Chapter Fourteen: SUMMARY AND CONCLUSIONS

Chapter Fourteen: SUMMARY AND CONCLUSIONS Chris Hurt The pork industry is changing rapidly. These changes not only are numerous but they are also complex, and they are threatening to most producers and businesses who operate in the pork industry. These factors make it difficult for industry participants to make decisions about how to ensure a more promising future. This publication helps to fill some of the gaps in knowledge created by the rapid change. It has been designed as a comprehensive tool to aid in long-range planning by participants in the industry. The logic behind this process is that by understanding the reasons and implications of change, pork industry participants can best position their businesses. An important theme is: If your business is aligned in the direction of change, then change is an opportunity and not a threat. The economic analysis in this publication has two components. The first is a study of various systems of pork production. This study helps to identify differences in production costs by size and by technology used. Five systems are analyzed, including: 1200 sows, 600 sows, 300 sows, a 150 sow high technology system, and a 150 low technology system. The second major component of the economic analysis helps users identify and understand a set of relatively new technologies including: Split-Sex and Phase Feeding; Artificial Insemination and Enhanced Genetics; All-In/All-Out Production; Segregated Early Weaning; Marketing; and Financial Management. The economic analysis involves the examination of how various technologies can be adopted in smaller size operations and how adoption would affect cost of production. Results of Systems Analysis The analysis of various systems of production reveals major differences in costs. These systems are developed with specific details and drawings provided in each chapter. The 1200 sow high technology system is designed as the smallest size in which most of the known current technology can be incorporated. As such, its production efficiencies and cost are the lowest, as shown in Table 14-1, which provides side-by-side comparisons of costs. The 1200 sow system has costs of $34.25 per hundredweight based upon the assumptions outlined in Chapter 3 and $2.29 per bushel corn prices. The prices for corn and soybean meal are held constant for all systems. In addition, all systems are assumed to be located in the Midwest. Costs of production for the 600 and 300 sow systems are $35.72 and $38.63, but increase to $40.54 for the 150 sow high technology system and $47.88 for the 150 sow low technology system. 175

Some explanation of the 150 sow low technology system is in order since its costs are dramatically higher than the other systems. The 150 sow low technology system simulates a typical seven farrowing per year operation where the manager has both grain and hogs. Buildings are not intensively utilized, producing only 55 pigs per crate per year. The lack of intensity in building flow relates to two important factors: first, this type of farm needs flexibility in the use of labor for the cropping enterprise; and second, the buildings are often older and may be nearly depreciated. Also, labor is not very efficient because of the older buildings and the lower level of capital investment in buildings and equipment. In the 150 sow low technology budget it is assumed that buildings and equipment are new, with full depreciation and labor charges. Thus, while the costs at $47.88 seems to nearly be unreasonable, it is realistic if the owner receives a labor wage and replaces buildings and equipment when needed. One conclusion is obvious at this point, and that is that no one would build new facilities and run them at the low intensity described in the 150 sow low technology system; they simply could not be competitive. However, existing farms with highly depreciated facilities may be able to continue to operate for some time into the future; they just will have financial difficulty replacing buildings and equipment. The costs for the 150 sow high technology system, at $40.54, are surprisingly greater than the costs for the 1200 sow operation. This difference amounts to $6.29 per hundredweight. The $40.54 may be fairly close to the average industry costs in mid-1995, but the large difference relative to the 1200 sow system means some changes must be made to remain competitive in the longer run. Even the 300 sow system, with costs of $4.38 per hundredweight higher than the 1200 sow system, appears to need modifications to bring it more closely into competition with the larger systems. On the other hand, the 600 sow system comes reasonably close to achieving costs parity with the largest sow system analyzed. This points to the conclusion that those who want to be totally independent in the future may want to set the objective to achieve a size which will be 600 sows or larger. This is a size where much of the technology can be incorporated and much of the disadvantage of smaller size can still be overcome. Where do the major costs differences lie? They are in two areas: feed costs due to better potential feed efficiencies in the larger systems and in indirect costs such as building and equipment costs, and labor. 176

Table 14-1: Costs of Production Comparisons by Pork Production System ($/Cwt.) 1200 Sow 600 Sow 300 Sow 150 Sow 150 Sow High Tech. High Tech. High Tech. High Tech. Low Tech. Corn 9.19 9.19 9.81 9.81 10.72 Soybean Meal 5.53 5.53 5.89 5.89 6.45 Other Feed 3.84 3.84 4.10 4.10 4.49 TOTAL FEED 18.56 18.56 19.80 19.80 21.66 Herd Health.51.51.53.55.58 Utilities 1.71 1.71 1.78 1.68 1.79 Marketing 1.00 1.00 1.00 1.00 1.00 Miscellaneous.21.21.22.23.24 Mortality Disposal.03.03.04.04.06 AI Costs.04.04 N/A N/A N/A TOTAL DIRECT 22.07 22.07 23.37 23.29 25.33 Market Inventory.40.40.44.51.72 Breeding Inventory 1.59 1.66 1.20 1.48 1.73 Equipment 4.04 4.53 5.66 6.84 9.27 Buildings 2.67 2.79 2.67 2.86 3.70 Land.02.03.05.07.05 Labor 2.06 2.84 3.86 4.11 5.70 Management 1.39 1.39 1.38 1.38 1.38 TOTAL INDIRECT 12.17 13.64 15.26 17.25 22.55 TOTAL COSTS $34.25 $35.72 $38.63 $40.54 $47.88 Costs vs. 1200 Sow N/A +$1.47 +$4.38 +$6.29 +$13.63 The feed efficiencies for the systems are 3.0 for the 1200 and 600 sow high technology, 3.2 for the 150 sow high technology, and 3.5 for the 150 low technology. There is no difference in feed prices, so the feed cost difference is primarily due to the variation in feed efficiency. The larger differences, however, are in indirect costs. This includes major differences in building and equipment costs per hundredweight. There are three reasons larger operations lower their costs of buildings and equipment per hundredweight relative to smaller operations: the ability to buy at somewhat lower price levels; the lower costs per unit for building larger buildings; and the greater throughput of animals, resulting in more output per dollar of investment. Labor cost is the other major difference in the indirect costs. Labor cost is lower in the larger units because of the higher level of technology and because size allows each person to be more efficient with his or her time. 177

Application of New Technology: Can Smaller Producers Compete? The results of the systems analysis outlined in the previous section seem to suggest that smaller producers will have limited ability to compete on a costs of production basis. This, however, is not necessarily the case, as is demonstrated in Chapters 7 through 13. These chapters examine various technologies which are being considered by many smaller producers today. In addition to outlining the nature of the technology, the analysis in the publication examine both how to implement the technology in smaller operations and the likely impacts on costs of production if the technology were to be implemented. A number of the technologies are implemented into the 150 sow low technology system, with costs improvements measured from that base. Table 14-2 provides a summary of some of this information, but we invite our readers to return to each chapter for specific details on the technology and alternative ways to implement it. In Table 14-2, the various technologies explored are ranked by the amount of costs lowering (or revenue increasing) found. The technology found to have the most potential impact on costs is Segregated Early Weaning and All-In/All-Out production (SEW/AIAO). It is assumed in the publication that conversion to SEW always includes AIAO production also. The estimated returns above all implementation costs could be in the range of $4.75 per hundredweight, or about $11.50 per head on 245 pound market hogs. SEW/AIAO appears to be a very promising technology to greatly enhance the health of pigs in the nursery and the grower/finisher. It has the potential to reduce feed efficiency, enabling producers with favorable genetics to achieve whole herd feed efficiencies near 3.0 on grind and mix moderate fat level rations. In addition, it appears to have the potential to greatly reduce days to market and reduce death loss in the nursery and grower/finisher. Drawbacks to SEW/AIAO include the process of conversion, which involves a fairly major change in the existing operation; very high priced diets for the early weaned pigs (However, while they are high priced, the amount the early weaned pigs eat is so small that it has only a minor impact on overall costs of production.); and uncertainty of the impacts on early weaned sows with regard to rebreeding and the size of their next litter. Additional research and practical experience of producers who have already adopted the technology should soon provide the needed answers on sow impacts. Explanations of the technology and ways to incorporate SEW/AIAO in smaller operations are provide in several places in the publication, especially in Chapters 9, 10, and 13. The second most important technology is the enhancement of genetics and the economic impact this has on production costs. Enhanced genetics can improve many economically important factors such as litter size, the number weaned, weaning weights, and, most important, feed efficiencies. The estimated impact of genetics in improving production costs is $3.38 per hundredweight, or about $8.25 per head. Please keep in mind that this could vary greatly in individual herds. 178

The third most important technology involves the throughput of the operation. Throughput simply means pushing lots of animals through the operation in an efficient manner. The returns to throughput are often overlooked by pork producers, but are shown here to be among the most meaningful ways to lower costs. Unfortunately, many Midwestern producers have far to go in finding ways to get their output high enough to lower per unit fixed costs. Chapter 3, describing the 1200 sow system, provides some interesting perspectives on throughput, and Chapter 13 describes ways to intensify the flow through a 150 sow unit when converting to SEW/AIAO. The fourth most important technology in Table 14-2 is, once more, genetics. However, this is the potential economic impact on the revenue side of improved genetics. The genetics in the 150 and 300 sow systems are compared with those of the 600 and 1200 sow genetics. In the smaller size units, the barrows and gilts have carcasses that are 51 and 53% lean as estimated by the Fat-O-Meter. Alternatively, the genetics specified in the 1200 sow system have barrows and gilts with carcasses of 57 and 59% lean. These differences are priced out using four different packer programs around the country at a $45 per hundredweight live price. The difference is about $2.25 per live hundredweight on a live basis, or about $5.50 per head. Discussions of genetics, how to achieve better genetics with artificial insemination, marketing, and the linkages between marketing and genetics are provided in Chapters 8 and 11. It is also important to note that in Table 14-2 the economic impacts of improved genetics are broken into two parts, that which influences the costs of production and that which impacts revenue. If these two are considered together, then genetics becomes the single most important technology for many to consider. Ranked number five in the technology list is split-sex and phase feeding. This technology is found to provide returns above costs of adoption of about $1.75 per hundredweight, or over $4 per head. Information on this technology, ways to implement it, and impacts on costs of production are in Chapter 7. All-In/All-Out is the next ranked technology. AIAO can be implemented by itself without SEW and is considered for this analysis. It is found that AIAO could generate around $2 per head above all costs in remodeled buildings fitted for AIAO. However, returns above costs are as high as $4 to $5 per head if producers can find a way to effectively use the extra capacity in the finishing building created from fewer days to market. Those building new facilities specifically designed for AIAO will generate closer to the $4 to $5 per head return. (See Chapter 9.) There are four types of networks described in this publication: production networks; input buying networks; output selling networks; and information networks. Alternative forms of production networks for adopting SEW are in Chapters 10 and 13. A description of networking in general, along with advantages and disadvantages, is in Chapter 12. No specific research has been conducted to evaluate the advantages of input or output networks. However, it is our judgement that they can have notable impacts on costs and revenues. Our judgement is that the impacts may be in the range of $.50 to $1.00 per hundredweight. Some will argue that the impact is much larger, but they often link other advantages we have already put into the technology mix. For example, some producers suggest they receive $2 to $3 per 179

hundredweight more for their hogs because they are in a marketing network. It is likely that packers will pay somewhat more for semi loads of hogs, but most of the $2 to $3 premium is associated with superior carcasses and loads of consistent cutting animals. In our analysis, the added carcass value is assigned to genetics, rather than to a selling network. Table 14-2: Ranking of Technologies by Returns and Ease to Implement a Rank Technology Tested On Impact Impact Ease of $/cwt $/head Adoption f 1 SEW/AIAO 150 low technology 4.73 11.59 7 2 Genetics-Production 150 low tech vs 1200 3.38 8.28 b 3 3 Throughput 150/300 vs 600/1200 3.09 7.57 c 8 4 Genetics-Revenue 150/300 vs 600/1200 2.24 5.48 d 4 5 Split Sex/Phase 150 low technology 1.79 4.39 1 Feeding 6 All-In/All-Out 150 low technology.73 1.79 c 2 7 Network Selling Judgement only f.75 1.83 5 8 Network Buying Judgement only f.70 1.72 6 a Impacts are estimated within models in this publication, unless noted otherwise. b Estimated impacts of genetics on feed efficiency, pigs/litter, and fixed costs. c Estimated as 30% of difference in costs for breeding inventory, buildings, equipment, labor, and management cost. d Revenue impact of improving from 150/300 level to 600/1200 level at $45/cwt. e Impact of implementing AIAO by itself, without SEW. The impact for SEW/AIAO on first line includes both SEW and AIAO. f Based on the judgement of authors only. Also provided in the last column of Table 14-2 is a subjective ranking of ease of adoption for the technology. Please realize these are opinions of university swine specialist only and are not based upon broader information backed by research or producer surveys. Perhaps split-sex and phase feeding are the easiest of the listed technologies to implement. They only involve adding one bulk bin (or more), making some changes in feed delivery, and splitting pens of animals into all barrows and all gilts. In addition the returns appear favorable. Second on the ease of adoption list is AIAO by itself. This means adding walls to form rooms in the nursery and grower/finisher, and perhaps pit curtains. It often also means changing farrowing to a grouping system, and it takes more time for cleaning and disinfection. As mentioned, returns can be even more favorable than shown in Table 14-2. Ranked third and fourth is genetics. Rapid progress in genetic selection can be made with AI or with a change to a superior seedstock supplier. This can be relatively easy to implement if it is a simple change of seedstock supplier, or much more complex if it involves movement to an onfarm collection AI program. However, keep in mind that even an AI program can be implemented in steps which give producers a chance to try AI with purchased semen, then move on to on-farm collection if warranted. Networking for selling hogs and for buying inputs ranks as the fifth and sixth technologies with regard to ease of adoption. While the concept of networking is easy to understand, the implementation is not always easy. The difficulties develop rapidly in finding people who are 180

like-minded and willing to give up a portion of their independence for the welfare of the group. Networks should also have a business organization, which will involve costs to establish, and considerable time to set up. Unquestionably they can have economic merit, and production networks may enable smaller producers to overcome most of their cost disadvantages relative to larger systems. Our ranking includes SEW/AIAO and throughput as two of the most difficult technologies to implement. The reason is because they often mean major changes in the production system, major expansions, or major adjustments in business organization. This may not always be the case, as for a producer building a new nursery unit at least 300 feet downwind from the current continuous flow system. However, even this producer will quickly think about the implications of using the old nursery to add more crates and then expand and intensify the operation. (See Chapter 13.) In conclusion, some technologies are fairly easy to acquire, and economic returns above costs are worth pursuing. Perhaps split-sex and phase feeding as well as AIAO production are in this category. Enhanced genetics may be more difficult to achieve, but the potential rewards are enormous. The same can generally be said for SEW/AIAO and throughput; rewards are great, but not everyone will want to go through this much change. Finally, at least in our judgement, putting effort into buying and selling networks when other parts of the technology puzzle are not in place probably does not make much sense, because the effort is high, but potential returns are fairly low. However, be sure to realize that at least two exceptions exist. First, information networks are inexpensive and can be very helpful in comparing data and sharing knowledge with other producers. And second, networks, including production networks, may be the best avenue through which individual s operations can acquire the technologies. 181

How Should You Proceed? Unique Situations Require Individual Thought Each pork operation is unique and is in a different position with regard to resources and opportunities for change. This means that the economic impacts that have been outlined in this publication will not hold for everyone. Producers also vary in the technologies they have already adopted, so the future plans for each operation must be unique to their individual situations. Some will want to start with consideration of an upgrade in genetics; others have already upgraded genetics and will move on to other technologies. Returns from technologies can also vary sharply from the analysis here. For example, in some herds the implementation of SEW/AIAO can lower feed efficiencies by four tenths of a percentage point and cut days to market by 30 to 40 days. However, if a herd is already marketing hogs at 160 days with feed efficiencies near 3.0, this technology is not likely to demonstrate as much improvement. As a general guideline, it would be good to closely examine the specifications of the 1200 sow system in Chapter 3. The objective for most smaller producers is not to reach the 1200 sow size, but to understand the technologies in that system and then begin to evaluate how they can best begin to incorporate the technologies, acquire the production efficiencies, and overcome the disadvantages of size. Regarding the issue of size, we believe that many producers as small as 150 sows can economically incorporate a number of the technologies that the larger systems employ. However, to overcome the disadvantages presented by smaller size, producers may have to work with larger groups which mimic a larger operation. The keys to successfully keeping costs competitive are not as strongly related to size as they are to production efficiencies. Key production efficiencies include the breeding herd efficiency; building and equipment efficiency; and labor efficiency. Many smaller producers, through excelling in husbandry skills, can achieve herd production efficiencies similar to larger operations. These husbandry skills help acheive favorable ratios for, pigs per litter, weaning rates, and the very important feed efficiency levels. However, it is more difficult to achieve the throughput required to keep pigs marketed per sow per year at very high levels and to keep building, equipment, and labor costs per unit at low levels. Smaller producers who do not attain strong efficiencies in production, capital, or labor are at sharp disadvantages relative to larger operations. Making the Decisions There have been many technologies, concepts, and ideas developed in this publication. Now we encourage pork producers and those business managers in related industries to begin to develop their long-range plans. Start by reviewing the strategic planning process in Chapter 1. Remember, this is the opportunity to move your business from where it is today to where you want it to be in the future. 182

Various producers have different planning time frames for their pork operations. Some are looking for a place to exit the industry; others are making the decisions today that will position them for long-run competitiveness. One of the key questions regarding planning horizons is the level of hog prices in the future. If prices are going to be low (losses), more producers would want to move to a short-run exit strategy; on the other hand, if they are going to be high (profitable), more would shift to a long-run growth strategy. In Chapter 11, two models provide estimates of annual hog prices to the year 2005. While there is variation in these models, the conclusion is that prices will average about $43 over the next decade (in relation to current production costs). This is about $3 per hundredweight lower than in the past ten years. Table 14-3 provides some suggested items to be considered by producers planning for different time frames. Those thinking of a short-range planning horizon may be looking for a place to exit the industry, perhaps within the next three years. Those with an intermediate planning horizon may want to position themselves for planned exiting, perhaps in a three- to sixyear time frame. Most using an intermediate planning horizon would also like the opportunity to make a decision about continuing in the business at some later time. Those who want to remain a viable part of the industry for the long-run need to consider nearly all of the alternatives in this publication, including major changes in production methods and in business organization. Items under the short-term planning horizon encourage producers not just to exit from the industry, but to do so with a well-developed plan. New capital investments and implementation of new technology should be kept at a minimum. Those with an intermediate-term planning horizon will want to consider more technologies, be willing to make more capital investments, and continue to make improvements in their production units. However, they will want to make a decision about continuing to produce hogs sometime in the next five or so years. The long-term planning horizon is always the most difficult, because so many potential alternatives need to be considered. How long is the long-run? It is a period extensive enough for managers to consider changes in buildings, equipment, production systems, and business organization. For this reason, there is an extended list of items in Table 14-3. We hope those of you considering the long-term horizon have found this publication of considerable value. The final realization, however, is that the long-run is never reached. Some would like to make the current changes that will make them competitive, then put things on hold. But this will not happen. The industry will continue to evolve, and thus the search for optimum systems will continue into the future. Therefore, producers must establish the philosophies that will allow continuous improvement of their product and of their businesses performance. 183

Table 14-3: Items to Be Considered by Pork Producers with Different Planning Horizons Short-Term Horizon (0 to 3 Years) Expect to exit within 3 years. Make minor changes in production technology. Only invest in quick payback items. Consider split-sex & phase feeding. Consider what will become of facilities. Consider whether someone else will have interest in facilities. Decide what will trigger your exit, and attempt to make it favorable. Explore income tax consequences of exiting. Consider alternative investments for capital. Intermediate-Term Horizon (Want to evaluate position and potentially exit in another 3 to 6 years) Identify strengths, then Focus-Intensify-Improve (Chapter 1) Minimize capital investments with payback longer than 5 years. Enhance genetics. Adopt split-sex and phase feeding. Adopt AIAO. Identify who will carry operation into future. Consider whether more extensive changes are warranted. Begin to consider all items under short-term horizon. Long-Term Horizon (Plan to remain competitive) Identify strengths then Focus-Intensify-Improve (Chapter 1). Study optimum production systems approaches (Chapters 2 to 6). Understand technologies and ways to implement (Chapters 7 to 10). Enhance genetics. Explore ways to incorporate SEW/AIAO. Consider ways to increase throughput. Implement split-sex and phase feeding. Consider networking possibilities. including: information, production, input, and output networks. To remain totally independent, set 600 sow size objective. If you can't reach 600 sows in the longer-run, look for ways to work in systems with others. Consider alternative business arrangements (Chapter 12) including: Specialization in one phase farrowing, nursery, or finishing; Contracting; Leasing; Outside equity capital, etc.; and Linkage to packer, (Chapter 11). 184

More Alternatives Opportunities Improvement Potential We trust this publication has provided you with abundant ideas regarding ways you can fit into the pork industry. While the changes are complex, there are probably more alternative ways to be involved in the industry today than at perhaps any time in the past. There are opportunities to be independent producers, aligned producers, have specialized farrowing operations, specialized nursery operations, specialized finishing operations, farrow-to-finish operations, contract operations, contracting operations, be tied to a packer, or sell on the open market each day and the list could go on. These alternatives mean that all producers need to evaluate their particular set of resources, skills, and aspirations, and decide how they can best position them to meet their individual goals. This means opportunity for those who can position themselves correctly in the changing industry. The many changes are not only providing more alternatives and opportunities, but are also serving to enhance the performance of the pork industry. The industry is improving its product s quality and moderating its product s price for consumers in this and foreign countries. These performance gains will result in a growth industry over the next decade. The U.S. pork industry has more alternatives, opportunities, and ability to grow and improve its performance than ever. We hope you will grasp the opportunities ahead by positioning your pork operation for the 21st century. For Additional Copies Additional copies of the book ID-210,, are available for $25.00 through Purdue s Media Distribution Center. You may also order the book and video series V-ID-210, which contains both the book and two videos presenting 13 segments that supplement and illustrate key areas discussed in the book. The V-ID-210 is available for $75.00. Mail your check or money order to the address below, or order by phone, FAX, or email and be billed later. Media Distribution Center (765) 494-6794 - Hours 8-5/M-F 310 South 2nd Street FAX (765) 496-1540 Lafayette, IN 47901-1232 EMAIL juanita@ecn.purdue.edu 185