The typical swine producer wears many hats, managing animals, employees, facilities, finances and markets. With such a wide range of responsibilities, preparing the next generation requires more than teaching day to day skills, it demands building a broad and adaptable professional toolkit. One essential skill set to add to that toolbox is economic reasoning and analysis.
Economics is often misunderstood. It’s sometimes confused with accounting or finance, or treated as a catch all term for anything involving business or money. In reality, economics is the science of how we use resources, and how to put those finite resources to better use. Just as an engine converts fuel into energy, economics views farms as systems that transform inputs into more desirable outputs. Capital, labor, land and other resources enter the system and emerge as food. In this framework, money isn’t a product; it’s merely a unit of measurement, much like horsepower or torque.
With that foundation in mind, here are five key economic concepts every future producer should understand.
1. Profit
When we view the farm as a transformation system, profit becomes the measure of how efficiently that system operates. If more output is created than inputs used, the farm is operating efficiently. It’s also important to remember that profit is relative. A farm is successful not just because it earns a surplus, but because it earns more per pig than its peers. In a competitive environment, the more efficient survive.
2. Opportunity Cost
If profit measures efficiency, opportunity cost measures what could have been. It’s the tool that helps determine whether a farm is operating at peak efficiency. Opportunity cost shows up in two ways. First, in decision making: if the farm reinvests $100,000 in one project, all alternative uses of that money disappear. Those lost alternatives need to be weighed against the chosen path. Second, opportunity cost emerges as lost potential, often from disease or errors like feed outages. Opportunity costs represent real losses. Even if they don’t appear in QuickBooks, they are just as impactful and often twice as dangerous because they can go unnoticed.
3. Modeling
Modeling turns concepts into insight and insight into action. A model is simply a structured description of reality. For instance, projecting a pig’s weight based on starting weight and ADG is a basic model. Models don’t need to be complicated, but they must be accurate. Start simple; once your model reliably reflects reality, you can expand it. Ultimately, a farm’s model should describe how profit is generated so opportunity cost can be evaluated with confidence.
4. Risk Analysis
Once a profit model is established, it’s time to test extremes. Ask “what if?” What if pig prices fall to a 20 year low? What if disease severely impacts performance? The goal isn’t to find breakeven points but to identify critical failure thresholds. Knowing those limits helps determine the most likely threats and how to mitigate them.
5. Variation
Risk analysis reveals a fundamental truth: averages rarely reflect reality. Weather, markets, and biological systems constantly change, making variation, not the average, the norm. Understanding and measuring variation opens new paths to improve efficiency. Variation often has disproportionate effects on profitability. A 10% change in a parameter rarely results in a 10% change in profit, due to how pigs are valued and how performance changes cascade through the system.
With these skills, tomorrow’s producers will be better equipped to meet, and exceed, the challenges ahead, positioning themselves to consistently achieve above average profits.
Lance Mulberry is an economist with KnowledgeVentures, LLC. He consults with producers, processors, pharmaceutical companies, genetics firms, nutrition, and technology providers throughout the global pork chain.
