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10 Management Opportunities/Survival Tips

Article-10 Management Opportunities/Survival Tips

Chances are you are already pretty good at treading water. The tidal wave of low hog prices hit the pork industry hard. U.S. pork producers are survivors though, and many optimists have discovered an opportunity or two in the wake of the crisis. National Hog Farmer has been talking to some of the people who have been paddling along with you during these trying times. Following is a collection of views

Chances are you are already pretty good at treading water. The tidal wave of low hog prices hit the pork industry hard. U.S. pork producers are survivors though, and many optimists have discovered an opportunity or two in the wake of the crisis. National Hog Farmer has been talking to some of the people who have been paddling along with you during these trying times. Following is a collection of views on management opportunities and survival tips to help you keep your head above water.

1. Closely Analyze Production Costs: Do a cost:benefit analysis of major production costs.

Maybe it's time for a sit-down session with your major consultants to justify the cost of some of your production practices. What are the herd health consequences of turning down ventilation, for example, or eliminating "critical" vaccinations? Which performance losses might make the most difference if key production inputs are removed?

North Carolina consulting engineer Bynum Driggers says it always pays to maintain good ventilation. If you cut corners and place your pigs in a poor environment, they are not going to perform as well, and as a consequence, medication costs can increase. Sometimes saving pennies will cost you dollars. If it creates a health problem, you may end up treating the whole herd. "We've seen situations like this where ventilation was lacking or not as good as it could have been, and as a consequence, medication costs were higher than they should have been," says Driggers.

There is a tendency to cut back on minimum ventilation rates during the winter. Remember, these minimum rates are set to remove moisture, odors, gases and provide oxygen for both pigs and people. Driggers urges producers to resist this strategy. "If you look at the cost of energy on a per-animal basis, this is a very small percentage of the total cost of producing a pound of pork."

Also, any time you trap moisture inside a building, you risk long-term damage to the structure and the insulation in your barns.

Of course, to improve ventilation efficiency, make sure fan blades and shutters are clean and operating correctly. Poorly maintained fans and inlets increase pressure, increasing the power requirements and the cost of ventilation. Review extension service bulletin checklists on steps to take in managing ventilation systems.

Management for Zack McCullen III, vice president of the swine division, Prestage Farms, Clinton, NC, means focusing on big-ticket items that can make a real difference.

"We are concentrating on farrowing rate and livability in the farrowing house," he notes. "We are constantly looking at feeding programs to make sure we are not over-feeding or under-feeding. It's really basic stuff and about all you can do. You can only cut so much before it starts to hurt."

Prestage is also closely evaluating employees to make sure they are making the most efficient use of their time.

Overall, you've got to get your costs down into the mid-$30s if you are going to survive long-term in this industry, says McCullen. He says Prestage Farms is working hard to get "everything clicking" to reach that cost level. Currently, their cost of production is about 38 cents/cwt.

To cut costs, Fred Cunningham, DVM, co-owner of a 4,200-sow, farrow-to-finish operation near Moyock, NC, increased weaning age from 14 to 18 days. It eliminated the first pelleted diet fed in the nursery, saving about 50-75 cents/pig.

"We haven't lost anything on the health side, but that's partly because we have a pretty stable health status," Cunningham says of the three-site production system.

And there has been a tremendous advantage on the quality side to the change in weaning age, he claims. The weaning weights are averaging about 11 lb. And, at the bottom-end, pigs weigh about 9 lb. instead of 7 lb. At the top end, they are weaning 16-lb. pigs.

"Research shows that the more you crossfoster pigs, the more uniform the pigs will be. But you also lower the entire average," says Cunningham. That is why he quit crossfostering at 24 hours after birth of a litter. The pigs stay healthier and it helps deal with any labor shortage, he says.

On health programs, he regards the hog price crisis as a golden opportunity for producers to seriously evaluate their medication programs. Have a diagnostic workup done. Find out what serious health problems you have so you can focus your herd health program. Re-examine this program every six months to make sure you're not treating something you don't have.

According to Tim Loula, DVM, and the veterinary group at the Swine Veterinary Center at St. Peter, MN, producers need to sit down with their veterinarian and review vaccinations and medications (feed grade and routine). Steps that many of the client farms have taken include:

* Cut prefarrowing shots like E. coli on low-risk (higher parity) sows. Emphasize feedback programs;

* Drop pseudorabies virus (PRV) vaccinations on higher parity sows in low-risk areas;

* If your herd is PRV positive, consider enrolling in the federal, accelerated eradication program;

* Challenge the decision to use any routine piglet vaccination and treatments;

* Review the use of high-cost vs. low-cost antibiotics;

* Check your on-farm inventory of drugs and supplies before reordering;

* Review biosecurity measures to ensure no new diseases are introduced. Don't cheat on isolation/acclimation.

2. Look Toward The Future: Consider out-month futures contracts.

Dennis Michael, Yankton, SD, sums up the attitude pork industry survivors must adopt, "You keep reading about cutting costs, but I think most of the guys who are in it for the long run are already doing everything they can on the production side to contain costs. We've done genetics, we've done feed cost. What we're looking at now is improving our marketing, and getting better at that."

The South Dakota Pork Producers and South Dakota Corn Growers are sponsoring marketing meetings to help producers, offering different meetings for different levels of marketing knowledge. They're also trying to set up some marketing clubs.

In a related effort, Michael is on the board of the North Central Pork Marketing Co-op, a group trying to develop a 1,000-head per day hog plant.

"We lost a packing plant in Huron, SD, last year and we're dependent on Smithfield-owned John Morrell in Sioux Falls and Sioux City. These aren't the most modern plants to begin with and the rumor now is that Smithfield has been buying a lot of sows over the last few months, so who knows how much chain space they'll have available in the future," says Michael.

"I think the producer has to analyze his own situation and look at buying at least catastrophic insurance so he doesn't go through again what he went through this last year," says Darrell Axtell, Securities Corp. of Iowa, Cedar Rapids.

He thinks buying "put options" on rallies, at a level to protect cost of production or as much of it as possible, is probably the easiest way to do this. If the producer wants to lower the cost of that insurance, Axtell says to consider selling "call options."

"Make sure that call you sell is something you can live with. This market is extremely volatile and you want to sell that call at a high enough price that you will be comfortable with," says Axtell.

John Lawrence, Iowa State University extension economist, advises producers to be especially wary of fourth quarter (1999) marketings. Lawrence feels the summer months could take care of themselves, but that the sow and gilt slaughter data indicate liquidation plans may have moderated since the startling recovery of prices in January. If that's the case, he thinks the December futures may be the contract month to look for hedging opportunities.

Kent Feeds has initiated a program offering to pay the brokerage costs for farmers interested in using an options strategy to protect feed or livestock prices. The program is open to producers moving more than 200 pigs in a group. Another benefit beside the paid brokerage fee is that Kent will not require a full contract group if you're marketing an odd lot over 200. Kent will pick up and try to match the odd lots.

3. Consider Advance Buying Feed Needs: Which crop and feed grain signals should you pay attention to?

Most analysts remain quite bearish on the outlook for corn and soybeans, advising producers to take a hand-to-mouth approach in buying corn and soybean meal. (A strategy that many producers can appreciate in times of tight cash flow.)

The La Ni---a weather pattern is the wild card. Darrell Axtell says a feed buyer may want to look at buying out-of-the money call options to provide protection from weather related rallies.

Mark Legan, Coatesville, IN, locked in 48% soybean meal for $144/ton last fall. He said the upside risk from that price level was much more important than gains on the downside. Axtell says producers have to be careful to lock in good prices when available, rather than swinging for the fences all the time. "You can pass up a lot of dollars, chasing that last nickel," says Axtell.

Brian Buhr, University of Minnesota agricultural economist, says cost of production is the No. 1 area producers need to focus on when using the futures market.

"Start by figuring out an acceptable profit margin," Buhr advises. "Then, when you look at futures prices, you can figure out what they actually mean to your bottom line. It's easier to recognize opportunities. Try to lock in a certain percentage over cost of production on a particular margin."

Buhr says if it seems the market is in a downward trend on feed grains, for example, but offers some profit opportunities, protect 5-10% of production. "Set a benchmark," he suggests. "For every $5-10 change in soybean meal prices, for example, you lock in another 5%. It becomes a built-in strategy so you are not trying to pick the low or the high. You are moving along with the market."

Buhr also evaluates the market's historical lows. "When I say historical lows, I am referring to prices for the last 15 years, relevant history," he says. "I look at price distributions before setting strategies." He says, looking at hog price distributions, $59 was the all-time high price.

He also looks at seasonal distributions. "In December, hogs averaged around $38. The all-time high (in December) was around $48. However, things can happen that can change history. Until this last year, for example, the low end of the distribution had been around $24 for hogs." Even taking the exceptions into account, using historical price distributions can still help producers make more informed, objective decisions.

4. Re-negotiate Genetic Supplier Contracts: Barter where you can in the areas of gilt replacements, semen sources, quantity discounts, delivery dates, delivery weights, etc.

The effort of Cotswold USA (which waived all current contracts with commercial customers and slashed prices of its genetics) is helping its customers get through these hard times by reducing their costs, explains Todd See, extension swine specialist, North Carolina State University. (See News Update, National Hog Farmer, Jan. 15, 1999, page 8.)

Producers should ask their genetic suppliers to consider adjusting the price structure for gilt replacements and semen supplies. Work for better rates, don't sell your operation short, says See. Keep using high-quality gilt replacements, boars and semen to maintain genetic progress and parity distribution. Avoid cutting back on gilt orders if you can't re-negotiate. Don't keep sows too long because you will end up with production shortfalls. Reduce culling rates from 40-50% to an average of 30%.

If you ordered breeding-age replacement gilts, don't accept them weighing 150 lb. and have to feed them out. Chances are, the price will be the same for both groups. "Be more particular about the quality and the stipulations in your contracts and agreements on what you are buying," suggests See.

If your supplier insists he only has lightweight breeding stock to sell to you, that definitely is a good time to re-negotiate your contract.

"Your supplier should be willing to accommodate you. Some may be willing to defer payments, but some just can't afford to," he explains.

As for boar semen, there is quite a wide range in product prices, so shop around. You might be able to save some money by going to a different grade or level of semen, or using pooled semen, while still maintaining genetic quality. You might also talk your supplier into negotiating a long-term contract and scheduling plan that can cut costs. Savings of several dollars per dose may be possible.

There can be some cost savings to producing your own replacement gilts, provided you use some sort of rotational breeding program. Don't just pull market gilts out of finishing.

Keeping your own gilts back can be a good idea short-term, says veterinarian Loula. To keep breeding costs down, the vet group also advises delaying boar purchases and buying semen in the interim, maximizing use of existing herd boars (6-7 services/week for all natural service boars), and consider delaying first service to reduce the number of inseminations.

It might also be beneficial to breeding efficiency to lower sow death loss, consider internal multiplication or join a user group for bringing in genetics.

5. Refine Sow Culling Strategies: Check non-productive sow days (NPD), average parity, feeding programs, crate-use efficiencies, etc. Compare maintenance/development costs and productivity levels for sows vs. gilts.

Don't cut corners when it comes to maintaining your breeding program, points out See. Evaluate carefully to see which ones are performing and paying off. "It is time for the sows with a lot of open, non-productive days to be removed from the system," he declares. Really check records to find out if we are feeding a lot of extra sows and/or boars that aren't producing pigs. "Let's take time out and really evaluate our records in the breeding herd and remove non-productive breeding animals," he stresses.

If producers do a good job of removing sows that aren't breeding back, heat and pregnancy detection and pig flow can be managed, and facilities filled optimally. Producers should be able to save by not having to over-breed and over-fill facilities, says See. "Plan ahead for that seasonal dip instead of over-reacting to it and over-breeding after the fact," he adds.

Large operations are quickly cutting dead-wood sow numbers. Veterinarian Cunningham says his staff focused on the inefficient units in the operation and ended up culling 800 sows that weren't cycling or ready to breed on time.

Carroll Foods of Warsaw, NC, cut about 10,000 sows from its system and plans to trim more in the first quarter of this year.

Murphy Family Farms plans to cancel contracts with about a dozen of its sow farms by mid-February, blaming the move on low hog prices and an oversupply of market-ready hogs.

6. Re-negotiate your front-end contracts/pig supplies.

Mark Legan, Coatesville, IN, willingly re-negotiated some of his Isowean contracts as the bottom fell out of the market. Legan, who entered the contracts after expanding his sow herd from 250 to 700, says the new contracts they worked out take more notice of the price for market hogs. Legan says they have lowered the floor from the original $30-35/weaned pig range. But in exchange, the ceiling on the early weaned pig price has also been raised.

Don Johnson, Farm Business Information Systems, Lake Crystal, MN, says he is seeing some people in the sow co-ops looking at refinancing debt on the sow unit, stretching repayment schedules in an attempt to lower the feeder pig costs coming out of the unit.

7. Maintain Good Lender Relations: Negotiate/communicate with lenders.

Mark Legan, Coatesville, IN, producer who runs about 700 sows, says that some of the producers in his area are looking at moving some of their short-term debt on the livestock side onto a longer term base on the crop side. Tom Ricke, Norwest Ag Credit, Des Moines, IA, says they have worked through some similar restructuring of debt in their office.

"We're looking for guys who are proactive, who have a marketing plan, who want to be survivors," says Ricke. He tells of one client who decided to forward price hogs with a packer for all of 1999, locking in a price near $35.

8. Review Relationships With Feed Suppliers: Seek quantity discounts, evaluate possible cost-saving solutions.

Palmer Holden, Iowa State University extension swine specialist, says many feed companies recognize the importance of keeping their customers in business. He heard about some major feed companies cutting prices by as much as 10%.

Some feed companies may be willing to step in and help finance a customer through these tough times. "We've seen some producers turning to their feed supplier, putting their feed account on a payment schedule, with a plan to pay it off over 3-5 years," explains Don Johnson, Farm Business Information Systems, Lake Crystal, MN.

"What they're doing is capturing current debt and moving it out to intermediate or long-term debt. It improves their working capital situation, which is what so many of the bankers are focusing on," he adds. With sows valued at $100 each, weaned pigs at $10 apiece and finishing pigs at $40 each, Johnson says keeping that working capital number up where the lender wants to see it is a formidable task.

Holden offers emergency recommendations to producers to help save some money in the short term. He says reduced-cost diets may allow producers to use more home-raised corn, thus minimizing the cash flow required to purchase feed ingredients.

Holden says producers could skip the vitamins and trace minerals in diets for pigs that weigh at least 120 lb. and heavier. "If pigs weigh 180 lb. or more, producers could skip the soybean meal, too; however, they still need to provide calcium, phosphorus and salt."

If producers use synthetic lysine along with home-raised corn to replace some soybean meal, cash flow could also be helped.

Holden cautions that the pigs on the deficient diets are going to take longer to get to market, but that may be a positive point too. "The odds are, if it takes a week or more longer than usual to get to market, it may help the producer gain a higher price," he speculates.

While feeding deficient diets won't decrease the cost of production (because of the inefficiencies that go along with the practice), the increased income from a higher market price could more than make up the difference.

"This is a plan for an emergency situation only," Holden stresses. "This is just a suggestion that could help keep producers solvent through the worst months."

But, don't use these temporary, deficient rations on replacement animals destined for the breeding herd, he warns.

If pig flow is such that marketing can't be delayed for a week to 10 days, Holden says producers might consider marketing pigs at a lighter weight.

"Your feed efficiency is going to be better," he says. "You still need to be able to meet the minimum weight required by your packer though. You can't afford to take a weight discount in addition to the low prices."

9. Review Labor Needs: Do you need all of your full-time employees?

There used to be 50 employees at the hog operation Cunningham co-owns. Since times turned tough, staff has been trimmed by about 10. "Folks who were willing to quit or who threatened to quit, we basically accepted their resignations," he explains.

How is the job getting done on this 4,200-sow, farrow-to-finish operation? "I think the main thing is we have rearranged some pig flow and people have sort of doubled up on some duties," says Cunningham. The downside is that building maintenance and sanitation are done only as needed, but the pigs are being well taken care of.

10. Consider Other Income Streams: Is niche marketing a possibility? Are you using your management talents efficiently?

Like many pork producers today, Jay Foushee of Roxboro, NC, is frustrated by low live hog prices and high retail prices. Couple that with low prices for his tobacco, corn, soybean and wheat, and the 100-sow, feeder pig producer is quite concerned about his survival in agriculture.

Foushee's wife, Kim, has had a fulltime, off-farm job for 10 years at North Carolina State University, and that has helped support the family.

But he is seriously looking into building a small, on-farm slaughter-processing-old country store business. His goal is to offer a quality product to local grills and restaurants and complement that with a mail-order business. Plans are to handle 10-15 hogs/day a few days a week to start.

"We are going to have to find ways to diversify more," says Foushee. "If I have to just count on raising hogs, I will be hurting," he admits.