Building Costs Cause Growing Pains

The pork industry is growing. It may be hard to spot, but for the past three years, hog numbers have grown annually, and there"s more on the horizon.

Are you willing to go through the growing pains to be a part of it? Lots of people are asking that question as new hog buildings or rumors of new buildings surface across the countryside.

Last year, projections pointed to the placement of 125,000 new sows. While there have been additions, there also have been reductions, since that time. This year, experts project another 100,000 to 150,000 new sows.

Much like hog numbers, building costs aren"t standing still. In the late 1990s, a new deep-pit, 2,000-head, wean-to-finish building cost $145 to $160 per pig space to build in the Iowa/Minnesota/South Dakota region. Today that same building costs $175 to $230 per pig space.

A new 2,400-head sow unit will cost between $1,300 to $1,550 per sow space. A new 2,000-head nursery will run $135 to $145 per head, and a 2,000-head finisher now ranges from $180 to $200 per head. 

Those prices are comparable for other parts of the country, says Kirk Brincks, national sales manager for Hog Slat. The only exception is a sow unit, which can range from $900 to $1,550 per sow, depending on where it"s located and the manure-handling system that"s involved.

The bottom line is that increased demand and international tariffs have triggered sharply higher costs for all building materials, especially steel, concrete, stainless steel and plastic. You also can trace much of the increased cost to higher gas and diesel prices. Brincks points out that all suppliers have a variable surcharge on deliveries because of the high fuel costs.

"To try to reduce the overall cost of a project today, producers put more hogs under one roof," says Brincks. "Producers used to have 1,000-head (finishing) buildings or end-to-end 2,000-head buildings. Now, we"re seeing buildings that are four rooms wide by two rooms long that will hold as many as 8,000 hogs under one roof."

Another trend in the Midwest and Great Lakes region is to build quad buildings. These hold 1,000 to 1,200 hogs each in four separate rooms, for a total of 4,000 to 4,800 hogs.

Along with new buildings, some of the growth underway involves changing production from three-site to two-site units. Producers are converting nurseries to sow buildings, and adopting wean-to-finish buildings. This means the grow/finish building has to house pigs for 24 weeks instead of 16 weeks. That will actually increase a producer"s building needs by one-third.

Here"s an example. A producer has a three-site production system with 2,500 sows, 8,000 nursery spaces and 16,000 finishing spaces. If he converts to a two-site system with 2,500 sows and 24,000 wean-to-finish spaces, he will face a definite capacity problem. He will need to add pig spaces, which means more buildings.

Along with the building"s size and capacity, there are other factors to keep in mind with new construction if you"re going down that path. You have to do your homework concerning environmental and zoning compliance, location, site and the physical depreciation (economic life) of a building and equipment. You also have to decide if it"s a design that fits.

Here are some additional points to review before you begin:

  • Engineering: Are you using a certified construction engineer? Does the design and components fit today"s standards? Will the building meet the structural load requirements?
  • Flow: Determine the building capacity, the number of buildings and network of other production sites.
  • Production requirements: How many pigs will you have in each room and/or building? What type of animal handling, genetics, herd health, feeding and other programs will you institute in the operation?
  • Biosecurity: Are you planning to install showers and a truck wash? What is your proximity to other pork production facilities that either you or someone else owns?
  • Concrete: What strength and thickness do you need? Will concrete work for your building design? What are the reinforcement costs? Is concrete available in your area?
  • Building framing and sheathing material: This includes the roof metal, interior and exterior wall material, insulation, lumber, curtains and bird screens. Make sure all of these fit your needs and are made of high-quality materials. Are these materials available when you want to start your building project?
  • Electrical components, cost, layout and regulations: Is the builder using a certified electrician? You also have to ensure that the job is completed at a reasonable cost and that it meets all regulations.
  • Plumbing materials: Have you contacted different suppliers to get a competitive bid for high-quality materials?
  • Flooring surfaces, windows, doors, firewalls and escape routes: Has the contractor included plenty of safety protection and escape plans for you and your employees?
  • Type of manure-handling system: Will it be deep pit or shallow pit? What are the regulation requirements? What are the engineering costs?
  • Ventilation: Will the building have natural, combination, tunnel or another type of ventilation? You also have to decide if you"re going to set up a computer-controlled network.
  • Feed monitoring system: How many bins do you need? Is it a computerized feed system or will you feed the pigs by hand? Raising hogs to the industry"s increasingly heavier weights takes a toll on feeders and equipment, notes Brincks. Will your equipment handle larger, heavier pigs?
  • Water: Will all pigs have plenty of high-quality drinking water available? Is there a water source available to clean and disinfect the buildings?
  • Pens: Are you planning to use large or small pens? What about gestation stalls or crates?
  • Weather: Will your building withstand the elements such as heavy wind, snow, rain and hail? Do you have adequate fire protection? Do you have insurance to cover weather and fire-related damage?

One shortcut some producers have taken is to have the contractor design and construct the building and manure-handling facilities, instead of hiring a certified agricultural engineer, notes Brincks. This can be risky especially when it comes to zoning issues and environmental compliance.

When you choose a site, look at its proximity to the following areas before you begin:

  • Residences, located on the site and nearby. Will neighbors welcome your operation or will you face opposition?
  • Other area livestock production.
  • Public areas, such as churches, parks or campgrounds.
  • Waterways and swamps.
  • Access to feed, labor, transportation, packing and other pork production facilities.

Another concern is the building"s physical depreciation. As a rule, the depreciation schedule for equipment is 10 to 12 years, and for facilities, it"s 20 to 25 years. Granted, it depends on how well you maintain the facilities and equipment; the type of equipment you use (stainless steel, galvanized steel or painted); and the condition of the slats, manure-management system and the structure.

This is where those heavy hogs figure into the equation again. They can reduce the building"s lifespan. Not only does existing equipment take a beating from the pigs, but you have to figure market hogs that can reach 300 pounds into your design.

For instance, Brincks says his company has made the standard gate size three inches larger to accommodate heavier pigs in the grow/finish phase. Feeders also are raised by six inches to accommodate the larger animals.

What does all this mean?
There are opportunities to grow, but it won"t be cheap or easy. If you"re a contract producer, consider working with a lender on creative financing or negotiate a contract extension with the hog owner.

A standard contract usually runs from seven to 10 years. If you"re able to extend the contract for another two to five years, then you can lower your monthly building payments and spread the payments over more years. The downside to this strategy is that you will end up paying more interest. (See sidebar for more information on interest rates and financing.)

Another possibility is that if you need more pig space, the producer whom you"re contracting with may contribute by paying a portion of the project costs.

Unfortunately, Brincks doesn"t see any signs in the near future that suggest building prices will be heading lower. Major inputs such as concrete may stabilize, but he doesn"t expect any reduction in price because of demands for materials from other industries.

So, if construction or growth plans are in your future, don"t forget to prepare yourself for higher input costs and the overall growing pains that you will face.

Labor"s Supply and Demand

Labor issues boil down to employee supply and demand. Of course, there also are geographic and seasonal influences, worker compensation rules, safety rules and other factors that ultimately impact labor costs.

For instance, concrete labor costs vary up to $40 per cubic yard, and building framing labor costs vary as much as 60 cents a square foot, says Kirk Brincks, national sales manager of Hog Slat.

He notes that agriculture is a low-margin industry and that filters through to subcontractors. "When there"s more profitable places to do construction, crews will go elsewhere, such as to residential and commercial jobs," says Brincks.

Employee management consultant, Don Tyler, expects the pork industry"s labor issue to remain about the same for the next two years, but in the long term, problems will intensify.

Tyler says that other companies are pulling employees away from the livestock sector, and college graduates have more options than they"ve had in the last few years. For example, this spring he spoke to a Purdue University agricultural economics class where 18 of the 20 seniors had job offers paying $40,000 or more, plus benefits. The other two just hadn"t decided which job offer they were going to accept.

As more college students tap into higher salaries, more kids may decide to go to college instead of working for local pork operations.

Certainly, immigrant labor is
increasingly common in pork production, which raises new issues.

"Operations that I work with are tough on themselves to make sure they"re doing everything right when it comes to immigration," notes Tyler. "Operations that already experience high turnover, that don"t do their homework on background checks, will continue to have trouble with immigrant labor."

Interest Rates Not Slowing Growth

Rising interest rates aren"t deterring growth plans in the pork industry. Producers are still making money, and alternative investments, such as bonds or savings accounts, still aren"t terribly attractive.

"I don"t know if producers have fully realized the increased costs and higher interest rates," says Lee Fuchs, vice president of capital markets, Farm Credit Services of Missouri. "With substantially higher building costs (15 percent to 20 percent) and higher interest rates than a year ago, it"s going to be harder to cash flow expansion."

He notes that a typical amortized loan for a new facility is 10 years. "Producers are asking for 12 to 15 years and rarely get it," says Fuchs. The exception may be when a large land base secures the loan.

Shorter loans do protect lenders and producers. It forces discipline and lets producers pay off debt quicker so they don"t get over-leveraged.

"It"s healthy if lenders hold the line on loan periods," says Fuchs. "If a producer gets in a bind in a few years because of short amortization, then the producer and lender will come together, discuss it and work out a solution."

As for the overall interest rate trend line, the Federal Reserve and the market will continue to drive it higher. Fuchs says with the state of the bond markets and demand for money, rates will move upward at least for the next year or so.

Fuchs does have one piece of advice concerning rates. "If a producer is going to borrow money long-term, (like 10 years) discuss an option of a pre-payment penalty with your lender. It will help you get a better rate," he says. "The flat-yield curve in interest rates is reflecting a liquid bond market that is causing a premium if you don"t have a pre-payment penalty."

For example, typically FCS offers a 10-year fixed rate one with and one without a pre-payment penalty. Usually the difference is 0.25 percent to 0.5 percent, with the lower rate having the pre-payment option. The lender has less risk that you will pay the loan off early, because you"ll pay a penalty if you do. His other option is to make you pay more interest, which could end up giving you more payment stress.

Also, with future cash flows anticipated to tighten for producers, it is less likely there will be excess cash to prepay loans. Therefore, the producer has less risk with a loan that carries a prepayment penalty.

Fuchs says it"s a bargain now for a borrower to have a loan with a prepayment penalty, because interest rates are offering an opportunity to lock in a good deal.

"As you look at higher costs to build, a producer needs to keep the option open to postpone expansion," says Fuchs. "You don"t want to get locked into having to expand. Even if you have a contract, you may be subject to cost increases long term. It"s better to stay flexible."



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