By Kent Bang, Compeer Financial
Cost of pig production in 2018 was up over the previous two years when we look at our internal database and also when we compare to the model published monthly by Iowa State University. This model is published within the Estimated Livestock Margins and has been very good data for making farm comparisons in terms of revenue and cost of production in the pork sector. Total cost of production in the model for 2018 (through November) was $4.42 per head higher than 2017, fairly consistent with our database numbers for the same period.
Production costs based on the Iowa State model are easiest to digest looking at two major components – feed costs and non-feed costs. Overall, cost of production in the model adding death loss was $47.47 per live hundredweight (cwt) in 2016; $46.32 in 2017 and $47.96 in 2018. While this is one of the longer stretches of time without wider swings in costs over the past 20 years, I found some surprising information when looking at the differences between 2017 and 2018.
Feed costs in 2018 were higher by $3.94 per head. Of that increased cost, corn made up 15%, soybean meal made up 29%, and higher dried distillers’ grains (DDG) costs made up 34%. The balance was attributed to feed processing costs increasing year over year. Non-feed costs increased as well. One big ticket item for my clients in 2018 was labor costs.
A Look at the Database
I believe the Iowa State database is an excellent tool for tracking your returns monthly, quarterly or annually against a standard to see how you compare against the industry. I like to look at it from two big picture comparisons.
First, how does revenue compare to the model on a per hundredweight basis? We sell pigs on many different pricing formulas in this industry and it is worthwhile to see how you compare to a standard on revenue over time. The Iowa State model uses the negotiated price from the LM_HG204 report. Revenue for January through November 2018 averaged $60.35 per cwt. (carcass).
The question is, did my farm beat that number and by how much? The same concept makes a worthwhile comparison on costs. Costs on the model for the same period were $63.95 per cwt. (carcass). My belief is that typical costs range from $62 - $70 per cwt over that period with only 20% to 25% meeting the Iowa State model costs. However, comparing to a standard over time will provide great insight into farm performance.
Other Benchmarking Benefits
Additional benefits are achieved by benchmarking against the Iowa State model. Two that come to mind are the process of budgeting and comparing results to that budget. This is the best method to sustain improvement in any process, including pig production. The other benefit is in risk-management. Knowing the impact of risk management on revenue and costs can help make decisions critical to management success.
The Iowa State model would indicate that pig production over the four years, including 2015 to 2018, was little better than breakeven when assuming pigs sold at the average negotiated price (LM_HG204) and with costs at the model average. Margins that were made were by exceeding that revenue or cost of production benchmark, or by risk management strategies that worked.