIT ($ / SOW / YE EAR) () () () $4 change in market hog price /sow ( ) Variability in market hog prices contributed less to profit risk in compared to Profit delta 10 = -$211 ( ) Nearby monthly corn futures prices (high-low-close, ) 2008) $1.85 to $7.50 / bu. PROFIT ($ / SOW / YE EAR) ().30 to.80 / lb. carcass weight in.05 increments ( ).50 to.90 / lb. carcass weight in.05 increments ( ) $1.80 to $3.20 / bu. () () The steeper the line, the greater the profit risk attributed to variability in market hog prices!! ( ) Source: 2

3 Nearby monthly soybean meal futures prices (high-low-close, ) 2008) Variability in corn and SBM prices contributed much MORE to profit risk in compared to $150 to 450 / ton Represents the change in all diet costs (lactation, gestation, gilt, wean-to-finish) for a change in corn and SBM prices equal to one-tenth of the range $140 to 375 / ton () Profit delta 10 = -$72 ( ) Corn prices vary from $1.80 to $3.20 / bu. & SBM prices vary from $140 to $375 / ton ( ) Corn prices vary from $1.85 to $7.50 / bu. & SBM prices vary from $150 to $450 / ton ( ) Source: () () ( ) In fact, the contribution of variability in corn and soybean meal prices to profit risk has been on par with market hog prices contribution since e 2005 Profit delta 10 for ( ) (Diet costs) How much does disease contribute to profit risk? Profit delta 10 for ( ) (Diet costs) PROFIT ($/SOW/YEAR) () () Corn prices vary from $1.85 to $7.50 / bu. & SBM prices vary from $150 to $450 / ton.50 to.90 / lb. carcass weight in.05 increments PROFIT ($/SOW/YEAR) () () Profit delta 10 = -$20 (Prewean mortality) Corn prices vary from $1.85 to $7.50 / bu. & SBM prices vary from $150 to $450 / ton.50 to.90 / lb. carcass weight in.05 increments Prewean mortality varies from 5% to 20% in 1.5% increments () () The individual contributions of variability in prewean mortality, wean-to to-finish mortality and feed conversion to profit risk all are much less than the contribution of variation in market hog, corn and SBM prices PROFIT ($/SOW/YEAR) (Diet costs) Profit delta () 10 = -$20 (Prewean mortality) Profit delta 10 = -$29 () (Wean-to-finish mortality) Profit delta 10 = -$50 () (Wean-to-finish feed conversion) Corn prices vary from $1.85 to $7.50 / bu. & SBM prices vary from $150 to $450 / ton.50 to.90 / lb. carcass weight in.05 increments Prewean mortality varies from 5% to 20% in 1.5% increments Wean-to-finish mortality varies from 0% to 15% in 1.5% increments Wean-to-finish feed conversion varies from 2.2 to 2.95 in increments However, the combined contribution of variability in prewean mortality, wean-to-finish mortality and feed conversion to profit risk approaches that of variation in market hog, corn and SBM prices PROFIT ($/SOW/YE EAR) () () () Profit delta 10 = -$101 (Diet costs) In many production systems, the contribution of disease to profit risk is likely greater than the contribution of market hog, corn and SBM prices Corn prices vary from $1.85 to $7.50 / bu. & SBM prices vary from $150 to $450 / ton.50 to.90 / lb. carcass weight in.05 increments Prewean mortality, wean-tofinish mortality and wean-tofinish feed conversion combined 3

4 Implications for risk management Manage the margin!! Importance of managing feed prices paid is now on par with managing market hog prices received The relative contribution of variation in diet costs to profit risk has increased substantially since 2005 Outline of Presentation 1) The relative contribution of market hog, corn and soybean meal prices and disease to profit risk 2) Impact of health how changes in wean-to-finish productivity measures affect profitability as diet costs rise 3) The trade-off between throughput and producing a healthy, high-quality wean pig that converts feed well Disease is still a major contributor to profit risk Impact of health - How has higher diet costs increased the importance of a healthy pig? We know that as diet costs rise, disease related losses of wean-to-finish FCR are increasingly gycostly Can we generalize to say that rising diet costs increase the negative impact of disease on profitability? No, the financial impact depends upon which productivity measures are affected most When diet costs rise disease that degrades feed conversion is: 1. Much less costly 2. Less costly 3. Equally costly 4. More costly 5. Much more costly Much less cost... Less costly Equally costly 14% More costly 24% 62% Much more cost... When diet costs rise disease that degrades early mortality is: When diet costs rise disease that degrades late mortality is: 1. Much less costly 2. Less costly 3. Equally costly 4. More costly 5. Much more costly 10% 5% 38% 38% 10% 1. Much less costly 2. Less costly 3. Equally costly 4. More costly 5. Much more costly 14% 27% 59% Much less cost... Less costly Equally costly More costly Much more cost... Much less cost... Less costly Equally costly More costly Much more cost... 4

5 When diet costs rise disease that degrades average daily gain is: 1. Much less costly 2. Less costly 3. Equally costly 4. More costly 5. Much more costly Much less cost... 0% Less costly 5% Equally costly 33% More costly 24% 38% Much more cost... A wean-to-finish budgeting model is used to evaluate how profitability is influenced by productivity changes attributed to disease Changes in profitability resulting from changes in Wean-to-finish FCR Wean-to-finish mortality Wean-to-finish ADG Evaluated for two scenarios: 1. Low wean-to-finish weighted average diet cost ($150/ton) 2. High wean-to-finish weighted average diet cost ($200/ton) About the budgeting model used A wean-to-finish budgeting model for a single turn of a 1000 head barn was used The model accounts for all costs and revenues How Costs Accrue in Wean-to-Finish Model Fixed Per pig placed Per lb. of gain Fixed Costs Wean pig costs costs Feed costs Revenue Per lb. sold Assumption for feed conversion scenarios Wean-to-finish feed conversion increases from 2.50 to 2.75 pounds of feed/pound of gain Change in profitability due to disease that impacts feed conversion is greater as diet costs rise (1000 head) Assumption for mortality scenarios -$4,550 -$6,067 Wean-to-finish mortality increases from 5% in baseline to 10% Early mortality scenario assumes 10% of gain has occurred when pigs die Late mortality scenario assumes 90% of gain has occurred when pigs die 5

6 Change in profitability due to disease that impacts early mortality is less as diet costs rise (1000 head) Change in profitability due to disease that impacts late mortality is ~unchanged as diet costs rise (1000 head) -$6,504 -$6,504 -$6,504 -$6,504 -$2,914 -$324 -$2,185 -$243 Assumption for average daily gain scenarios Wean-to-finish average daily gain decreases from 1.75 to 1.65 pounds per day Baseline market weight is 271pounds Market weight under reduced ADG scenarios is 256 pounds Assumes no change in the average market hog price Change in profitability due to disease that impacts average daily gain is less as diet costs rise (1000 head) -$6,606 -$6,606 -$2,600 -$3,467 As diet costs rise, managing diseases that reduce feed conversion become much more important! Feed conversion more Late mortality ~equal Early mortality less Average daily gain - less More Less Outline of Presentation 1) The relative contribution of market hog, corn and soybean meal prices and disease to profit risk 2) Impact of health how changes in wean-to-finish productivity measures affect profitability as diet costs rise 3) The trade-off between throughput and producing a healthy, high-quality wean pig that converts feed well 6

7 Relative to 2000, rate the importance of managing: Throughput in the breeding herd 2. Less important 4. More important 0% 14% 48% 29% 10% Relative to 2000, rate the importance of managing: Weaned pig quality 2. Less important 4. More important 20% 20% 60% Under the old paradigm producers were rewarded for focusing on throughput Measured by PSY lbs. of pork marketed per sow per year, etc. Higher throughput means fixed costs are spread over more pigs or pounds of pork sold Throughput is still important, but relatively less so When diet costs rise, the rewards are shifting towards producing a healthy, high-quality weaned pig Specifically, a high-quality weaned pig that converts feed efficiently Consider the tradeoff between Reduced throughput via higher pre-wean mortality (PWM) and Producing a healthy, high-quality group of wean pigs that have an improvement in the average feed conversion ratio (FCR) The tradeoff between PWM and FCR for alternative diet costs is evaluated with a budgeting model using annual profitability as the outcome Changes in profitability resulting from simultaneous increase in both 1. PWM (worse) 2. Wean-to-finish FCR (better) Evaluated for two scenarios: 1. Low diet costs 2. High diet costs (50% higher than low diet costs) Includes lactation, gestation, gilt and wean-to-finish diets About the budgeting model used A breed-to-finish budgeting model for a 1000 sow herd was used 7

8 The model accounts for all costs and revenues Fixed Costs costs Feed costs Revenue Fixed Costs Wean pig costs costs Feed costs Revenue How Costs Accrue in Breeding Herd Model Fixed Per sow inventoried Per pig born alive Per weaned pig How Costs Accrue in Wean-to-Finish Model Fixed Per pig placed Per lb. of gain Per lb. sold Cost is transferred from breeding herd model Assumption for prewean mortality and feed conversion scenarios Prewean mortality increase from 11% to 15% Wean-to-finish feed conversion increases from 2.50 to 2.60 pounds of feed/pound of gain Sacrificing 4% PWM for a 0.1 improvement in average wean-to-finish FCR is a losing strategy when diet costs are low but a winning strategy when diet costs are high ($ / Year) $3,000,000 $2,500,000 $2,000,000,000,000 Revenue, $2,841,295 -$127,689 Revenue, $2,713,596 Profit, $634,953 Feed cost, $1,115,308 cost, $150,422 Fixed cost, $271,879 Change in profit due to 4% incr. in PWM & 0.1 decr. in FCR - Low vs. high diet costs Low feed cost High feed cost -$91,184 -$29,843 Profit, $605,110 Feed cost, $1,024,214 cost, $143,662 Fixed cost, $271,879 $15,704 Revenue, $2,841,295 -$127,689 Revenue, Profit, $5,777 $2,713,596 Profit, $21,481 -$136,642 Feed cost, $1,672,962 Feed cost, $1,536,320 cost, $150,422 Fixed cost, $271,879 cost, $143,662 Fixed cost, $271,879 Take-homes Our old conventional wisdom is no longer valid The relative contribution of variation in diet costs to profit risk has increased substantially since 2005 The contribution of diet costs is now on par with that of variability in hog prices Manage the margin Reevaluate marketing contracts Focus more resources and time on feed ingredient acquisition and pricing Diversity is still a good risk management strategy,000 Weaned pig cost, $668,732 Weaned pig cost, $668,732 Weaned pig cost, $740,254 Weaned pig cost, $740,254 Low feed cost, prewean Low feed cost, prewean High feed cost, prewean High feed cost, prewean mortality = 11%, feed mortality = 15%, feed mortality = 11%, feed mortality = 15%, feed conversion = 2.6 conversion = 2.5 conversion = 2.6 conversion = 2.5 Weaned pig cost Fixed cost cost Feed cost Profit Revenue Take-homes Focus on throughput is relatively less rewarding as diet costs rise -- placing a healthy, high-quality wean pig that will convert feed efficiently is relatively more rewarding as diet costs rise Reevaluate SOP s for managing substandard pigs We debated what to do with substandard wean pigs when corn was $2.50 and SBM was $150 the decision gets easier as diet costs rise» Best option is still to prevent them, but if not possible remove them early Reevaluate agreements and employee bonus programs that provide incentives for maximizing the number of pigs (and not quality) weaned Reevaluate weaning age (with our without remodeling or adding to existing facilities As diet costs rise, improvements in feed conversion, ADG and mortality may offset the reduction in the number of pigs weaned or cost of remodeling or construction? Take-homes As diet costs rise, managing diseases that reduce feed conversion become much more important Shift money spent on disease intervention (vaccines, pharmaceuticals and management) Spend more for diseases with relatively large impact on feed efficiency Spend less for diseases with relatively large impact on ADG and mortality Make better measurements! 8