Strong Business Model Required for Success In the Hog Business

Increasing weaning age while reducing breeding herd inventory may help cut losses. Everyone involved in the hog business knows that 2009 was anything but business as usual

Increasing weaning age while reducing breeding herd inventory may help cut losses.

Everyone involved in the hog business knows that 2009 was anything but business as usual. There was global recession, high feed costs that erased normally profitable hog prices, a new strain of influenza that dampened price prospects and over-reliance on the export market.

Even with improved opportunities in 2010, critical questions remain, says Joe Connor, DVM, Carthage (IL) Veterinary Service, Ltd.

“As the world comes to and passes seven billion in population, it is hard for us to understand how we can be in a low-cost food production system and not be profitable,” Connor says.

But the future of exports may not prove so rosy to meat producers as first-world countries conserve scarce resources and reduce economic growth. “It is likely that meat consumption per capita will decline in the developed countries even as it is increasing in the underdeveloped countries, and several of our key trading partners will try to increase their own production and reduce reliance on imports,” he predicts.

Markets Driven by Technology

New technology lowered production costs and produced solid returns. “Our industry has experienced a tremendous year-on-year improvement in pigs weaned per inventory sow and carcass harvested per inventory sow,” Connor continues.

That success fueled increases in sizes of facilities and sow herds to boost weekly pig production and to capture the advantages of rapid wean-to-finish flow time, further lowering costs of diets, transportation and health.

Connor predicts there will be more gains from genetics, both in sow productivity and wean-to-finish feed conversion, but the advances will be smaller. Producers will need to utilize a business model in the short term that emphasizes survival, again focusing on technology that lowers costs and improves efficiencies.

“We have to implement, daily, all the technology that we have. Benchmarking data still illustrates a wide difference in productivity and cost of production, (which is) highly driven by people and (herd) health,” Connor says.

Survival will mean increasing alliances and partnerships as a method to manage risk. It will mean greater cost transparency and much higher scrutiny from a number of outside sources.

Survival also means “producers must measure, understand and control the variance of production costs and revenue,” Connor says.

“Without tracking variance, farms are missing large opportunities to increase the value of their final output, reduce their costs and stabilize future outcome,” he declares.

Disease remains the number one cause of variation in production and, thus, profitability. Predicting disease prevalence will be paramount for disease interventions.

He advises producers to continually review health programs and strategies that are unique to an individual's herd or system.

“We are embarking on continuous diagnostic profiling that will more effectively manage each group of pigs. It will take a very close working relationship with your veterinarian, but the rewards will be huge,” Connor promises.

Genetics and genetics-health interactions must be understood to determine the appropriate sire and dam lines.

DuPont Equation

One excellent method to evaluate your business strengths and weaknesses is the DuPont Equation, Connor believes.

The equation helps evaluate your current business and direct strategy, breaking return on equity into three management areas: assets, expenses and debt.

This model uses return on equity in order to link financial, biological and market risk, and quantify the impact of various levels of variation. Figure 1 provides a flow chart.

“The goal is to improve return on assets by effectively managing and balancing profit margin and asset turnover,” Connor points out. That can be achieved by improving margin, turnover or both. Margins can be improved by cutting costs and increasing sale price. Turnover can be increased by increasing sales volume, reducing inventory or fixed assets and improving credit terms.

For pork producers, the lesson is to keep financial leverage low to keep the lender satisfied. “If a producer implements proper risk management, the risk to the lender is reduced and the lender can allow higher leverage,” he says.

Managing all three parts of the DuPont equation tends to maximize the value of the business. When one or more parts fail, it is usually due to underuse of resources, Connor says. In a hog operation, variables to review closely include sow herd mortality, non-productive sow days, parity distribution, preweaning mortality, wean-to-finish mortality, average daily gain, farrowing rate, pigs weaned/litter and slaughter weight.

Net profit margin is another key variable; balancing costs and returns, by implementing the basics of production day after day, week after week is essential to maintain a sustainable operation, he concludes.