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Adapting to Smaller Margins

The pork industry has entered a new supply-and-demand paradigm, and cost-cutting measures may be needed to survive the current downturn. Looking back over the last 30 years, the corn-hog price relationship pretty much kept the hog economy in balance. Whenever corn hit $3/bu., hog prices would react, moving higher. When corn reached $3/bu. in June 1974, live hog futures were $36.95/cwt. Corn rose to

Looking back over the last 30 years, the corn-hog price relationship pretty much kept the hog economy in balance.

Whenever corn hit $3/bu., hog prices would react, moving higher. When corn reached $3/bu. in June 1974, live hog futures were $36.95/cwt. Corn rose to $3.84/bu. by September and hog futures followed that rise, closing at $63.52/cwt. in September 1975, for a 72% increase in hog prices in just 15 months.

“Every time corn hit $3/bu., the hog market would respond within 4-18 months with a 30-80% increase in price,” explains David Stender, Iowa State University Extension swine field specialist.

When that happened in 1974-75, hog production dropped 23%, as aging producers grew tired of the physical demands of raising hogs and elected to concentrate on their crops.

That relationship existed until three years ago, Stender explained in a talk at the Swine Transition Options Seminar Aug. 5 in Sheldon, IA. In October 2006, corn passed $3/bu. and reached a high of $7.16/bu. in June 2008. While corn prices shot up, hog prices remained flat, resulting in double-digit losses that continue to this day.

“This corn-hog price relationship isn't working anymore,” Stender states. “We no longer have hog farmers with bad knees and growing corn and quitting hogs. They are gone now. Everybody else is into hogs as a business now. Instead of a 20:1 hog:corn price ratio, we are living with a 10:1 hog:corn price ratio.”

This price ratio, computed simply as the price of hogs/cwt., live divided by the price of corn/bu., has traditionally been used as an indicator of pork producer profitability. When corn prices are high in relation to pork prices, fewer units of corn equal the dollar value of 100 lb. of pork.

Moreover, hog supply has not adjusted to lower hog price margins. Feed prices are below the record 2008 levels, but remain higher than the pre-2007 era, according to John Lawrence, Iowa State University Extension livestock economist. “In fact, U.S. sow slaughter has decreased, not increased, since the first of the year. Without smaller supplies, prices will not recover,” he asserts.

Based on the old rule of thumb, for each 1% change in supply, price should change about 3% in the opposite direction. For example, second-quarter 2009 live hog prices averaged $45/cwt. With a 1, 3 and 5% reduction in supply, Lawrence calculates prices would be $1.35 (3%), $4.05 (9%) and $6.75 (15%) higher, respectively, for the second quarter of 2010. “The hog sector needs a 15% price increase and a 5% supply reduction just to break even,” he says.

Lawrence and Stender agree the lack of response to low hog prices has become a game of chicken to see who moves first to cut sow numbers.

Reducing Throughput

Using an economic spreadsheet model developed by Derald Holtkamp, DVM, Iowa State University, it may be possible in some cases to reduce throughput and also cut financial losses, Stender says. Reducing output from 1,000 head to 900 head can lower losses a little — producing 10% less hogs — provided the producer can reduce costs by $5/head, Stender says.

The reasons most producers balk at reducing throughput in normal times are because throughput maximizes the use of facilities and other fixed assets, and because cutting costs is a tough proposition, especially in high-fixed-cost herds where cuts in production increase fixed costs, Stender admits.

Weaning Age Advantages

One strategy to reduce system cost might be to increase weaning age. Going from an 18-20-day weaning age to a 24-day weaning age can bring big dividends as part of a strategy to reduce the sow herd and reduce the pressure on sows and litters going through the farrowing house, Holtkamp says.

As a result, “Every day that you add to the weaning age of that pig, research from Kansas State University (KSU) has calculated an extra 59 cents/head in the finisher, so if you are putting on five days, that's potentially about $3/pig that you pick up in the finisher,” Stender says. That advantage comes from improved wean-to-finish feed conversion (Figure 1) and greatly reduced mortality (Figure 2).

Weaning a heavier pig means pigs get a better start in the nursery and use less of the more expensive starter diets needed by lighter weight pigs.

Because of less nursery death loss (~3%) in the study, the modeled cost of weaned-pig-per-head-marketed be-comes less for the heavier weaner.

And finishing that heavier pig results in less substandard pigs and more top-quality pigs sold, producing a cost advantage overall.

Stender says, in addition, there may be some average daily gain, feed conversion and mortality benefits from lower stocking densities or, depending on the circumstances, nursery and finisher facility space that is leased or contracted that may be cut, saving the cost of operating those facilities.

If fixed costs can be cut as well as variable costs, then the cost savings will be larger and more worthwhile.

“Reductions in throughput will require different strategies for different operations,” Stender continues. “Producers may need to go through their budgets line by line to make sure each variable cost can be reduced in line with pig reductions. For example, labor is a variable cost, but some operations have full-time people on salaries, making a reduction in hours impractical.”

Next Page: Other Cost-Saving Tips

Other Cost-Saving Tips

  • To reduce feed costs, use records and knowledge of genetics in your herd to focus on feed efficiency and cost per gain, and not so much on lean growth rate, when formulating rations. Typically, less nutrient-dense diets that cost less will slow growth and feed efficiency. But a 10% reduction in the sow herd could translate into 10% extra space in nursery and finishing barns. “Some operations may be able to figure out how to use that extra space to reduce cost of gain. Tracking records and knowledge of how your genetics respond to lower feed nutrient levels is essential,” Stender says.

  • The most expensive pig in the operation is the low birthweight pig. Survival rate is poorer on these piglets. They don't grow as well or convert feed as well, and they turn out to be substandard pigs when you sell them (Figure 3), Stender comments. “If we are talking about a reduction in throughput, we want to have high birthweight pigs going through our production system that are healthy and vigorous and that we can make money with.”

  • Close your herd if it is positive for PRRS (porcine reproductive and respiratory syndrome) virus. “PRRS has been shown to cost $10/head marketed, and closing the herd to new introductions of gilts for approximately 200 days has been a tool used very successfully to eliminate PRRS from some operations,” Holtkamp says. Not adding breeding stock for 200 days might be a logical way to reduce the sow herd and eliminate PRRS as an added bonus. Consult your veterinarian about this option.