Hog revenue has been improving dramatically since the beginning of 2021. Revenue for market hogs has almost doubled since the beginning of the year, with surging domestic demand and continued strong export demand for our product.
Prices have also been aided by two big factors. 1) We’ve seen a reduction in the breeding herd over the past year, resulting in supply issues. 2) More recently, porcine reproductive and respiratory syndrome (PRRS) has impacted both reproductive farms and grow-out facilities. Cash revenue near $100 per cwt. should make producers feel pretty good about their situation after the past year. But production costs continue to rise and now is the time to review strategies for managing the impact of higher input costs.
Below are five of the main factors impacting the cost of pork production today and ideas to consider to control the rising cost of production.
Feed
Feed is the first thing on everyone’s mind. With the recent USDA reports on grain stocks and planting intentions, corn is up 30 cents and beans are up 64 cents. Nearby corn futures are trading at $5.73 and new crop at $4.88; soybean meal futures were $423 (nearby) and $413 (September), all up significantly since the report. These input increases will have the most profound impact on costs, at least in the short term. Cost of production has risen from $68 estimated in 2020 with $3.50 corn and $300 meal to over $82 today based only on feed costs.
What can you do?
• Alternative ingredients: Consider using distiller’s dried grains and solubles (DDGS) and other alternatives.
• Market weight: Hit target weights based on margin over feed costs.
• Feed conversions: Manage feed waste, feed budgets, etc.
Labor
Labor costs have continued to climb for most areas due to wages, benefits, etc. Employee retention is critical, and many factors impact your ability to retain employees. Going back to training, motivation, work environment and providing growth opportunities should help with retention.
Construction
Building materials and construction costs are high. Regardless of the project, whether it is maintenance, updates or new facilities, costs are higher – much higher. Careful planning in current times of high lumber, steel and construction labor is an important consideration. The other issue is the long-term replacement of assets with escalated costs. Returns in our industry have to allow for replacement of depreciable assets over time.
Energy
Energy costs are also moving higher with crude oil prices trading around $60 per barrel, much higher than a year ago. This impacts both farm and transportation costs for pigs, feed and everything else.
Capital
Capital costs are increasing as well. Although still at reasonable levels, depending on your perspective, rates have been rising and borrowing costs increasing. The U.S. Treasuries are a good index of that movement. Ten-year treasuries have moved up from under 1% at the beginning of the year to near 1.7% today.
Movement in costs are higher. So far, it has been offset by higher pig prices. Cost increases tend to have a longer-term impact (think feed and facilities) and managing costs should always be a focus. Risk management strategies will need to incorporate those costs to be effective.
More from Farm Journal’s PORK:
5 Key Steps to Manage Market Risk
Production Efficiencies and Costs Will Be Key in 2021 for Pig Farmers
Assess Your Options: 4 Questions Every Pig Farmer Should Ask
