It’s about blocking and tackling. Economics in the pork business has been on a wild ride over the past several years. Market prices that reached historically high water marks for much of the year, along with profitability for producers which also reached levels we had not experienced before.
Expanded sow numbers, better production and continued high market weights, have brought thin margins during 2015. The larger pork supplies have reduced the outlook, based on futures prices, near breakeven (or losses) over the next 12 months or more. This will require producers to focus much more on the basics (revenue and cost control), or blocking and tackling.
Cost of production has fallen significantly from 2014 and prior, but how you compare to your peers in the industry may be more important than in the last two years. I have used the model produced by Iowa State University economists for many years to get an indication of how to compare costs to a consistent model over time.
One needs to understand that the costs are based on average Iowa grain and feed costs. Those costs, year-to-date through August, have averaged $51.55 per hundredweight on a live basis. While I personally believe these costs are indicative of the top 50% of the Midwest, these costs are near $10 per hundredweight less than the same period a year ago. What is most critical is how do your costs compare to your peers? This helps define a large part of what makes you competitive in the industry.
Focus on biggest drivers
In order to analyze weaknesses in cost and to make continual improvement in total cost of production, I think focusing on the biggest drivers makes the most sense. Cost analysis, generally, includes both throughput and cost and can help identify those weaknesses to address the most significant drivers of cost.
- Pigs marketed (primary market) as a percent of pigs weaned.
- Feed cost per pound of gain from weaning to market weight.
- Total facility cost per pig or per pound produced (wean to finish).
- Weaned pig cost per head
- Pigs weaned per sow annually (P/MF/Y)
- Feed cost per head produced
- Facility cost per head
Obviously, there are many other issues related to cost, but I think the above are a quick analysis to gain understanding of trends that are impacting the overall cost of production relative to others.
Finally, it is a good time for most to start the budgeting process. This process really allows management to gain a good understanding of the drivers of cost and how they are impacting your farm. It also helps you execute a marketing plan when the opportunities present themselves. As the budget is developed, I think it is critical to have the ability to understand the impact of grain and feed cost, production levels and extraordinary items, and how they impacted the budget to actual results during the year.
Lastly, a strong budget builds more confidence so that marketing decisions have a chance to meet your goals. This is really the blocking and tackling issues of managing the business, continually improving the opportunity for profits and helping you become more competitive in the industry long-term.