Strive for Continuous Improvement
It’s remarkable how production and cost efficiency of the pork industry have improved over the years. There’s been constant progress in almost every production aspect of the pig business and the need to continue is evident. Those who do not continue to improve will find themselves at the higher end of the cost range and likely struggling for survival.
It has been interesting to watch what we measure and then watch the industry chase that measure and make improvements. There are helpful database products available for comparing sow farm performance. Comparing production measures in a broader group allows us to see where we are as a business and what we should be working to improve. My goal is to provide some context for measuring farms on a broader platform and leveraging that information to make meaningful continuous improvement on your farm.
Profitability
The big picture starts with profitability. Those numbers aren’t shared from farm to farm, so they are harder to come by. I have, for years, used the Iowa State University profit model to have a sense of the trends in profitability and use it to understand how farms I’m familiar with will stack up.
Compeer Financial has kept a peer comparison from a financial standpoint for nearly 10 years, which helps us track progress on a large group of producers and verify the progress over the long term relative to the Iowa State Model.
The model shows that profits for 2017 averaged $9.43 per head. Factors driving that number will be discussed, but one has to realize this is an average that assumes the same number of pigs, at the same market weight, were marketed each month of the year. Breaking down the key drivers and understanding how your operation compares long term determine where the value lies.
Revenue relative to the LM_HG201
This model uses the LM_HG201 report (the National Daily Direct Hog Prior Day Report for Slaughtered Swine) on a daily basis to determine revenue, which averaged $66.41 per carcass cwt in 2017.
Tracking your sales revenue to some standard (in this case the 201) helps provide a picture of how you compete on revenue compared to the industry. There are a lot of price discovery differences in the industry today, some of which would bring revenue enhancements at different times in the marketplace. In 2017, that range of revenue was $65 to $78 per cwt equaling more than $25 per head.
Cost of production relative to the Iowa State Model
I think one of the best uses of this model is understanding how a farm’s cost of production compares to the industry as a whole. In other words, are your costs competitive? After watching for years and comparing a large share of this industry, the model is representative of the top 25% of the industry. Production costs in the model for 2017 averaged $61.75. Based on what I see, a range of $60 to $68 would capture costs for hogs raised in the upper Midwest.
Corn basis would obviously impact areas outside the Midwest, as the cash corn price in Iowa is used for the model. The range in costs would equate to more than $15 per head in the Midwest, probably a little more.
What drives farm performance?
The point is, there is wide variation in revenue, costs and resulting profitability. Knowing where you are and how to attack it is the critical management decision you will make in striving for continuous improvement.
For those producers wanting to know the next step, for me it is addressing the biggest drivers of farm performance (below) and recognizing there is not a good, widely used benchmarking system that compares them.
